Headwinds from the latest global banking crisis have knocked the wind from the sails of the global economy, which has reeled from one crisis to another in the last 3 years. Optimism on the global economic outlook for 2023 rose in December`22, when China announced the opening of the country post the Covid restrictions. Global markets were ecstatic with the expected tailwinds from China. IMF upgraded the global GDP growth rate forecast for 2023 to 2.9% from 2,7% as it upgraded the Chinese GDP growth rate, for 2023, to 5.2% from ~ 3.5% in 2022.  Stock markets too reacted positively with global equity and debt funds pumping in close to $ 11.5bn in December`22, which marked the first month of net inflows into China since February`22, followed by an additional $30bn of inflows in January`23.

As the world`s second-largest economy the expected spurt of growth in China was seen as a messiah to the slowdown in Europe and America.

Chinese stakes in commodities markets are high…

Commodities markets, which reflect the global economic conditions, got a boost from the Chinese news with many key commodities prices going up in December`22. As the world's largest consumer and producer of commodities, China's economic growth and demand for major raw materials play a crucial role in the global commodities like iron ore, steel, aluminium, copper, oil, etc.  China is expected to account for 35% of the oil demand growth in 2023, 25% in copper, 41% in aluminium and 53% in Zinc! On a long-term basis too, the Chinese government`s “Make in China 2025”, aiming to promote high-tech manufacturing, adoption of electric vehicles, infrastructure, etc. is expected to create a huge demand for many metals like steel, copper, zinc, aluminium, etc. Similarly, the buildup of integrated oil to chemicals complexes like Hengli Petrochemicals is expected to create a big demand for oil, gas, etc.

China economic indicators post Lunar New Year holidays …

Economic indicators emanating from China, for February`23 and March`23, post the Lunar New Year Holidays, have been very encouraging.

• Manufacturing PMI for February`22 was at 51.6 and crossed 50 for the first time since       July`22.
• New loans issued by banks in January`23 was at RMB 4,900 bn ($720bn) as compared      to the last 6 months' monthly average of ~ RMB 1,790bn ($255bn)
• Steel production rates represented by blast furnace operating rates was at a healthy 84%
• Two of the largest traded commodities globally – iron ore and crude oil got a huge boost    from the expected Chinese demand uptick. Iron ore prices moved by ~ 20% since     December`22 while OPEC increased China`s oil demand growth estimate by ~ 8% in   March`23.
• Bulk freight rates, which is an indicator of commodities movement and industrial demand,  has seen a major increase in China-bound routes. Bauxite and coal shipments bulk freight rates, from South America and Guinea, have moved up by 15-20% since early February`23.

So, does this mean that China will power the commodities growth upwards in 2023 and is this positive trend sustainable for 2023?  I have my reservations about it, given the soft signals from various factors.

 

1)  China`s budget for 2023 has been muted for housing and infrastructure sectors...

China`s 14^th National Congress has spelt out the clear objectives for the Chinese economy for 2023. In short, the government has spelt out a conservative growth plan for 2023 as compared to expectations of an explosive growth. Some of the key pointers from the Congress which indicate a reserved growth rate:

·   GDP growth rate in 2023 expected at 5% as compared to earlier expectations of 5.5% +.

·   Fiscal deficit at 3% vs 2.8% in 2022 which indicates that the government is not going for a major fiscal stimulus. India`s fiscal deficit for 2023-24, for that matter, is 6.4%

·  Importantly, the housing sector, which is the key for commodities markets, will be subjected to control for “unregulated expansion.”

·  Infrastructure build, another sector which is vital for commodities, too will see a controlled spending only.

·    Major focus will be on consumer spending, create more jobs and take steps to reverse the trend of declining population. China has been trying to convert its economy to a consumer spending led economy rather than an export and capital formation led economy for past many years.

 

2)  Exports markets will be muted due to global slowdown…

Chinese growth over the last 20 years has been powered by its exports business. Due to the global slowdown, contribution of the next exports to Chinese GDP crashed to – 42% in Q4`22 from 24% in Q3`22 due to the global slowdown. With global markets in a slowdown exports markets growth will be slow. Chinese manufacturing industries, especially in metals like aluminium, zinc, and copper, are dependent to about 20-25% on the global markets, in basic as well as value added exports. For example, in the aluminium business, China is not only a major exporter of aluminium metal but also a major exporter of fabricated aluminium products to various parts of the world.

