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QuickHit: U.S. mining operations and supply chain security

In this QuickHit episode, we are joined by Jerry Mullins the Senior Vice President, Government Affairs and External Relations for the National Mining Association. In this episode we explore U.S. mining operations in the height of the pandemic. We take a look at the industry’s serious concern about supply chain security. We also talked about rare earths and how the U.S. miners are contributing to the global green economy.

 

The National Mining Association is the voice of mining in Washington, D.C. with the administration, with Congress, and different agencies. The focus of the organization is to grow domestic mining in the United States and highlight the most significant and timely issues that impact mining’s ability to safely and sustainably locate, permit, mine, transport and utilize the nation’s vast resources .

 

This is QuickHit’s episode 16. For previous episodes you might have missed, kindly check:

 

The “Great Pause” and the rise of agile startups

“LUV in the Time of COVID”

Proactive companies use data to COVID-proof their supply chains

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes:

 

TN: From your perspective, looking at what happened in mining during COVID and post COVID, what did mining firms see around continuity of operations and the risks there? Also, what did mining clients find with supply chain continuity? That’s a real question and that’s something we saw a lot of issues around as countries like Peru and others just completely shut down.

 

JM: Fortunately, domestic mining in United States was deemed an essential industry, and so it was allowed to continue to operate. That’s really important to recognize. As an industry, it had the ability to absorb the different environment that a pandemic brought on, and companies were allowed to successfully operate. These companies were able to continue to produce the raw materials that were needed for multiple industries across the globe.

 

As far as the effects of other countries and how they were affected, when you think about the global economies that generally slowed down, a lot of folks hit a pause. Economies had to re-calibrate exactly what they were able to do and the best way to do it. The domestic mining in the United States played a real critical role in leadership of showing the nation how to continue to work forward safely and effectively.

 

TN: With the supply chain disruptions and some of the geopolitical issues, there is a real sense in the US that there may be some supply chain security issues around metals and minerals. Can you help us with that? What is the Association doing?

 

JM: That’s an interesting point you bring up about the security issue. Just last month, the National Mining Association conducted a poll and 64% of the respondents said they were concerned about the supply chain dynamics and how reliant the U.S. was on international supplies of different critical minerals.

 

You’ve seen a real zest of excitement and certainly interest in focusing on the ability for U.S. producers to fill that gap and make sure that those critical minerals that are needed can be produced in the United States. [This means] addressing some of the permitting challenges that domestic mining faces and finding ways to more effectively allow for U.S. mining to meet a lot of demand that exists.

 

TN: When you talk about things like permitting and we talk about supply chain risk, one of the big kind of things that flag up is rare earths. Can we talk a little bit about rare earths and understand for the U.S. electronic sector and Department of Defense and others? What are some of the things that you’re thinking about and your observations about rare earths in the U.S. and the exposure to rare earths from other places?

 

JM: Well, certainly the Department of Defense relies on 750,000 tons of minerals each year. That’s for everything from armor for the individual soldier, to armor on a tank, to different requirements for jet engines to telecommunications. When you think about everything from palladium to copper to gold and silver–some rare–some not as rare. But those necessities are real. There’s an opportunity for tremendous growth in the rare earth field in this country. It is really opening up, and that’s something that international investors as well as domestic investors are starting to recognize.

 

TN: One of the other things we hear quite a lot about is the green economy — electric vehicles, battery technology. We hear a lot about those technologies accelerating in other locations and maybe the U.S. has to catch up or there are minerals from other places that the U.S. may or may not produce. How do you see U.S. miners contributing to the green economy and battery technology and electric vehicles and that whole section of the economy?

 

JM: When you talk about battery technology and when you talk about the electrification of the auto fleet, what you’re talking about is copper. And you’re talking about mass needs of copper, mass needs of gold, mass needs of silver, and be able to satisfy the requirements. If you look at the wind technology and the coking steel that’s going to be required, the coking coal for making steel that’s going to be required, these are needed to achieve the goals that have been put out there. The American miner is absolutely part of of that future.

 

TN: Great. Perfect. Jerry, thanks so much for taking your time today. I really appreciate this and I look forward to speaking again as we see all of the supply chain issues with COVID and post-COVID. It’ll be really interesting to reconnect and hear some of your thoughts at that point.

 

JM: Thank you, Tony. I look forward to it.

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QuickHit: The “Great Pause” and the rise of agile startups

Vice President for Accelerator Investment Fund for Capital Factory, Bryan Chambers, joins Tony Nash for QuickHit’s 15th episode. In this episode, they discuss the making of agile startups, and how they are amidst an economic recession brought on by the COVID pandemic, energy fallout, and other issues. Chambers also talked about The Great Pause. He sees this as a large contributing factor for the future of startups around the globe.

 

Capital Factory is the center of gravity for entrepreneurs in Texas. They help founders and startups by introducing them to their next investors, their next customers, their next employees. Since 2013, they’ve been the most active VC in the state of Texas, unlocking billions of dollars of new value for startups.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: How have small, innovative companies been impacted by the various kind of problems we’ve seen over the last four months starting with COVID and then energy fallout? And how are corporates responding to that?

 

BC: The best entrepreneurs I’ve ever had the opportunity to work with generally have two characteristics: they’re incredibly resourceful and they are very emotionally intelligent individuals. Those are the two critical aspects of entrepreneurs that are also going to help them successfully navigate a global pandemic.

 

Everybody’s pretty impacted. The impact is significant. And so much that we’ve applied a formula internally called the COVID Impact Score. We ask everybody: how has COVID impacted this business and where is it going? How is it changing? Few people are positively impacted by it. Most people are negatively impacted by it. A few businesses are just neutrally impacted. But most people fall into that first camp, the negatively impacted.

 

People should be looking in the mirror, thinking very deeply about how do they pivot. How do they capitalize on new opportunities? Regardless of a global pandemic, it’s incredibly hard to build a startup and build a successful organization. This makes it even more difficult, and we’re going to see a lot of companies die faster. But we’ll also see lots of new and exciting innovations be born. We know in the wake of a crisis, major innovation and reform, happen. It’s exciting. But it’s also painful to get there.

 

It’s the Great Pause. The investment community is confused because our minds always say “no” when it comes to making an investment decision or a purchasing decision. It may not the [fault] of the product or service. We don’t know what’s going to happen in our business next month or next quarter and confused minds say “no”.  And I think there’s a lot of “no” right now.

 

TN: That’s what we’re seeing in the commercial environment but I think from the investor side, I yearn for the days of Q3 2019 in terms of investment funding. What a beautiful time it was. And it’s just a 180-degrees from that right now. As an entrepreneur and a startup, it’s an interesting time for us. It’s a matter of reorienting who we are. I know Capital Factory is doing the same thing.  Even big corporates are doing the same thing.

 

That’s what we’re seeing in a lot of the conversations we’re having. Many people aren’t really sure of their short-term priorities, and they just kept moving along. We’re finding opportunities in that, which is great.

 

Figuring out how to respond to that had been a challenge for us. But now that we’ve cracked it, we feel like we’re really moving ahead, and I’m hoping that those entrepreneurs that you guys are working with, that many of them can do that.

 

So part of the next step is what are corporates doing? How are corporates innovating through this? Are they relying on Capital Factory companies or external innovations to figure this out, or are they doing that great pause you’re talking about? Or are they just taking their own inventory in-house? Maybe they are trying to figure out where they’re going?

 

BC: It’s all of the above. Budgets have dried up and confusion still remains. People are scrambling to figure out how to re-prioritize innovation projects. But something so unique is happening in the technology ecosystem, not just in Texas, not just in the nation, but across the world. Innovation cycles are continuously speeding up. They’re getting faster. This only makes Fortune 500 companies more and more susceptible to disruption and more and more uncomfortable.

 

Any major corporation has two strategies: an internal strategy and an external strategy. They must be thinking about both. How do we improve our own processes, our own efficiencies and continue to innovate and iterate better and faster? But we better look outside our four walls, because startups are coming to eat our lunch. They can do it better and faster than they ever have in the history of the world, and it’s happening.

