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QuickHit: Can Western companies solve the China dilemma?

This week’s QuickHit, we have Isaac Stone Fish of Strategy Risks to talk about how western companies and other companies around the world should deal with China and compromises that you need to do for that. He also shares the status of Hong Kong as a gateway to China. How about the environmental and human rights violations of China and how the US companies can make sure they are running an ethical business? And what is the status of non-profit organizations in China, especially those that are environment and human rights focuses?

 

Strategy Risks quantifies corporate exposure to Beijing. This was started because Isaac got frustrated at the way that ESG environmental, social and corporate governance providers were ranking Chinese companies and US companies that had exposures to China. Isaac thought it would be fun and interesting and hopefully very useful to have a different way of measuring and quantifying this exposure.

 

Isaac grew up in Syracuse, a nice little place but basically about as far away from the center of anything as possible. He started going to China when he was 16 for something different. He started in Western China and ended up living in Beijing for about six years. He also worked in journalism mostly, it was the Asia foreign policy. Spent a few years doing a mix of public affairs, commentating, bloviating, writing, and then started Strategy Risks roughly six months ago.

 

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This QuickHit episode was recorded on February 3, 2021.

 

The views and opinions expressed in this Normalization of China 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: It’s really interesting looking at ESG and public markets and I think we’ve seen over the past few years a lot of tensions between China and the U.S. They’ve been there for 10 years but they really took shape over the last few years. If you’re a publicly traded company today in the U.S. or traded on a U.S. exchange, what are the things that you need to really think about with regard to China? What are the biggest risks and biggest considerations that you’re talking to your clients about?

 

ISF: One thing that people overlook is the risks of their China strategy. Not in China itself but globally and especially in the United States. The rules for engagement in China are so different for these corporations in China than they are in the United States. And the U.S. is drawing some pretty thick regulatory lines especially around Xinjiang, the region of northwest China where there are roughly a million Muslims in concentration camps. That a lot of times, these major corporations, their China offices will ignore or overlook or not put nearly enough attention on.

 

The messages that we’re communicating and the things that luckily are starting to bubble up into these board rooms is the understanding that to have a China strategy, you need to have a global strategy that is very aware both of what Beijing wants but also what the Biden administration and many American people want.

 

TN: For the last 15, 20 years it almost seems like companies have had a global strategy and then they’ve had this China strategy off to the side because it was such a big market, growing so fast. It seems to me like you’re talking almost about the normalization of China in terms of performance expectations, social expectations, those sorts of things. Is that right? Is that kind of what you’re implying?

 

ISF: One of the smartest ways of the Chinese communist party, which has ruled China since 1949, were the smartest things they have done is made it seem like their country was a normal country. And there’s nothing aberrant about China or the Chinese people. But there’s something quite apparent about the Chinese Communist Party.

 

And the rules for playing in China are quite different than they are in basically everywhere else. What we’re starting to see is the realization that companies need to do something to limit the influence of Beijing on their corporate headquarters, on their products and on their decision making.

 

TN: But can you do that actually? Because if you’re saying an automotive company and most of your revenues come from China, and the Chinese government says something, it seems really hard. And companies have been awkward about doing that for the past say 10, 15 years. Really changing how you help companies treat them like any other country? I think what you raised about what the CCP has done since 1949 is amazing. It’s great perspective. But can the CCP understand that they’re being normalized as well?

 

ISF: The CCP are doing this as an active strategy in as much as such a complex institution has a single strategy. They’re certainly trying to make people think that they are normal in our sort of western liberalism definition of that. Most of the companies that we talk about in this space, the U.S. is a far more important market for them than China. NBA is a great example.

 

China is its growth market. The USA is its most important market and what companies are starting to realize is that what happens to them in China and what touches China doesn’t just touch on their business in China but affects their business in the United States as well.

 

What we do at Strategy Risks is less working with the companies like the NBA that are having these problems, but work with other people in the financial chains, institutional investors, pension funds, endowments and explain to them the different risks and exposures that they’ll have with the companies in their portfolio and some of the problems they might have with being overweight in certain companies about Chinese or American that are complicit in Chinese human rights abuses.

 

TN: From a portfolio investor’a perspective, until very recently, you could park a whole lot of money in Hong Kong and then dip into China as needed. But it seems that that’s becoming less of an easy strategy since the crackdown in Hong Kong last year. Is that the case or is Hong Kong still in a pretty good place to take advantage of mainland stuff?

 

ISF: From a pure markets perspective, Hong Kong is still an excellent place for that. What’s really changed is the safety and the rule of law and the feeling of security for people doing deals in Hong Kong. Hong Kong is still an excellent window into China and we’re seeing Shenzhen and Shanghai supplanting a lot of what Hong Kong is doing in Seoul to agree. But the issue with Hong Kong is much more for the people there as opposed to the people who are using it as a conduit.

