• Matthew Fotheringham

🌎 Is LatAm Ready to Supply the US? | Oils Blustery Year Continues | Mediterranean Standoff


August 28th, 2020


Happy Friday!


This week we saw postponed NBA, MLB and MLS fixtures, in solidarity with recent protests after Jacob Blake was shot seven times in the back by police. In times like these sports seem unimportant in comparison and bringing attention to these issues is essential to help better educate and fight ignorance.


Did You Know...


The largest boycott in sports history is widely considered to be during the Moscow Olympics in 1980, which saw only 80 out of 147 countries competing.


The recent invasion of which country caused this movement?


(Answer below)


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MXN BRL CRC CLP


Are LatAm's Supply Chains Ready?


COVID has shown the susceptibility of supply chains to disruption, leading many to consider shortening them dramatically - “nearshoring”. For the North American market, Mexico has always been a part of this trend, but the rest of LATAM has an opportunity to pick up the slack and capture business from SE Asia, with Costa Rica, Chile and Columbia best placed to compete.


Transport cost differences are huge - it takes just one week and $1,800 to ship a container to the US from Mexico, compared with 5 weeks and $4,300 from China. In addition, labor costs are becoming more competitive, even when compared with East Asia (eg Vietnam).


So, what are the three main challenges for the region?


  • Major infrastructure investments (especially transport) at roughly 3% of GDP fall far short of East Asia at 8%. While packages from Amazon might arrive in 1-2 days in the US, it could be 2-4 weeks in LATAM.

  • The region's lack of readiness for new technologies (R&D, e-commerce). Assessing the region on these criteria, as well as preparedness for supply chain integration show that Chile, Costa Rica, Mexico, Brazil and Columbia stand out.

  • Lastly, the perennial political situation in most of LATAM - lack of predictability, stability and security- will hamper LATAM’s ability to compete in the supply chain race.


Supply Chain Readiness

The MXN is a very volatile currency, and unfortunately also very expensive to hedge. BRL is equally volatile, but the hedging costs are much more palatable. The Costa Rican currency, CRC, is far more stable - which is good because the derivatives market is non-existent. Last shown here is the Chilean peso, which is also quite volatile.





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Hurricane Laura Touched Down the Gulf



Hurricane Laura made landfall this week near Cameron, Louisiana, bringing a ferocious wind, torrential rain and flash flooding. The storm had intensified briskly into a Category 4 hurricane before slamming into the Gulf Coast near the Louisiana-Texas border, 1.5 million people were asked to leave their homes.


After several hours since the hurricane made landfall, Laura was downgraded to a Category 1 hurricane but still blowing hard enough to be deadly, according to the National Hurricane Center.


From the first alerts and impacts earlier in the week, Hurricane Laura forced 84% of the current oil production in the Gulf of Mexico to shut down, which worried the market initially, making future fuel prices hit the highs of the past 5 months. Brent was up about 0.5% on Wednesday to US$45.9/ barrel and WTI was up 0.3% to US$43.3/barrel.


Brent Crude Chart

However, despite both oil extraction units and refineries being closed preemptively in the Gulf of Mexico region, investors now seem to largely ignore the storm, due to the commodity's ample inventories and oversupply currently flooding the markets.


The Energy Information Administration reported Wednesday that U.S. crude inventories fell by 4.7 million barrels for the week ended Aug. 21, marking a fifth weekly decline in a row. Still, at 507.8 million barrels, crude supplies are still about 15% above the first-year average for this time of year, the EIA said.


Crude oil stocks (million barrels) and days of supply

Even though the Gulf of Mexico is relatively unharmed by the second storm in less than a week, experts expect up to 25 other significant storms in this year's hurricane season.


In addition, Russian President Vladimir Putin dropped a hint that Russia would continue with production restriction agreements, saying in an interview with state television that it would be "better if the price of oil were a little higher". Perhaps some market players are hoping the hurricane will do "light" damage to oil refineries.


The dollar index over this week has been hovering at 93 points and might follow working at this level. Early last Thursday, the Fed Chair Powell said the FOMC would target "inflation that averages 2% over time", which means that inflation could be above the 2% target following periods when inflation runs below that level. Powell also said that any inflation overshoots in Fed policy will be "moderate."

US Dollar Index

TRY EUR


Greece and Turkey Face-Off




Historic rivals and NATO allies Greece and Turkey inch toward a possible military confrontation that could end up engulfing the eastern Mediterannean. The Navies from both countries made a show of force in the contested region of the Eastern Mediterranean this week, contesting gas and oil reserves in disputed continental shelves.

There are an estimated 1.7 billion barrels of recoverable oil and 122 trillion cubic feet of gas in the Levant Basin section of the Eastern Mediterranean (see map).


Many Greek islands in the Aegean and the Eastern Mediterranean are within sight of the Turkish coast, so issues of territorial waters are complex and the two countries have come to the brink of war in the past. This latest row involves continental shelves, which can stretch up to 200 miles from the shore.


Greece argues that the Turkish survey ship that set sail from Antalya is encroaching on its continental shelf, pointing to a large area off the Greek island of Kastellorizo, 2km from the Turkish mainland- so it's not an easy thing to resolve.


Greece and Turkey have overlapping claims in the Eastern Mediterranean

Hostilities first flared when Ankara announced that it is extending the duration of a seismic exploration mission in the disputed waters. Greece considers Turkish gas exploration illegal. On Wednesday, Turkey confirmed that its navy warships were conducting "maritime training" with a US vessel in the Eastern Mediterranean. Other NATO allies took the other side, with France and Italy joining Greece and Cyprus for joint naval exercises. What could possibly go wrong? Well. there has already been one collision between a Greek warship and a Turkish warship, in which the Turkish vessel took some damage. Hopefully, it doesn't escalate.

The TRY is a disaster. 19% volatility and 15% hedging costs.

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In Other News



Currency Heat Map

This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.




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Quiz of the week


Answers


The Soviet Union invaded Afghanistan in 1979, which caused the ensuing boycott of the 1980 Moscow Olympics.


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