 

New business models and new types of firms will emerge. New firms like Capital Factory and our Innovation Council, the service that we help provide to startups and to our Fortune 500 organizations are going to be more prevalent. It is so fast and furious [at this point in time]. No large corporation can [compete] successfully without help from new types of partners.

 

TN: What we saw initially with COVID, especially, is a wave of fear. Now what we’re starting to see is a wave of humility. We could have done this better. We need to look outside. We need to consider that person inside who had that idea. That initial wave of fear was really two months. People were just reacting and trying to figure out how to survive day-to-day. Now they’re taking stock and looking back so they can figure out what their next step is.

 

How do you see corporates operating with external innovative companies going forward? Do you see more action there? Do you see more interest there? Do you see the return of corporate VC arm in any large company?

 

BC: Corporations need to be great at executing low-cost, low-risk proof-of-concepts in a non-production environment. We’re going to need to do integrations with lots of startups and rapidly test. Then [they will need to] choose the ones that work well and scale with them, if not acquire them, invest in them or support them.

 

The global pandemic has brought that confusion which has brought a temporary pause. But we’re going to see it continue to accelerate, and we’re going to see it accelerate in all areas. Organizations will be be forced to start engaging earlier with startups. We’re going to see more corporate venture capital dollars begin to flow.

 

Big corporations, now for the first time, are turning around thinking, “Oh my gosh, that startup can really compete with us and we´re Microsoft.” That statement is more true now than it ever has been. It’s only that level of innovation that will continue to benefit the agile, resourceful startups.

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QuickHit: “LUV in the Time of COVID”

Avalon Advisor’s chief economist and author of “After Normal: Making Sense of the Global Economy”, Sam Rines joins Tony Nash for the 14th episode of QuickHit, where we discussed the L, U, and V recoveries in different states and industries. He also shares some interesting data on traffic congestion, CPIs, car sales, and food prices — and what these data mean for investors, businesses, and people. And what trend is he seeing to pop back up in travel and leisure?

 

Don’t miss out some of our relevant QuickHit episodes:

Proactive companies use data to COVID-proof their supply chains

Manufacturers are bouncing back, but…

We’re not going to normalize

How do we use up all the corn now?

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

TN: I’m trying to figure out when and how do we come out of this? We have our models, we have our views on things. But I read your stuff every day and what are you thinking? Where are we right now? Are we early, mid, late? Where are we now and where do you think will go in the next few weeks or months?

 

SR: So I think the answer is all three. We call it LUV in the Time of COVID. There will be an L-shaped recovery, a U-shaped recovery, and a V-shaped recovery depending on whether you look at Texas or Florida or Kentucky. Whether its manufacturing or services. Everything has its own shape. So we’re early on some, middle on some, and late on others.

 

On the overall employment side, we’re probably past peak pain. At this point, you’re mostly having unemployment benefits a hindrance to bringing people back to work, not help people keep afloat. That’s not true everywhere. Certainly, there are places that are still shut down and those people still need those unemployment benefits. But places like Texas that are reopening to a certain degree like Florida and Georgia. It’s difficult to bring people back to jobs that pay less than the enhanced unemployment benefits.

 

One interesting piece of the puzzle though is the continuing unemployment claims and you’ve begun to see the states that open actually begin to roll those down. So people are coming off those unemployment slowly. It’s not happening quickly. Florida is one of the exceptions that Florida came off extremely fast. I think that’s going to be one of the stories that’ll pick up pace over the next three to four weeks. There’s a decent chance that if we’ll continue to have these types of numbers for continuing claims. There’s a decent chance that the May unemployment number will be the worst number we see this year. You begin to improve pretty quickly. The June number, we don’t take that survey for another few weeks. That’s more than likely going to be better than May in terms of unemployment beginning to come down. So we think it’s a mixed bag. But employments probably going to improve from here.

TN: That’s good news, I hope. There are a lot of service jobs and blue-collar jobs that were laid off in the first waves. Is that right?

SR: Yeah most of them. The interesting thing is it’s fairly easy to social distance within most manufacturing facilities. So manufacturing, theoretically, can snap back a little bit faster than the services side of the economy. The services industry is going to be the laggard here. But the service industry is also the majority employer, far more important on the employment side of manufacturing.

TN: You keep an eye on things like traffic patterns and restaurant usage. What are you seeing as the rate at coming back and then what does that say about things like food prices or gasoline consumption?

 

SR: It’s snapping back very quickly on the driving side of things. That’s snapping back much faster than public transit, airlines, etc. You have the U for airlines and mass transit. But you have what appears to be a pretty sharp V in driving. Congestion is almost back to normal levels in places like Houston during rush hour. Texas generally is back towards its baseline according to most of the metrics.

 

The RV sales are through the roof. People still want to go on vacation. And if you can’t and don’t want to get on a plane and go to Cabo, you get in an RV and go to the Grand Canyon. It’s just another way to get out of the house. I got to a little bit of trouble for saying it. But I’ll say it again, if you keep boomers off of cruise ships, they’ll find a way to still go places and still have fun in retirement. They’re not just gonna stay up. They’re not just going to stay cooped up in their house. And the interesting thing about that is an RV is not a small investment for most people. So I think that travel might have more legs than people are really giving credit for. Camping might actually make a come back here versus your more crowded areas, particularly within that boomer crowd.

 

TN: Back to the 70s for camping. We hear about food shortages with meat and we also hear about storage for crude oil. With more activity, are you seeing faster drawdown with crude oil? Are you seeing anything happening there in terms of food?

 

SR: So with crude, we’re beginning to see drawdowns and I’m not sure that it’s faster than we anticipated. But gasoline particularly has picked up much faster than people anticipated. That drawdown will be much faster, much stronger and have longer legs than was anticipated. On the overall demand side for oil, it’s a harder picture to paint. Aviation fuel is a significant driver on the margin of usage within the US. A lack of that is offsetting any bullishness on the gasoline side. Those will probably balance each other out for the most part as we move forward and you have a drawdown that’s relatively in line with what we were anticipating a few months ago.

 

On the food side, you’ve seen a snapback in restaurants for Texas in particular. We are back to, give or take 55 percent usage for restaurants. We have 50% occupancy allowed in Texas. That appears to be pretty close to maxed out. At least restaurants, we get reservations. We’ve seen some interesting things on the eat-at-home food side. We dug through the CPI, the inflation data pretty carefully and found that the food at home was getting increasingly expensive in a way that we hadn’t seen in a long time. Eggs were getting expensive. Meat was getting expensive. Fresh fruits and vegetables are getting expensive and they were accelerating at a pretty rapid pace.

 

It does look like we’re going to have some pretty good crops. It doesn’t look like we’re going to have trouble on that front. So we shouldn’t have the pricing pressure emanating from that side, which is good.

 

The critical aspect is going to be how do we get the beef demand back up to the point where you actually have cattle ranchers wanting to not cull their herds and therefore drive state prices higher. I think that’s going to take more states opening restaurants like New York, California, and other big steak consuming areas of the country reopening and really beginning to drive that incremental demand.

 

Another fun note is I grew up in New Hampshire. Lobster is an important part of eating there. And lobster prices plummeted to the point where lobstermen decided they probably shouldn’t even go out and they were selling for two to four dollars a pound on the side of the road.

 

TN: Let’s just take a minute and we’re sitting in October 1st. We’ve gone through Q2. It was carnage. We’ve gone through Q3 and we’re looking back on Q3 versus Q2. What are you thinking at that point, October 1st of this year? Help me understand a little bit of that based on your perspective today.

 

SR: Based on my perspective today, I’ll probably be sitting in Boston, hopefully having a client meeting at a lobster that’s more expensive than three bucks, looking back and wondering how we missed the pickup that was happening in June and July and how the pockets of things that were doing much better than anticipated.