 

3)  Private sector investment to the Gross Capital Formation (GCF) can be low...

Thanks to the political developments in China, the communist party has taken an iron grip on the country as well as over the private sector. Technology sector has been heavily under the government`s scanner over the last few years. The stories of treatment to private entrepreneurs like Jack Ma as well as the disappearance of the Chinese banker Bao Fan doesn’t exude much confidence in the Chinese private sector.

 

Over the last 3 years, the government owned enterprises and joint ventures have contributed to about 80% of the industrial value add to the economy. With no major stimulus due to fiscal deficit controls and the private sector issues, industrial value add will have a muted growth only. Also, Gross Capital Formation (GCF) contribution to the GDP has been lagging the consumption expenditure over the last 6 quarters. As the Chinese government does not plan to increase its fiscal deficit in a big way, GCF formation can be muted and hence a drag on commodities demand.

 

4)  Chinese economy structure has undergone a shift towards tertiary economy...

Chinese economic structure has moved more towards end consumer-based economies like banking, insurance, services, etc. as compared to the primary industries like extraction, agriculture, and secondary industries like manufacturing. In 2010, the tertiary economy accounted for 43% of the economy which has moved up to 53% in 2022. Secondary and primary economies which accounted for 56% of the economy have presently moved down to ~ 43%. Thus, China's shift towards a more service-oriented and innovation-driven economy could potentially result in reduced demand for basic commodities like steel while potentially increasing demand for others like lithium, etc in long term.

 5) Geopolitical pressures on China due to Russia stance will play on sanctions.

Due to China`s pro Russia stand in the war and tensions with the western world especially due to the Taiwan issue, Chinese trade will be the target of many trade sanctions. Apart from being a major trade partner with Russia, China has also been a trade hub for Russia. For example, China has been feeding alumina to Russian aluminium smelters while importing alumina from Australia and other countries to feed its own smelters. Chinese chips industry too has been a target for western sanctions.

To summarize, despite tailwinds from China seen so far this year, there are still many structural issues that will affect the commodities business demand in China in 2023. One key factor is that the government`s priorities as announced in the budget, isn’t on infrastructure and housing, while secondly the global economic conditions and China`s geopolitical stands will be another hurdle.

Hence commodity products, which are very dependent upon China, may have a limited upside. Hence, I find it difficult to envisage China playing a major bull factor for the global commodities markets. However, in the interest of the global economy and commodities markets, I would like to be proved wrong!!

 

Outlook for 2023 = Positive or Negative ?

As we draw to the end of 2022, one can only say what a volatile and topsy-turvy year it has been. The year started with lots of hope as everybody was coming out of the Covid fear. Unfortunately, the Russia – Ukraine conflict led to a crisis again in the world with the resulting spike in energy prices, inflation, interest hikes, and recessionary conditions.

The world`s largest economy – the USA faced a peculiar situation of a strong job market as well as rising inflation leading to interest rate hikes spooking the global economy. Europe has been majorly hit by the gas shortage, from the Russian conflict, and is supposedly in a deep recession. China saw lockdowns from Covid and when things were going right, it has seen a sudden wave of Covid emergence again. Global bond markets outlook portends weakness as we move to 2023.

However, everything is not all that gloomy.

1. India has been a bright spot in the global economy thanks to strong consumer spending as well as infrastructure spending.
2. The world cup football tournament was held very successfully in Qatar despite all the negativity to start off with. An African nation -Morocco, made it to the semi-finals of the world cup for the first time ever and globally people shed tears of joy as Lionel Messi lifted the football world cup at the fag end of his career.
   
3. Thanks to the fossil energy crisis, the world has fully realized the potential of renewables which is a great omen for the future.
   
4. Russian President Vladimir Putin has given indications of ending the war.  

As we enter 2023, I am personally inclined to look at the positive trends. Let’s hope that we all have a better year in 2023 and that prosperity and peace prevail.

Merry Xmas and Happy New Year 2023!!