 

TN: That’s really interesting what you say about Shenzhen, Shanghai, and Seoul because I’ve been seeing that take shape over the last five or six years and it’s interesting that it’s getting a lot of traction.

 

With Xinjiang and with other things happening socially in China, what about things like non-profits? Issues that they have to raise in China? How can you operate a non-profit in China and stay true to your mission if it’s kind of awkward with Beijing or with the CCP, which are one and the same?

 

ISF: Most times, you can’t. What’s been happening is that a huge amount of western nonprofits have, sometimes it’s this evangelical view and sometimes it’s just well this is a very important country filled with a lot of lovely people and we want to come here and do good. But they find that knowingly or unknowingly, their message and their mission gets corrupted because they need to work with their government partners. And sometimes, their mission is totally at odds with the mission of the party. And so, they have to make sacrifices that I would say perverts what they’re doing.

 

We see this perhaps most intently in both the very human rights focused nonprofits and in the environmental focused non-profits. A lot of whom have found themselves being very praiseworthy of what Beijing is doing even though China’s far and away the worst polluter and the worst carbon emitter. They take signs coming from top leaders that Beijing is committed to making these changes even though the changes often don’t get made. But they are finding themselves in a position where in order to be there, they have to sacrifice some of their credibility. A very heartening sign I’m seeing is people saying, maybe I don’t actually need to be in China in order to do something that’s positive for the world.

 

TN: Do you see a path to China having that type of environment in 5, 10, 20 years time? Or do you think we’re kind of on this this really is it slower than that?

 

ISF: It’s such an important question and I wish I had some good way to answer it. In China, as Chinese officials love to say, has 5,000 years of history. The Communist Party has been in power for what, one and a half percent of that time. At some point, in the near future, the party will no longer rule China. Will that be next year? Will that be 30 years? Will that be 200 years? It’s so hard to say, but it’s certainly not inevitable.

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QuickHit Visual (Videos)

QuickHit: There are a quarter billion barrels of oil headed to China right now

Co-Founder of TankerTrackers.com Samir Madani joins us for this week’s QuickHit episode where he talked about where the oil is coming and going, explained the volatility around oil and VLCCs, and if China has the capacity to store the quarter billion barrels of oil that they are buying on the cheap.

 

TankerTrackers.com is a service that Sam started with a couple of friends from four years ago. They track tankers that carry crude oil and gas condensates, to give the moms and pops of this world a heads up on what’s happening in the oil flow situation. The company aims to deviate from the black-and-white narrative in mass media to show the world the grey area that oil is not always the cause of war.

 

Follow Tony on Twitter: https://twitter.com/TonyNashNerd

Follow Sam on Twitter: https://twitter.com/Samir_Madani

Check out the CI Futures platform to forecast currencies, commodities, and equity indices: https://www.completeintel.com/ci-futures/

 

***This QuickHit episode was recorded on September 2, 2020.

Last week’s QuickHit was with political economic consultant Albert Marko where he explained about this “perceived recovery” and the artificial market.

 

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: Crude oil and trade have a lot to do with economic health globally. We’ve just gone through COVID. We’ve gone through a lot of government-mandated closures and there’s been quite a lot of discussion about the rate at which economies are coming back. You see this every day, right? You see the crude trade, you see international trade. How do things look from your perspective?

 

SM: What we’ve noticed is that since January to now, exports have (except the USA) fell from 19 million barrels a day in exports to around 14 million barrels a day. 4.5 million barrels a day in drop between January and now. That’s a lot. That’s 120 million barrels a month, which is not shipped out now.

 

We see immense amount of barrels heading over to China because they are buying on the cheap. We saw around a quarter billion barrels of oil headed towards China right now. And of that quarter billion, half of it is already in their Anchorage area. They have over 100 million barrels that are just floating and waiting to get on to shore.

 

The reason for this is because of the flooding in China, which slows down consumption of gasoline. But it picks up consumption of diesel for the heavy machines that are going to move on the land and so on.

 

Refinery runs worldwide right now are much lower than the year on year because of the fact that gasoline consumption is down.

 

What I’m waiting for in the EIA report is not how much inventory has been removed or added, but the refinery runs. How much gasoline is being created out of the food processing? So I’m waiting for a moving average because you shouldn’t rely on the weekly numbers. You should look for the moving average. Wait for that number to cross 15 million barrels per day. That’s my threshold to say that the U.S. economy and the whole thing is coming back roaring again. So because there’s only a small window between 15 and 18 and around 17.5, 18 when it was actually at peak. So I’m very positive that we’ll come across 15 probably in the new year for sure.

 

TN: In the new year. So Q1, you think things are coming back?

 

SM: Definitely. Definitely.