 

It’s worth noting according to one of the data sources I used, auto sales are actually picking back up rapidly from down, north of 60% for new cars and used cars. New autos only down, I’d call it the high 20% range from a year ago. Used cars down single digits from a year ago, on a volume basis. That kind of snapback in different pockets of the economy is going to be what I’m looking back and wondering how I missed whatever it might be whether it was people wanting to get back on cruises. I don’t think they’re going to want to give back on cruises. I don’t think people are gonna jump back on planes very quickly.

 

I think we have a 911 type of recovery. Three years, give or take there. I think that’s the mindset to use. But there will be something that just completely catches me off guard in terms of the speed and rapidity that it comes back, or with the L-shaped, it’s just never coming back. One thing I think we’ll catch a lot of people off-guard is the pivot on the margin from hotels to homes. Renting at home instead of renting a hotel. Being spaced away from people, having the pool to yourself. I think there will be trends like that that have become pretty clear whether or not they have legs by October and I think that’s probably one of them.

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QuickHit: Proactive companies use data to COVID-proof their supply chains

Supply chain expert and SAP SCM/IBP Architect Odell Smith of My Supply Chain Group joins this week’s QuickHit to talk about how proactive companies will survive, how data helps them decide quickly on supply chain solutions, and what we can do to be better prepared next time. After a quick 5-year stint in engineering, Odell has been doing supply chain technologies for over 30 years. His company does mostly SAP products and advisory services and implementing technologies for the supply chain.

 

Don’t forget to subscribe to our Youtube channel and hit the bell icon to be notified when a new QuickHit goes live. If you missed some of our episodes, here are some of the lastest ones you’ll enjoy watching:

 

Manufacturers are bouncing back, but…

We’re not going to normalize

How do we use up all the corn now?

How ready is the military to face COVID-19 and its challenges?

Oil companies will either shut-in or cut back, layoffs not done yet

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: How are your clients looking at their supply chains? How do they use their data to better understand and plan their supply chains even with all the craziness and volatility? Can you give us an example?

 

OS: Our clients have had a variety of different issues. There are companies that even inside the same company, they’ve had one business unit with a huge spike in demand and another business unit will just drop off. One of our clients is one of the largest beer producers in the world. Their keg business that supports restaurants just evaporated all of a sudden. But their bottled beer just went through the roof.

 

So these companies are trying to see these demand patterns as they come in, but also be able to quickly respond to those. Everybody’s used to the monthly demand patterns. But being able to see such a rapid volatile change in these demand patterns and being able to see that with data in the systems, then being able to simulate how you’re going to respond and make intelligent decisions based on that data, has been a real game-changer. If this had happened 20 years ago, it would have been a much more difficult scenario to recover from.

 

TN: What kind of data are people using to make these decisions? Because we really don’t know what’s coming from the outside. All the governments say macroeconomic data. This hasn’t come in obviously. So how are people taking data in to understand how to adjust their manufacturing patterns?

 

OS: The operation’s focus is about trying to estimate what that demand pattern is going to look like and then be able to adjust from that, if you have a constant supply. But if you have an irregular supply, it’s also a problem.

 

Another huge issue here is we’ve off-shored so much stuff in the last 15 to 20 years. An example is one of our customers that is a large paper supplier. They bring in pulp from other suppliers. Everybody’s familiar with the toilet paper issues that we’ve had. These guys had all kinds of issues come up. They bring in product and then they manufacture that product. As they do that, their supply chains were disrupted by not being able to get their suppliers’ product through the ports. Their port activity was blocked. They knew that was going to be the case, and so they had to redirect some of that stuff that was coming in to run their manufacturing.

 

They also worked proactively with the ports. They knew that the port was going to be closed and they had to redirect that. We put in some cost optimization for them to be able to evaluate simulations to estimate where it looked like the best place to bring this raw material. And then of course, their manufacturing process itself had to change, because there’s a lot more demand now for toilet paper than there was for paper towels.

 

Nobody expected that demand shift. Everybody was unprepared for that. But being able to use data to make smart, intelligent, short-term decisions about how to correct for that new demand was something that they were able to put in place fairly quickly. For scenario planning, we were using SAP IBP to be able to make those right decisions.

 

TN: I started my career in a freight forwarder, customs broker, and all the physical logistics around it. And it was always interesting to me early in my career to see when people had cost-sensitive, time-sensitive, quality-based decisions, and you’re balancing all three. The types of decisions they made sounded like they didn’t really have any history to go by. They were just looking at expectations, and you’re just playing it day-by-day or week-by-week.

 

OS: If you have the tools and you have the data, then you can do that. Now, a lot of this data was manufactured data themselves because it was based on estimates. What are my options here? I’ve got three other ports to use, and there’s different costs of transportation going through those ports, plus there’s a risk. Will I be able to get the stuff processed through and time to be able to make it? And if I don’t, then what’s the downstream impact to me in my subsequent manufacturing process?

 

TN: All to get a roll of toilet paper to your corner store. What would you say manufacturing companies need to be thinking about? How can people be better prepared the next time this happens?

 

OS: One thing that came out of this is that this data is changing so rapidly. [Companies that can] access that data can see what worked, and what didn’t work from the last situation. There are going to be some things when you’re making these snap decisions, and you’re just trying to keep your business afloat. There are going to be some things that you learn in hindsight that were not the best thing to do. As long as you plan for that, and you know that that’s going to be the case, and you review that after the fact, and are prepared for that risk, know where that risk is, then it always helps you be able to respond better next time. If you don’t learn from those things, shame on you.

 

TN: Do most major manufacturing firms today have a good base of data and well-organized data to make some of those decisions? Or is it still kind of iffy?

 

OS: It depends. There are some that have really good data. But it has to be a decision by the company. The company has to decide to put the resources in place and to have that vision, that strategy of knowing that that data is important and that the data needs to be reviewed, audited, and cleansed.

 

Some companies are very proactive. Some companies are completely reactive. And when you get in a situation like this with this craziness, these [reactive] companies won’t make it. Proactive companies will make it. So it’s really a business mindset and putting a value on that data that makes it helpful.

 

TN: These major manufacturers that you work with, I think there’s a perception out there that a manufacturing firm has one ERP system. Do you work with any firms that have kind of one ERP system or are they dealing with half a dozen or more typically?

 

OS: There are companies that have been able to maintain that single ERP situation. But more than not, you wind up with mergers and acquisitions. And these M&A activity is just brutal on IT organizations because very seldom do you acquire somebody who has the very same ERP system and they are on the same version that you’re on. And then, there’s a product rationalization and a customer rationalization that has to take place. Those are all very difficult things to get past.

 

TN: Pointing out, so just people understand. It’s not as if you’re just taking data out, putting it in a big machine and then putting it out the other end to help make a decision. You’re taking data in from a lot of different sources. And you’re making sure that it’s somewhat normalized or understandable in the output. And then those managers within those companies are also seeing data in a number of different formats to make those decisions. So this isn’t linear. This looks more like a bunch of weeds over here and a bunch of mangled tree roots over there and you’re trying to make it as linear as possible. The complexity of these decisions, the complexity of these data, say logistics activities, are just fascinating.

 

So last question here Odell. You’ve seen these companies through the first phase or two phases of this. Do you see these companies back on a path to normalization now? Are there manufacturing and supply chain processes normalizing now?

 

OS: There are some that are beginning to get back on the horse and there are some that are just still severely impacted. Some of our customers are in the pharma industry. They’re just going nuts and they’re going to continue to go nuts for a while. It’s really a mixed bag of things. A lot of our customers manufacture products that are related to home. Everybody has been doing a lot more of that lately. Demands for those have still been really strong even though supply may have been impacted by some of the situations.

 

One of our clients is a company that has multiple legacy systems. One of the great things about these new cloud solutions is the ability to do that normalization, to be able to take data from multiple different ERPs, disparate ERPs, and bring it in for a total view for the executive team to make these quick decisions. A lot of our customers are doing really well, and so it’s great to see them coming out of this. It’s been a slow couple of months for people just to wrap their arms around the thing, and try to just fight fires. And then now we’re coming out of some of that and into recovery mode that looks good and strong.

