Daily Update: May 10, 2021

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Exploding demand, factory outages, and supply- chain disruptions have created a global shortage of semiconductors. Industry insiders, investors, and policymakers from Washington to Beijing to Brussels are trying to address the chip crunch’s adverse effects on car makers, solar power providers, medical device producers, and technology firms. But market participants expect the situation could worsen before improving.

A host of factors have exacerbated the production pressures burdening companies around the globe. Chip suppliers scaled back their capacity investments prior to the pandemic in 2018, and manufacturers likewise decreased production for cars while increasing output for consumer electronics when the pandemic took hold of the global economy. When the U.S. Commerce Department restricted exports of semiconductor equipment from certain Chinese firms just as the global auto industry recovered faster than anticipated in the second half of last year, a supply imbalance materialized. That, alongside the sanctions, created a semiconductor shortage that is now accelerating as demand for the tiny but mighty parts that power everything from smartphones to satellites continues to outpace supply.

While some companies are seeking alternatives to semiconductors, conditions are worsening to the point that S&P Global Ratings projects chip shortfalls to be the major variable that will affect revenues and profits of key global entities that create computers, smartphones, appliances, cars, and other primary products for at least the next 12 months. While S&P Global Ratings anticipates that the situation will stabilize in the second half of this year, additional disruptions could send shockwaves that yield more acute shortages.

Asia dominates the global market for outsourcing semiconductor production, but a global effort to diversify chip manufacturing is underway. China's 14th Five Year Plan specifies establishing "science and technology self-reliance” that will increase the amount of semiconductors made and consumed in China to 70% by 2025, from 30% in 2019. The European Union’s recently announced Digital Compass plan aims to double the 27-country bloc’s chip manufacturing output to 20% of the global market by 2030 as a means of solidifying “digital sovereignty.” The U.S. government is urging less reliance on foreign chip making and increasing its incentives for domestic chip manufacturing under President Joe Biden’s $2 trillion infrastructure plan, which allocates a $50 billion Chip Act for the American semiconductor industry. Leaders from the U.S.’s most powerful tech and auto firms have advocated for the administration to invest in the semiconductor situation.

Any U.S. policy intervention is unlikely to increase the availability of semiconductors within a few months, according to Panjiva, part of S&P Global Market Intelligence.

The pressure is most painful for the auto industry. Earlier this year, General Motors, Ford, Nissan, and other vehicle-makers announced limits on their production or shutdowns of some factories due to the shortages. In April, Ford kept the brakes on its production halts, inviting knock-on effects into its entire supply chain. Now, U.S. automakers are continuing to adjust their output to meet the chip crunch and expect the decline to continue in the second quarter of this year, according to S&P Global Platts. Elsewhere, the chip shortage is likely to shake up and slow down China’s electric vehicle production.

"The semiconductor shortage and the impact to production will get worse before it gets better," Ford CEO Jim Farley said April 28 on the company's first-quarter earnings call.

Today is Monday, May 10, 2021 and here is today’s essential intelligence.

Market Dynamics

Sentiment Keeps Swelling Global Grains Prices, But Uncertainty Remains

Global grain prices saw an unprecedented price rally during 2020 as the world grappled with the coronavirus pandemic, which gave rise to challenges and fears never seen before.

—Read the full article from S&P Global Platts

Comparing Small-Cap Indices in Developed and Emerging Markets

Not all small-cap indices are identical. Indices within the same market cap range can have varied performance in different markets. We studied the S&P Developed SmallCap and S&P Emerging SmallCap for their performance, volatility, and sector allocation in different market segments.

—Read the full article from S&P Dow Jones Indices

Copper Climbs Back Above $10,000/Mt, Approaching All-Time High

Copper returned above $10,000/mt on the back of a weak dollar and with China returning to work after a three-day national holiday, with the London Metal Exchange three-month spot copper price trading at $10,117.50/mt ($4.59/lb) at 1749 GMT, some $72.50/mt short of its all-time high of $10,190/mt from February 2011.

—Read the full article from S&P Global Platts

Banking Sector Under Pressure

Tech Disruption In Retail Banking: CEE Banks Are On The Digital Fast Lane

S&P Global Ratings believes that Central and Eastern European (CEE) banks have progressed well in adapting their business models to the digital landscape, and the speed of digitalization in some of these markets outpaces that in many European peer countries. The majority of banks adapted early thanks to a digital-affine workforce, readily available technology, and sound income buffers in recent years, which enabled them to upscale investments into product innovations and to strengthen internal IT processes. Now, many banks in CEE are well positioned to meet client preferences through their already-largely digitized back-end infrastructure and state-of-the-art products.

—Read the full report from S&P Global Ratings

Excess Liquidity, Low Rates Leave Banks Between A Rock And M&A

Pressures on revenue from excess liquidity and low interest rates could force many banks to consider right-sizing their cost structures through M&A. While many banks hoped that loan demand would return with an improved economic outlook and the surge in deposits over the last year would wane, that has not come to pass.

—Read the full article from S&P Global Market Intelligence

ESG in the Time of COVID-19

A Supportive Offshore Wind Industry Sees Biden's 2030 Goal As Ambitious

Pressures on revenue from excess liquidity and low interest rates could force many banks to consider right-sizing their cost structures through M&A. While many banks hoped that loan demand would return with an improved economic outlook and the surge in deposits over the last year would wane, that has not come to pass.

—Read the full article from S&P Global Market Intelligence

Acciona Sticks To Planned Renewables IPO Despite Market Volatility

Spain's Acciona SA is sticking to a plan to list its renewable energy subsidiary by the end of June despite a decidedly downbeat picture for recent renewables IPOs in the country. José Ángel Tejero, Acciona's CFO, confirmed the company's intention to take its green energy business public during an earnings presentation May 7, two days after another Spanish renewables producer shelved its planned IPO due to share price volatility in the sector.

—Read the full article from S&P Global Market Intelligence

UK Offshore Wind Must Consider How To Integrate Hydrogen: Siemens Energy

UK offshore wind developers need to consider how to integrate hydrogen production and infrastructure into their projects, the UK head of energy technology company Siemens Energy, Steve Scrimshaw, told S&P Global Platts.

—Read the full article from S&P Global Platts

Fossil Fuel Sector Has 'Best Potential' To Reduce Methane Emissions: Report

The fossil fuel sector has the "best potential" to reduce human-caused methane emissions in the 2020s, a new report from the United Nations Environment Programme (UNEP) and the Climate and Clean Air Coalition (CCAC) shows. The report published late May 6 said a 45% reduction in human-caused methane emissions by 2030 would put the world on a path to achieving the Paris Agreement goal to keep warming to 1.5 degrees Celsius this century.

—Read the full article from S&P Global Platts

The Future of Energy & Commodities

S Korea May Seek More Naphtha As Polypropylene, Medical Device Needs Surge

South Korea's major petrochemical makers have stepped up efforts to boost production of polypropylene as base material demand for medical device manufacturing surged following the rollout of vaccination programs across Asia, opening the door for the country to import more petrochemical feedstock naphtha.

—Read the full article from S&P Global Platts

Energy Transfer Gets First-Quarter Lift From Gas Demand Surge During Texas Freeze

Energy Transfer swung to a massive first-quarter profit from a year-ago loss as the midstream operator was able to keep strategically located pipelines and storage assets working during the Texas freeze in February and benefitted from the higher prices that resulted from the surge in demand.

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.