Cheers
#2023, #worldeconomy ,#peace

“Human Resources Supply Chain” – another crisis facing corporates

 “Thanks, Ram for your recognition but after a long thought I have decided to quit my job”. That was one of my brightest team members- 23 years old Darryl, throwing the dreaded “resignation” bomb on me after I handed him his letter for a special recognition, retention bonus letter and extension of work from home facility for him. His reasoning was that he and his family didn’t like Mumbai and he never wants to work in Mumbai in the future! Secondly, he felt that if he had to grow professionally, he had to work in the same corporate office with his bosses and not in a sales office like we had in Bengaluru. Hence, he wanted to work in a corporate in Bengaluru and quit from our Mumbai-based India`s leading conglomerate!!

Even though somebody like me, who came to Mumbai as a student and made my career here, found this reasoning difficult to fathom, the truth is different today with the latest generation workforces!

Recent Trends in Human Resources space

The last couple of years have seen some interesting trends in the Human Resources (HR) space:

ü  Mass resignation wave

ü  1) Debate between work from home (wfh) vs work from office,

ü  2) Challenges in yanking people from wfh to come back to office

ü  3) Hot topic today – moonlighting.

Post Covid and the Ukraine crisis, firms across the world have been grappling with the “Supply Chain Crisis” as supplies of key inputs like semiconductors, oil, gas, etc have been affected which has affected the business dynamics. However, businesses must now face the other elephant in the room “Human Resources supply chain” crisis!!

With a high bit of certainty, never has the HR space faced such a challenging situation and importantly this situation is probably once in a lifetime opportunity for HR professionals to redefine and place on a higher pedestal the value brought to the business by HR teams!!

What`s the soft thread behind the new workforce trends like mass resignation and moonlighting?

Mass resignation wave was triggered by people realizing the benefits of working remotely, and hence preferred jobs with remote working options. Also, the toll on mental health during the pandemic, triggered the need for people to shake off the negative effects of their existing jobs and look for other greener pastures outside leading to the wave.

Moonlighting is a hot topic being debated across India especially in IT companies and has thrown up many interesting issues. Many IT honchos like Rishad Premji of Wipro have spoken openly against moonlighting and have labelled it as cheating! However, the softer thread was that people were essentially looking at a side hustle to diversify their work, create more options in their careers and of course earn some money in the process.

Hybrid workplace is the way to go …

Indian Prime Minister Narendra Modi has made a strong pitch for hybrid work for the future. As per him, India missed the previous industrial revolutions due to lack of proper ecosystems and mindset. Hence the country should take full advantage of the present revolution in digital technology to leap ahead in the global arena and hybrid working is a part of it. He also says that women workforce participation, which is at a low 25% for India as compared to 48.5%[1] globally, will increase if Indian corporates and organizations adopt hybrid working.

By encouraging hybrid working, companies can save huge amounts of money due to lesser administration costs like lesser office space, etc. Secondly, in major cities, which face severe traffic congestion and pollution issues like Mumbai, New Delhi, Shanghai, etc, remote working can help reduce traffic congestion as well as reduce carbon footprint as lesser number of people will travel to work.

While remote working has its own advantages, physical workplace has the benefits of human interaction and informal discussions that promote innovation as well as forge greater workforce bonding. Hybrid working, combines the benefits of both remote and physical workplaces, and hence as per the Indian PM is the way for the future.  

Once the covid pandemic situation was brought under control, many firms opened their offices on a hybrid basis and subsequently to a full time (5days / 9AM- 5PM basis). Employees, who got used to remote working, didn’t want to go back to full time office basis and hence left jobs in companies not offering flexibility on work times.

“Ethical moonlighting” is a new workforce trend ...

The new generation of employees think that gone are the days when employees must work 24/7 / 365 days for their full-time jobs and prefer to have side hustles like consulting start-ups, work parttime in another job, etc. This has been branded negatively as “moonlighting”. The counter argument by employees is that firms, when faced with a downturn, don’t think twice before downsizing, cutting jobs and salaries. By doing “ethical moonlighting” – wherein employees don’t have a conflict of interest with their present jobs, if employees are taking care of themselves what wrong with it? Anyway, many CEO`s, Vice Presidents of top companies are on the board of other companies and government committees and if this is ethical, why should “ethical moonlighting’ be termed as cheating?