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QuickHit: Manufacturers are bouncing back, but…

In this QuickHit episode, we are talking with Chad Moutray of the National Association of Manufacturers (NAM). Chad is the Chief Economist for NAM, and he talks with manufacturers across the U.S. every day, to understand their issues and informs them of the the overall economic landscape. NAM has about 14,000 members that includes state manufacturing associations. Tony Nash discussed with Moutray the state of manufacturing especially in this time of the pandemic. What are they doing, thinking, and what are their plans? 

 

You can revisit our previous QuickHit episodes here:

 

We’re not going to normalize
How do we use up all the corn now?
How ready is the military to face COVID-19 and its challenges?

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Can you walk us through some of the manufacturing firms that you’ve been interacting with and how do they’ve come to understand the environment? What have they been thinking about? What have their priorities been? Because I think it’s been confusing for everybody. But from a manufacturing perspective, what have you been seeing?

 

CM: I’ll go through a couple of things here. Number one, just that dearth of data that we had early on, everyone was asking me, “What is the current capacity utilization for manufacturing right now in the State of Pennsylvania?” I don’t know. How would I know, right?

 

There was a lack of information early on, and the abruptness and the severity of this downturn just caught a lot of people [off guard]. The numbers are so heartbreaking and jaw-dropping. We’re starting to get a sense now of what those numbers really are, and the drastic-ness of these figures in terms of being the worst ever, or the worst since the Great Recession. But there was a lack of information early on that really just caught people by surprise.

 

Companies don’t know what to do. This is not just a business conversation. It’s also a life and death conversation. Do you keep operating? Do you not keep operating? Are you operating in a state where you’re forced to close? Are you deemed essential? A lot of those things early on really dominated manufacturers’ time in terms of whether to operate, what happens if someone gets sick in your facility? What do you do? Do you close everything down? There was a scramble early on just to figure out operationally “What am I doing?”.

 

It moved from there to the conversation about PPE, Personal Protective Equipment, masks or ventilators or whatever else.

 

One thing that really has dominated that manufacturing conversation over the last month has been the National Association of Manufacturers work with the administration [to understand] whether it’s FEMA or DOD or the Vice President’s Office to say, “Okay. What do we need in order for everything to come back to normal? How many masks do we need? How many ventilators do we need?” And then helping to identify manufacturers that can produce that. That really has dominated a lot of time for the NAM over the last month or so–getting a handle on what are those needs.

 

That has gravitated into the new normal. Everyone is [asking] what does manufacturing look like three months from now, six months from now, a year from now? How do you get back to a sense of normal, whether there’s a vaccine or not a vaccine?

 

Answering those questions will dominate much of my time from a research perspective. We asked on a survey “Are you re-engineering in your process to have social distancing in mind,” or “Are you going to let people work from home?” That’s not always possible on the shop floor. But in some cases it may be, right? So those types of questions are first and foremost.

 

We’re talking to a series of tire manufacturers. They have a huge retail operation and retail is just going to change dramatically. They not only look at the manufacturing side, but how retail is going to change, and then how they can react. It shows you just how dynamic this particular moment in time is in terms of dramatically changing the sector.

 

TN: I know you’re still in the process of doing your research but what’s your feeling now? Do you get the sense that people want to get back to kind of a normal-ish environment quickly? I know “there” is relative. But do you think there’s a desire to get back and get relatively normal business activity back say in Q2 or Q3? Do you get the sense that it’s going to be longer? What’s the drag? How long will this drag effect impact companies and impact manufacturers?

 

CM: I do think that we’ve passed the worst of it. I do think that in that late March, early April, that’s when things just really hit bottom. You’ve started to see a sense, especially from some of the more recent data, that things, while they’re still bad, are not as bad as they were several weeks ago. I do get a sense that you’re starting to see that bounce back in the marketplace, which is good.

 

In general, there is what we’ll call “quarantine fatigue” not just for consumers but for businesses as well. There is a sense that activity is going to start resuming.

 

The difference here is that yes people are going to come back to it but there’s still going to be some hesitance there. We don’t have a vaccine. So coming back to work is not the same as it was before. That’s true at the NAM, that’s true in every workplace in the country. People’s willingness to go out to restaurants and bars and go to Disney World has all changed a little bit.

 

I do think that we are bouncing back already. But in this new environment, there is still a little bit of hesitance about getting out in crowds and the workplace change. Yes, I can go back to the office maybe, but am I going to? Am I going to continue working from home? How much separation is there for me between me and my co-worker on the shop floor? We’ve already started to see that rebound. But it’s in a different place than it was two months ago.

 

TN: A lot of questions. Let me shift gears a little bit and ask you about trade. With COVID-19 and initially when this was hitting China hard, we saw a lot of supply chains stall out and slow down. We’ve been talking about the regionalization of supply chains for a few years at Complete Intelligence. Is that something that you’re seeing, and I know you’re not necessarily advocating a position. So I don’t expect you to be doing that. But are you seeing that happen or is that concept not seeing a lot of traction on yet?

 

CM: We were starting to see people re-evaluating their supply chains as a result of the Trade War. Last year, we were seeing a lot of that. It doesn’t mean all of it’s coming back to the U.S., but it certainly means production might be moving out of China and other places. This exacerbates that even more. There’s been this realization that we can’t depend on one country and one source to get all of our stuff anymore given the extremeness of this disaster economically.

 

People are going to be re-evaluating the supply chain. From the NAM point of view, we want as much of that to come back to the U.S. as possible so we’ll be advocating policies on on-shoring. Look for that coming from us. But the reality is, companies are going to locate where they locate. There’s a lot of reasons why companies locate wherever they do, and it’s where the customers are, that’s where their other suppliers are, that’s where the intelligence is. And some of it’s going to go to Mexico, or to the rest of Southeast Asia. There is definitely this understanding that we’ve got to re-evaluate that supply chain process in terms of who we’re buying from, making sure there’s duplication, and I think that’s a conversation that every firm is having right now.

 

TN: Very good. Chad, thank you so much for your time. I’d love to have you back in a few months to revisit some of these questions. As the unknowns dissipate, it’ll be very interesting to to look back and see what people did right, what mistakes people can avoid next time this happens.

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QuickHit: We’re not going to normalize

In this episode, our expert guest Grant Wilson of Exante Data said that “we’re not going to normalize” and that countries need to make the very difficult decision to risk re-infection or re-outbreak in order to reopen the economy.

 

Grant Wilson is the Head of Asia Pacific for Exante Data, a macro advisory and data analytics company based in New York, with a broad global client roster. Exante Data was one of the first to identify and analyze the impact of Coronavirus with detailed data.

 

You can also check out our previous QuickHit episodes: How do we use up all the corn now? and How ready is the military to face COVID-19 and its challenges?

 

Show Notes

 

GW: So we saw COVID very early – mid to late January. In fact, I positioned it as a key risk factor for our clients. And as the situation evolved we just stayed with it.

 

We moved the firm increasingly towards all data through this period because we’re trying to assess how the virus is affecting the economy: [what are the] different scenarios to restart in different countries, different sectors, which is really the most germane question at the moment.

 

TN: Where do you think we are? I think the initial shock is past. Do you think we’re on a path to normalization or are we still in a hesitation phase before we get on to that normalization path or something different?

 

GW: I think it’s something different. I don’t think we’re going to normalize. I do think there are going to be industries, which have fundamentally changed coming out of this. People want to put a time frame on it, and I think you just got a run with it.

 

But to give you some examples, I’m extremely pessimistic about commercial real estate globally. The way people work has changed fundamentally, and it’s not going to change back. Whether the virus comes off a little bit more or whether we do get a second wave. The fundamental changes that are happening in terms of office environment, the digitization of communication. Those things are not going to turn around. So if you’re a large landlord or a sponsor of CMBX, derivative structure, you’ve got some real problems, and it does not matter where the virus is.

 

Similarly like public infrastructure. People are clearly using less trains, less buses, obviously less planes. Interesting that there could be a shift back to private car usage. We are trying to think through the secular things coming out of this.

 

And then for the virus itself, one of the most peculiar things is that there’s only probably a couple of countries globally that can truly achieve elimination, like to totally get rid of the virus within a proximate, self-contained environment. New Zealand’s a very good example of that. In Australia, the case counts are extremely low. So the rest of the world will not eliminate this thing. They’re gonna have to pick and make these really, really difficult decisions about how much of a virus risk and re-outbreak that they want to tolerate as against the imperatives of restarting the economy.

 

TN: A lot of the talk was about flattening the curve, which was about reducing the kind of overwhelming capacity going into hospitals so they could actually treat people. That flattening the curve discussion has changed to something different. And it seems to almost be approaching a zero-tolerance discussion where we have these lockdowns and people can’t go into work and make a living.

 

In the States, we recently saw Elon Musk threatened to move his company out of California to Texas potentially so that he could get his company to work. And the State of California or the county relented and let them come into work. Are we in a period where there’s selective lockdowns? Does flattening the curve mean anything anymore? What are you seeing in terms of the economy, industries?

 

GW: The thing is that a lot of companies, retail, hospitality, mass events, you know football games, basketball, things like that, they don’t really work in this model where you have social distancing. And so, you either really just have to go for full eradication. But it’s not possible in many of these places. You’re going to have to tolerate some reinfection risk and get on with it.

 

I’m very far away from the U.S., but we’re tracking it very closely state-by-state that there is sort of a polarization developing where Republican states are more inclined to try to restart the economy and sort of run this risk. Democratic states are still more tolerant of lockdown. And it seems increasingly politicized, and that’s not a great surprise given you’ve got a big event at the end of the year.

 

I’ve contrasted to Europe. When you listen to Angela Merkel, not Britain because Britain was very late and very confused in terms of their strategy. She’s a scientist by training and she explained very, very clearly that the first part of the strategy was to make sure that they didn’t blow through their ICU constraint. And now that they’ve achieved that, indeed they have flattened a curve. They’re not gunning for elimination. They know they can’t get there. And so they’re just trying to manage what’s known as the r0 so it doesn’t pop back up above one and you have a real explosive re-acceleration. But they’re having to live with it.

 

What still hasn’t necessarily gotten through to people, is that business models that worked previously don’t work anymore. It’s very hard to see how a lot of small and medium-term enterprises are going to make it out of this. And I think that’s the Chapter 3 or Chapter 4 version of it. But that’s the concern. There’ll be some winners and there’ll be some adaptation of the economy. But the legacy and the tail on this is just immense. It’s immense.

 

TN: So tell me this. Is there anything good that’s going to come out of this?

 

GW: There’s probably going to be a very significant re-think about climate change. This is going to be one of the first years where carbon emissions globally are going to fall. Effectively, it’s because we shut things down. It was the way that people actually wanted to get there. That’s probably one interesting data point. If you look at that area very closely, we’ve never been able to run a real-time experiment like this. So it will be very interesting to see how the effects sort of percolate through.

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QuickHit: How do we use up all the corn now?

This QuickHit episode, we talked about agriculture commodities with focus on corn ethanol. We are joined by Chris Narayanan with INTL FCStone in their Capital Markets. Chris held several different roles in the commodity space and was formerly a commodities and equity analyst for investment bankers. He explains why we have surplus of corn and other ag commodities and that this problem started way before the global pandemic. What will be the solution, and with crude in trouble, does it mean trouble for corn ethanol as well?

 

Our previous QuickHit talked about the military and the U.S. defense’s biggest supply chain problem: its dependence on the enemy. Watch it here.

 

If you want to be notified about new QuickHit releases, be sure to subscribe to our Youtube Channel here. Or sign up to the CI Weekly Newsletter for more insights on the economy, markets, and trends.

 

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

 

Show Notes

 

TN: I wanted to talk a little bit about ag commodity markets. With all of the COVID-related issues, we’ve seen demand really fall. We’ve seen things like potatoes stacking up and milk being poured out. It’s deflationary, it’s wasteful. How is that impacting markets in terms of the expected supply coming on, and how long do you expect this demand issue to be there?

 

CN: First, I think it’s important to take a step back. When you look at the commodity space, especially at agriculture, in a lot of areas, we’ve been flooded for several years. And then when the Trade War hit, that was another hit to the system. And now the Coronavirus is here, it’s another hit to the system. We’re trying to chew through this as quickly as possible.

 

People are shifting from eating out to eating at home. The buying patterns are changing. The foodstuff needs are changing. You go all the way back through the supply chain, back to the farmer and the rancher, it changes the dynamic.

 

USDA came out, with their monthly ag supply and demand report and they’re pretty optimistic for the new crop year. Now, that’s going take some time, and obviously these are just projections.

 

Looking at my screen right now, the market is a little lukewarm to it. As we get to the growing season, we what kind of supply we can expect, and then once the harvest hits, we’ll know, in terms of the global economy, how much we actually need.

 

TN: We saw some freezes over the weekend as well in the Midwest. Is that hurting things or is that late freeze something that just happens occasionally and markets just work that in?

 

CN: It depends on where it is and what stage they are. Planning is all over the place in a lot of areas and it depends on what crop you’re talking about. I don’t think you can make a blanket statement on that. But certainly, depending on the damage and the intensity on the area, there could be some damage. That might be supportive to prices at some point. But I think it’s a little early to say.

 

TN: What about things like corn? When we can move into talking about ethanol or fuels or some of the downstream products? Do you see this freeze hurting the corn crop, so it would tighten up the demand environment a little bit? Or is it all fine and it’s not really going hurt supply?

 

CN: It depends on where they are in planning. We’re in the middle of May. A lot of people hope to be done by now. If they didn’t get it in the ground, they might delay for a couple of weeks. If they did have it in the ground, they had some early emergence in some of the southern areas. But where the freeze really didn’t hit, it shouldn’t have that big of an impact.

 

I think the big thing is how do we use up the corn that we have? In the last decade, we’ve seen a huge increase in corn supplies. I look at the amount that’s left over at the end of a crop year divided by how much we used in that particular year. That’s been on the rise, and I think ethanol is a big portion of it. When people talk about ethanol, they say we need an increase in blend or go from E10, E15, or even higher.

 

In my opinion, that’s just kicking the can down the road. You’ll see an uptick for a little while — five, seven years or whatever that number is, and then it’s going to level off again back to where we are. You’ve just reset the base, but you don’t really solve the problem in a more long-term fashion.

 

I think there are two big things that we’re seeing in this current situation. First, driving fuel efficiency on vehicles has increased over the last 15-20 years. We’re driving more miles per gallon of gasoline. So incrementally, you need less ethanol to blend with the gasoline. The second part of efficiency is we are producing more gallons of ethanol with less bushels of corn. You need less corn than you did before. And now with the Coronavirus, people aren’t driving. We have a lot of stay-at-home orders that are starting to expire in some parts of the country. But again, you’re not driving, so you just don’t need to buy as much gasoline. I mean, my truck tank is half-full, and I think the last time I filled it was about a month-and-a-half or two months ago. 

 

What we needed to look at is how can we best work ethanol into global trade and where are the export markets. For example, we have the RFS and the RFS2 – biofuels and advanced biofuels. We can bring in Brazilian ethanol made from sugarcane and export corn ethanol to them. It’s just one example of a symbiotic relationship where the blenders here would get credits.

 

TN: How is that different? Are there differences between sugarcane ethanol and corn ethanol in terms of the end use?

 

CN: In terms of the end use, no. It’s the same. It’s really the process in which it’s made and how the EPA and other organizations look at the efficiency, the cleanliness, and the process of producing it all. At the end of the day, it blends, and specs will dictate. But theoretically it’s going to be just another substitute of each other.

 

TN: I’m just curious just to dig into that, why would the U.S. import Brazilian ethanol and export corn ethanol? Are they substitutional? 

 

CN: To an extent they are substitutes. So that makes it a little bit more practical. Back when we had blending credits, there were different credits that you can get depending on the stage. Corn ethanol was the most basic.