Hence some Indian IT companies like Tech Mahindra and Infosys have been forced to come out with “moonlighting “policies but many companies in the core sector like manufacturing, banking, etc are still yet to take such initiatives and hence lose out on good talent.  

“HR supply chain crisis” is the moment to convert HR function to a value-added firm from a support function….

HR function is normally seen as a cost centre and a support activity - to recruit personnel, conduct annual appraisals and training programs, etc. I sincerely believe that the present “HR – supply chain crisis” is a great opportunity for CEO`s and CHRO`s to convert the HR function from a “support activity” to a “value adding” activity.

·       HR professionals in corporates should build a culture with a DNA imbibing “flexibility at work” and “work life balance” as key pillars. Using the same thread, trends like Hybrid working and ethical moonlighting should be a part of every HR team`s dictionary. If productivity of work is maintained through digital tools and there is no conflict of interest in moonlighting, employees should be free to pursue their interests. Many people would remember that IT companies, like Infosys and Wipro in India, became the preferred workplaces, due to the various employee related benefits that they offered like ESOP`s, workplace culture, etc

 

·   Just like companies’ flash CSR scorecards, share of women employees, etc in their media releases, HR teams should focus on highlighting share of employees working in a hybrid manner which will reflect the flexible working policies of the company. Not very far in the future, a firm’s brand image as well as market valuation can be influenced by the share of hybrid working employees in the total workforce.

 

·  Governments and local authorities should encourage hybrid working through regulations and tax breaks due to various benefits to the society like reduced pollution, lower carbon footprint, etc.

 

The “Human Resources – Supply Chain crisis” gives a huge opportunity to firms to extract greater value from the HR functions by adopting a flexible approach to workplace. This will help firms in keeping with the latest workplace trends as well as create greater business value for the organization. Will we see a “HR revolution” coming up very soon?? Hopefully yes!!

References:

· https://www.business-standard.com/article/current-affairs/pm-modi-bats-for-remote-work-flexible-work-hours-calls-it-the-future-122082501288_1.html

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Weaponization of assets - What are India`s options from Russia`s example?

 Weaponization of assets – Gas and Oil assets by Russia

An interesting article by one of my favorite authors– Swaminathan Iyer (Swaminomics) alluding to “Weaponization of key assets”.

https://economictimes.indiatimes.com/opinion/et-commentary/whos-sanctioning-whom-how-the-ukraine-screenplay-has-been-reversed/articleshow/94035863.cms

Russia, which was expected to be on the defensive after the western sanctions has skillfully played on the “weaponization of gas and oil supplies” to survive during this war-

a) By supplying oil at high discounts to its allies like India and China, Russia has kept its oil revenues flowing

b) By throttling gas supplies to Europe, Europe has slipped into a recession due to high energy costs and struggling! In fact it was Russia that was expected to be in a major recession!!

“Weaponization” might sound like a very strong, aggressive, and sometimes unethical term but viewed from a different perspective it is actually “Playing to core strengths”.

"Weaponization” is used in different forms in both corporate as well as geopolitics for individual benefits.

1) Amazon uses its massive IT and distribution reach to throttle its small
competitors

2) Reliance used its strong balance sheet / financial muscle from its core
business to play the tariff war in the Indian telecom space which led to a market consolidation/market exits

3) US government recently barred Nvidia from selling artificial intelligence chips to China to impede technological development in China

From India`s perspective, are there any assets that it can weaponize?

a) Well recently, India banned wheat exports when there was a food shortage but tweaked it to strategic supplies to needy countries to garner “brownie points”.

b) India played its oil imports card to get heavily discounted oil from Russia

c) India`s other major asset is its “human soft power/skills” -  Indian managers, software engineers, and even laborers to middle east countries. However, weaponizing “soft power” will be possible only if there are sufficient jobs available in the country. Else there will be a massive unemployment problem.

Moot points - are there any other assets that India and Indian companies can “Weaponize” for its benefit?

Look forward to replies/comments!!

#weaponization, #russianaggression , #energy , #wheat , #india , #softpower, #business , #europe ,#oilgas, #swaminomics