From a completely economic standpoint, if you’re a blender that has to purchase this ethanol to mix in with your gasoline, there was, at the time, an incentive involved for the added cost of doing this. So if we can work through this policy, maybe update the policies, look at our global trade where in any given year, you might have a surplus in one country and the other, why not introduce some kind of a trade scheme where you help each other out, right?

 

Because if you go to Brazil for example, you can go to a pump and they literally dial in E0 to E100. They can run their engines on most. And they run that mix depending on the economics, I think it was like 70. If the price of ethanol was 70% of gasoline or less then, it was more economic to use ethanol.

 

Some people say that you see a slight loss in fuel efficiency and so there’s that kind of scale that you can apply and use to your advantage. Look in the fact that you can increase the blend wall and maybe go to E20 or E25. And the tests from the engineers show that that’s not gonna do anything to the vehicle, then that’s great. But again, it’s a temporary fix — temporary meaning in the next ten years versus what I’m looking like 30, 40 years ahead in the future.

 

TN: So with crude oil prices depressed, how hard will it be to get those refiners to include ethanol? Are those blenders to include ethanol if crude and gasoline are super cheap?

 

CN: So here’s the thing that nobody talks about. We have the Clean Air Act, which introduced the cafe standards for fuel efficiency. In 30 different partners around the US, you have to introduce some kind of an oxygenate to basically treat the gasoline. MTBE was the preferred substance at the time but it was found to pollute groundwater. 30 some-odd different states banned it, so that effectively made a de facto nationwide ban on it. So to meet the Clean Air Act in those cafe standards, you had to introduce something. Ethanol was what came in. It burned clean. It was renewable. It didn’t pollute groundwater and it helped make that standard.

 

When I was at a previous job, going back about seven years ago or so, I was working with one of my other commodity analysts and we did a joint paper on corn gasoline and ethanol. If memory serves, it was like E6.2 or something where when you look at the different summer blends versus the winter blend the different metropolitan areas and you distill down to what do we actually need.

 

Until you find another additive to take the place of ethanol that’s cheaper, safer, or at least
safe, you still have some incremental demand that needs to be put into the gasoline that’s just required by law.

 

TN: Chris, thanks so much for your time today. I really appreciate it. I’d love to circle back and talk about other ag commodities in a couple of months to see where things are at.

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QuickHit: How ready is the military to face COVID-19 and its challenges?

In this QuickHit episode, we’re joined by Tate Nurkin to talk about the state of the military in COVID-19 pandemic. Tate is one of the world’s top defense and security experts, who has been in the security field for the past 20-25 years. He works for US defense and intelligence communities, allies, and partners in China and the Indo-Pacific, helping with defense technology to improve the future of military capabilities globally.

 

In our previous QuickHit episodes we covered the oil & gas industry:

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

Tony: One of the key things that I’m curious about is the impact of COVID on militaries and their readiness. We’re not hearing a lot about that. Are you seeing anything there? Do you have any worries? Is that something that will last a few months or years into the future?

 

Tate: There are definitely some short-term implications for militaries and readiness is at the top of the list.

 

We saw a fair amount of media coverage of the situation on the USS Theodore Roosevelt, which actually was a pretty big deal. Over a thousand members of that 5,000-person crew were diagnosed with COVID 19. One passed away.

 

Those incidences are happening, not just with the Theodore Roosevelt. It’s happened on another US Navy ship and it’s happened on a French aircraft carrier. Just like cruise ships, these ships are places where you’re very contained and in close contact with other people who may be carrying the disease. It’s easy for the disease to spread.

 

We’ve also seen it with the Taiwanese Navy. Taiwan did a fantastic job containing the crisis, but they have friendship fleet missions that go to the South Pacific. The most recent one came back from Palau. A bunch of sailors who came off that mission were diagnosed after they had gone out into Taiwan and mingled around.

 

These are big issues. These ships, predominantly ship forces deployed throughout the world, must strike a balance between keeping people safe during peacetime, and also making sure that there’s operational readiness. It’s something that not just the US military has struggled with today.

 

 

Tony: Do you see that we’re going to be contending with this for years? Or do you think we’ll get over this in a matter of months or say a year or so?

 

 

Tate: I would put the time frame for the readiness challenge to be slightly shorter, 18 months maybe. It depends on how long, how many waves there are of outbreaks.

 

I certainly anticipate a second wave globally at least. I think that’s a shorter-term challenge and one that’s a little bit more manageable if you can come up with the right processes and procedures for what precautions to take. But it’s not just with deployed troops, but also with sheriffs working inside the Pentagon or civilians that are also supporting the defense enterprise.

 

There are longer-term challenges though. Some of what we’ve seen are militaries thinking about the new missions that they have to undertake. In the short term, this is supporting COVID-19 response and the longer term, refugee monitoring, border security, etc.. They’re outside of the direct defense sector and more in the security sector. But there are some new missions that the militaries will have to grapple with and a new, different sense of preparedness that will have to be dealt with.

 

 

Tony: In terms of things to grapple with, I’m just wondering about things like social unrest. We’ve seen a lot of economic fallout from this as people have to sit on the sidelines for months, as the industries have stopped, as things like deflation have set in with wages… There are not just the social aspects of being isolated, but the economic impacts also. What I wonder about is social unrest. Is that something that we really don’t need to worry about? Or is that something that you take seriously?

 

 

Tate: I tend to try and navigate the spectrum between alarmism and dismissiveness. In this case, some finding somewhere in between, but maybe on the side closer to the alarmism. This is a big deal. There will be spatial and economic repercussions and some states won’t be particularly well equipped to handle those. Whether it’s overturning of regimes or just extraordinary societal and political pressure on regimes.

 

Asia is a good place to start. Some will be more resilient than others. But this is a big challenge for defense and security communities and for political establishments for sure. Reshoring supply chains, including the defense supply chain, will just amplify some of those pressures.

 

 

Tony: Amplify the pressures in the manufacturing countries today, so the Asian countries?

 

 

Tate: Some of the Asian countries. Japan, for example, has $2.2 billion that were built into it. Most recent supplemental budget for reshoring supply chains out of China. Some of the others will get to Southeast Asia, some will go back to Japan. But the reshuffling of supply chains and the defense supply chain is not immune to that at all. This is something to keep an eye on for both defense readiness and for political stability issues.

 

 

Tony: In terms of that separation of supply chains, it almost sounds like it’s the opposite of the EU spirit. The EU came together with the Coal and Steel Union, then integrated manufacturing. The theory was, as they became integrated, there was less likelihood of conflict in Europe. Am I exaggerating? Is it the opposite of the EU theory and maybe something that you see dangerous over a 5, 10, 15, 20-year horizon? Is it near-term or longer-term? Where do you see conflict happening?

 

 

Tate: Returning to that defense supply chain as somewhat of an analog for the broader challenge. A couple of years ago, the administration commissioned a report on weakness in the US Defense supply chain. And one of the big findings was that the US Defense supply chain was over-relying on the competitor, which is China. Some chemicals that go in some ammunition and other materials are largely sourced out of China.

 

The answer here is to re-shore some critical supply chains. We’ve learned that with the medical supplies most recently. Part of the solution is to find your trusted partners and also to stick with them. And some of that can be regional.

 

One of the challenges coming out of COVID 19 is a geopolitical one, and it’s meeting the challenge of China on a lot of levels. And for the US, retreating back towards autarky might not be the right answer. We need to find the things that we absolutely have to have. Find the partners that we can trust, and try to engage them so that you have some partners to deal with, this is much broader challenge.

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QuickHit: Oil companies will either shut-in or cut back, layoffs not done yet

We continue discussing oil companies this week with Tracy Shuchart, who is a portfolio manager and considered as one of the leading experts on crude trading. Tony Nash asked who is trading oil these days, why the oil went negative, and when can we see a bit of recovery for the industry? Most importantly, will layoffs continue, and at what pace?

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Hi everyone. This is Tony with Complete Intelligence. We’re here doing a QuickHit, which is one of our quick discussions. Today, we are talking with Tracy Shuchart, who is a portfolio manager with a private equity fund and she is one of the foremost experts on crude trading. We’ve had a number of conversations with her already, and we’re really lucky to get a little bit of her time today.

 

Tracy, just a few days ago, I was talking with Vandana Hari, who was formerly a Research Scholar at Platts and knows everything about energy. She was telling me that there are three to four months of crude oil supply, and that’s the imbalance that we have in markets right now. That’s why we see WTI at less than 20 and these really difficult price hurdles for people to get over. Can you tell us who’s trading crude oil right now? Is it mom and pops? Is it professionals? What does that look like? And also, what will have to happen for those prices to rise, generally?

 

 

TS: Right. Right now, the USO had to get on the prep-month contracts.  

 

TN: Sorry, just to clarify for people who aren’t trading ETF’s. USO is a broadly traded energy ETF, and they’ve had a lot of problems with the structure of the futures that they trade. So they’ve had to push back the futures that they trade from the front month, which is the nearest month that’s traded to further back in a channel in hopes that the value of crude oil in the further of months trades higher than the current one. So they’ve done a lot of reconfiguration over the last few weeks. So sorry. I just wanted to explain that.

 

 

TS: That’s okay. They’re out of the front month. Bank of China just had a big problem when oil prices went negative. They had a lot of money in the front months. They’re out.

 

Most retail brokers are not allowing regular retail to be traded in the front couple months actually. All that you have trading front months are the big funds, anybody who’s been hedging and then maybe a bank or two. But it’s definitely not retail that’s in there, and there are a lot of big players now that are not in there.

 

When we get towards expiration, the problem is that most of the funds are pretty short and most of the hedgers are pretty short, and the banks are on the opposite side of that trade. But when we come to expiration, what I’m worried

about again is we’re going to have a no-bid scenario. We’re going to have that vacuum once again. You’re not going to have any natural buyers there.

 

 

TN: Okay. So the WTI traded in the US goes negative, but the WTI traded in London on the ICE doesn’t go negative.

 

 

TS: They just decided not to let that contract go negative. The difference between the contracts is the CME Group contract is physically deliverable, right? And ICE contract is a cash-settled contract. So they’re not going negative, but CME allowed this contract to go negative.

 

And they actually put out a notice about five days before that they were going to start letting some contracts go negative. This wasn’t a total surprise, as soon as I saw that, I thought it was going to go negative.

 

 

TN: Both you and I have told stories about how we had friends who wanted to trade. Like I had a couple of friends who wanted to triple long Crude ETF a week and a half before it went negative, and I said, “please, please don’t do that.” So grateful that neither of them did that because it could have been terrible.

 

So how do we clear this? We’ve got three-four months of oil just sitting around?

 

 

TS: If you talk to most of the big trading houses in Switzerland like Vitol, Trafigura, etc., basically their base case scenario, and they’re physical traders, their BEST scenario is it’ll be September before we get some sort of hints of a balance left.

 

So what is going to happen? There are either two things. We’re going to fill up storage, and then producers literally won’t have to shut it. There’s nowhere to put it, so they literally have to do what I call forced shut-ins. If you don’t want to shut-in, the market is going to force you to do that. That scenario is going to happen. Or we’re going to get a scenario where people decide to voluntarily cut back. Just look at the backend like CLR, Continental Resources just did that. They shut in about 30 percent of their production on the back end, and I think there’s about thirty-five to forty percent now that’s shut-in. And there are some other basins where that’s happening as well, in the Permian, etc.

 

 

TN: So that’s mostly people in the field they’ll probably let go. Will we see people at headquarters? Those CEOs or only those workers in the field?

 

 

TS: I think you’re going to see a broad range of layoffs. It’s already happening. You’ve already seen companies lay off a bunch of people… Halliburton’s laid off. Everybody’s laying off people. And they’re not just laying off field workers as they’re shutting rigs down, they’re cutting back on their office help, too.

 

And with the shutdown, it’s even more worrisome because maybe they figure out that, “we definitely don’t need this many people,” and all these people working remotely.

 

I don’t think that the layoffs are done yet. We’ve only had a couple of months of low oil prices. If this continues for another 3-4 months, we’re definitely in trouble.

 

 

TN: So is this time different? I mean if we were to stop today, and let’s say things come back to 30 bucks tomorrow, which they won’t. But if it stopped today, would the oil and gas industry look at this go, “Thank God we dodged that bullet, again?” Do they just go back to normal like nothing happened? Or if it were to stop today, would they say “Gosh, we really need to kind of reform who we are. Focus on productivity and become a modern business?” How long does it take for them to really make those realizations?

 

 

TS: I think what’s going to have to happen, which may not happen, is the money runs out, right?

 

So first, you had to ride the shale boom. All these banks throwing money on it. After 2016, things were easing up. So private equity guys got in there, and they threw a bunch of money at it. Basically, these guys are going to keep doing what they’re doing as long as they have a source of equity and a source of capital thrown at them all the time. As soon as that dries up, then they’ll be forced to delete and go out of business. We’re already seeing that happen. We’ve had over 200 bankruptcies just in the last four years alone, and this year we’re starting high. So they’re either going to go out of business — Chapter 7s, not 11s. And the thing is that with the big guys, like Chevron and Exxon that just entered into the Permian, they’re just waiting to chomp on some stranded assets.

 

So again, what it’s going to take is the money’s got to dry up or they go out of business. That’s the only way I really see them changing.

 

 

TN: Yeah and we’re just at the beginning, which is really hard to take because it’s tough. So Tracy I’d love to talk for a long, long time, you know that. But we’ve got to keep these short, so thanks so much for your time. I really appreciate your insights. We’ll come back to you again in another couple of weeks just to see where things are. I’m hoping things change. But I’m not certain that they will. So, we’ll be back in a couple of weeks and just see how things are.

 

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QuickHit: There’s no going back for O&G sector jobs

In this week’s QuickHit episode, we have Vandana Hari, CEO and founder of Vanda Insights. She has 25 years of experience in the oil and gas and we asked what she expects to see happening in the near future. Will the oil industry recover, and when? Will bankruptcies and layoffs in big oil firms continue? And what can these companies and the government do to prevent the worst from happening?

 

We also discussed the oil and gas industry in the previous QuickHit episode on what companies can do right now to win post-COVID.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Today we’re joined by Vandana Hari of Vanda Insights. She is one of the top energy market experts in the world. Can you tell us a little bit about your firm and what you do?

 

VH: I have been looking at the oil markets for 25 years now. I started my firm Vanda Insights, which provides global oil markets macro analysis about 4 years ago. Prior to that, I worked with Platts, which is a very well-known name in energy commodities. I looked at the pricing of crude, refined products and various other energy commodities. I covered news and analysis.

 

TN: Great. So it’s obvious why you’re here. Crude markets are in crisis. The big, big question is how long are we in this kind of sub $20, sub $30 zone? Generally, what’s your expectation for the length of that super depressed pricing?

 

VH: It’s certainly not going to be a v-shaped recovery. As we speak Brent, a benchmark crude, is trading around $22 to $23 a barrel. US WTI, another benchmark, is trading around $12 or $13 dollars a barrel. Now where do I see these going?

 

As we look out into May, and I’m taking into consideration a couple of factors there. One is that we are starting to see gradual reopening of the economy in Europe, the worst-hit countries Italy, Spain, France, Germany, and then we have the US and as we were discussing offline, Texas is looking to reopen. Some of the other US states are going to reopen as well. The oil markets will have a very close eye on these re-openings because they have the answer to demand revival. We are coming out of an unforeseen, unprecedented trough in global oil demand close to 30%–30 million barrels per day–of global oil demand has been destroyed. How does this go into May?

 

I’m expecting a very extremely slow gradual revival. There may be a bit of an impetus and upward boost to oil prices from a gradual reopening. Nothing like what we are seeing in the stock markets, though. I think that’s where stocks and stock markets and oil are going to decouple and have already started to decouple from what I can see.

 

The other element is going to be supply. So OPEC and non-OPEC alliance of 23 members. 20 out of those 23 have committed to reducing production collectively by about 9.7 million barrels per day for May and June. Now typically, that sort of an announcement, which happened back on the 12th of April would have in itself boosted oil prices. But this one didn’t. Now clearly it is seen as too little too late. Nonetheless, it will start mopping up some surplus. It’s just that it will again be very slow in giving any sort of positive signals to oil because remember, oil has to work through nearly three months of oversupply and an overhang. So the glut is going to take its time to disappear.

 

TN: It’s a demand problem, right? It’s a supply problem, but you do have lack of demand from the government shutdowns, and then there is supply continuing to come online. All of this issue, it makes me wonder bout the shale companies. I’m curious about shale and kind of privately held independent oil companies. But I also want to learn a little bit about NOCs, the national oil companies. If you don’t mind telling us, what is your view on shale? And how do you expect the NOC’s to fare after this? Do you think they’ll thrive? Do you think they’ll cut the fat? Do you think they’ll change at all, or do you think they’ll just continue to lumber along as they have for the past whatever 70 years?

 

VH: The one characteristic of this crisis is that the pain in the oil sector is being felt and will continue to be felt across the spectrum, all the way, from oil production to refining to logistics. And we can talk about logistics in a little bit as well, because that’s doing quite well now because of storage demand.

 

However, the pain is going to be felt all the way down to refining and retail. It’s also going to be spread across geographies. It’s going to be spread across the size and nature of companies, whether you are an oil major or an independent or an NOC.

 

Let’s talk about shale first. It’s not just the OPEC, non-OPEC enforced mandated cuts, but I am expecting to see major decline starting to happen in North America, in Brazil and perhaps in other places like the North Sea as well. What happens in the US is going to be key because it’s the biggest oil producer, thanks to the shale boom. Shale contributes nearly 80% of US oil production. What happens to shale is also going to hold the key to US energy independence in the future.

 

I also look at a couple of very key metrics in the shale patch. One is the weekly rig count that I monitor from Baker Hughes. The other one is a weekly count of the fracturing fleet. So in the hydraulic fracturing, it is far more jaw-dropping decline in numbers that have seen. 70% drop in the frat fleets currently versus the start of this year.

 

What all of that tells me, and we’ve done some number crunching of our own, is we expect to see close to a million barrels per day of decline in June going up to 2 million barrels per day in July. That’s something that the oil market is not quite factoring in yet. Let’s remember that shale bounced back phenomenally after the 2014-16 downturn. That’s the impression that the market has. That shale may be down on its knees, but it will bounce back. But this time, I think it’s going to be very, very different. It’s going to be nothing like a bounce back.

 

As far as national oil companies are concerned, I look at them quite closely sitting here in Asia, they are a breed in themselves. A lot of them are lumbering giants, very slow to change. Most of them are directly controlled by the government or have majority state ownership.

 

Now, one of the things that I have noticed that is going in favor of the NOC’s, especially in Asia–countries like India, China, even places in Southeast Asia–is that they have a captive, domestic, fast-growing market. These NOCs also tend to be vertically integrated, so and more often than not, Asia is a net importer of crude. They have giant refining operations and relatively less upstream or oil and gas production operations.

 

Refining is also getting hit in the current downturn. What we see refiners doing, which includes these NOCs of course, are they’re cutting back out. Port refining margins are terrible. They have gone into negative for a lot of the major products. How will the NOCs survive this? I think they come out of this with a great deal of financial strain. We have to see to what extent they get government support. Some of the NOCs, unfortunately, especially in countries like Indonesia, also struggle with fuel subsidies. So those might fare even worse in the recovery mode. Overall, I think another transition that’s going to take hold for NOCs is the investment in technology: to be more efficient whether you’re producing or refining or retailing oil. And to be more environmentally-friendly with products.

 

TN: Do you think they’ll be more productive? Do you think they’ll invest in technology? Just across the board with oil and gas companies in general. Do you think they’ll actually invest in productivity or do you think they’ll just kind of hold their breath and buckle down like they have always done? Can they afford to do that this time?

 

VH: So when it comes to technology, specifically for cleaner energy, it tends to be driven more by regulation than by market forces or by just companies one day waking up and deciding “Hey, I’m going to be more environmentally friendly.” It just doesn’t happen that way, and that’s certainly true for NOCs. I think oil majors are under a slightly different kind of dynamic. We’ve seen, for instance, only in recent weeks, BP and Shell double-down on their commitment towards greener, cleaner energy. Of course, their feet are being held to the fire by their shareholders.

 

NOCs are in a very different environment. I think a lot will depend on to what extent governments in Asia re-commit themselves to the Paris Agreement, and are part of the global drive towards cleaner energy. We have seen in recent years visible, tangible air pollution has been a major concern in cities all the way from Delhi to Beijing.

 

TN: As we as we stop under COVID, you know, air quality has improved dramatically, right?

 

VH: Yes indeed. You have to think when people go back to the new normal, and they are out and about and the pollution levels increase, what will that do in terms of pressure on these companies? So overall, I think the pressure from the environment will remain, to adopt new technologies, to move towards cleaner fuels.

 

Pressure from oil prices to be more efficient may be the case for NOCs. I see that a little bit less, and they’ll have to just pick and choose basically, right? But your big question, where does the money come from? I think that remains a major, major issue. Will they be able to raise money? So we’ve seen in the latest crisis, a few oil companies that are well-regarded, oil majors have tapped banks and raised loans. What I would personally love to see is for these NOCs to come out there a little more aggressively, because after all, they will be back in favor, thanks to the captive market. So I’d love to see them raise money with bonds, bank loans, or whatever, because they will need money from outside. There certainly won’t be enough to dip into their pockets.

 

TN: Yeah. The national accounts from any of these countries can’t really handle it. So that’s a great point.

 

We’re running long, but I don’t want to stop this conversation. So normally, I’d cut this off. But let me ask you one last question, okay? I live in Houston, Texas, and oil and gas town. We’ve seen some layoffs. But we actually haven’t seen a lot yet. You don’t live here so, you know, you can give us an unbiased view of the energy sector. What do you expect, and it’s not just Houston, of course, it’s the energy sector globally. Are we at the midpoint of energy layoffs, are we early, are we late? I mean, how bad do you expect it to get?

 

VH: I think we are probably at the beginning of it. So we have started seeing bankruptcies in the shale sector. Well, to be clear, the bankruptcies in the shale sector accelerated even in 2019. Shareholders and lenders have been becoming disenchanted with the sector for a while. But I do expect bankruptcies to set a record unfortunately in 2020, perhaps spilling over into 2021 as well.

 

But when I look at the US energy sector, I’m also paying attention to a lot of news about the US government making a lot of noise about wanting to help the energy sector. So whether it be, opening up the Strategic Petroleum Reserve, allowing producers to store oil there or to giving them loans from the Fed’s Main Street Lending program. All of that, remains to be seen, and we’ve heard some ideas about banning or putting tariffs on OPEC crude and so on, which probably won’t happen. But I think some of these other measures will happen.

 

My concern is that for most companies, it will probably be too little too late. So I do expect a huge consolidation, and unfortunately a lot of layoffs. People will just have to reinvent themselves, learn new skills, because there may be no going back to oil sector jobs.

 

TN: I think you’re right. I think it’s a generational change. I think it’s a really tough time, and you know these people, it’s nothing they deserve, it’s nothing they’ve even done. But it’s just a very tough global situation where supply outweighs demand. It’s that simple.

 

So Vandana, this has been amazing. I haven’t done any of these interviews that are this long. I’m so grateful to get this much of your time. Thanks you and I’m hoping maybe we can revisit with you in a few months see where things are and take stock of what the future holds?

 

VH: It’s been my pleasure, Tony and I’d love to do this again and thank you to our viewers who’ve stayed with us all the way to the end. I hope it has been worth it.