 

TN: Brent is in the mid 40s now. We see both Brent and WTI climbing slowly through the end of the year. Our view is that pricing will tick up in Q1 and then we see it trailing off a little bit later in the year. But we really do see a build through Q1. So it’s good. Thank you for confirming what we’re seeing.

 

You’re saying China’s got a quarter billion barrels in Anchorage and in transit, right? What’s their storage capacity? Is their storage capacity in excess of that, or will this stuff stay in floating storage?

 

SM: We did an actual manual survey. We went to storage farm of the storage farm with satellite imagery. And as compared to 2 years ago, you will actually see on Google Earth around 250 to 300 million barrels more than what it had. We have day-fresh images from Planet Labs and we were able to go in and see that year on year, China has the ability to add around a quarter billion barrels of free space. This is a drag and drop method with the standard size storage tanks of 100,000 cubic meters, which is 620,000 barrels. They just drop farms and you see just a whole new farm will pop up.

 

Since the consumption is down, there’s no pressure for them to do more. But we saw around 1.4 billion barrels of space and 1.1 billion barrels of occupancy. That was two years ago.

 

TN: Two years ago. It just seems like there’s so much supply and burning off that supply is still a challenge. We spoke with somebody from the Panama Canal about a month ago when she was talking about how LNG was redirected from the US to China to Europe or something. Are you still seeing redirection of shipments? Or are we back to almost normal trade patterns?

 

SM: In crude oil, we actually see a dog-eat-dog situation going on right now. For instance, Venezuela’s exports are down. It’s a toilet flush. It went down to a quarter million barrels a day now in our latest report. We’re using visual confirmation and I’ve never seen the number that low out of Venezuela. But here we are, we’re under 300 thousand for sure. For the average this year, it was around over half a million barrels a day.

 

But now lately, what happened is it just completely plummeted. A lot of the exports are going just to other countries so that they can bring in gasoline in exchange. It’s a barter.

 

What happens is, because they are shipping heavy sour crude oil, somebody else is going to eat their lunch. China wants to import that. India wants to import that. A lot of other countries in the Far East, they have heavy sour because they need the asphalt, they need the diesel. Why? Because they’re expanding their infrastructure.

 

What happened is that Iran started sending off a lot of the heavy sour lately. I noticed a lot of barrels heading out over that way. They’re getting assistance from other fleets from outside the country. The Chinese refiners and so on, they are dispatching vessels to pick up the oil. It’s not just the national running tanker company that’s delivering the oil.

 

TN: I’m really interested in that Iran-China trade lane. And you covered that a lot. With the circumvention of different agreements and embargoes, I see a lot of coverage of that. Do you see a growing dependence on Iranian oil out of China or does that seem to be declining? Do you see a diversity of suppliers? Of course, China has never had a single supplier. But do you see a growing number of suppliers and a growing dependence, say on Iranian crude? Or is it the other way around? Is Iran becoming increasingly dependent on China as an export market?

 

SM: Iran is growing more dependent on China because they’ve had four decades to prepare the whole Plan B for sanctions and so on. So they’ve really polished it up. They’ve smoothened out all the rough edges when it comes to sanctions so they know what they’re doing. But now, when I see how many barrels are leaving the country, and they look at the ratios of where it’s being sent, yes, they do send a lot to Syria, but it’s no more than usually around 100,000 barrels a day.

 

Once in March, a saw over a quarter million barrels a day. That’s because they have so much production going on in Iran and so little storage space. They have to get rid of it. And they are shipping a lot. So the current media narrative is that they’re exporting about somewhere between 70,000 and 200,000 barrels a day. That’s because those factories are only using AIS data, which is automatically picked up by systems. But what we do is the visual confirmation with satellite imagery, and we see around three to five times that. Somewhere between 600 and a million. And 600,000 barrels a day, that’s a lot. That’s 30 million barrels a month.

 

And so they have to get rid of these barrels because if they don’t, their production will have to drop even more to a point where they can’t revive those mature oil wells. It’s very costly to kick them back into action once sanctions do get listed.

 

And with the virus, what they do is they consume a lot domestically. They make it very cheap. And, because they’ve got to get rid of it, they store as much as they can. If they ran out of storage space on land, they put it on the vessel and they put on many vessels.

 

But now I’ve seen that the floating storage has dropped and shipped out a lot. China is the big buyer and there’s so many ways to deliver it to China. You can either go straight or you can meet another vessel halfway in the Strait of Malacca and so it’s a ship to ship transfer.

 

So, yes, Iran is more dependent on China than vice versa. And China does report their barrels is coming in from whoever the last port call was. So it’ll be Malaysia, it’ll be Indonesia, or someplace in between. It’s not coming in as Iranian anymore. Although in the latest monthly report, they had to show something, because this was obviously direct.

 

TN: You mentioned floating storage and VLCC market and it’s gone from a quarter million dollars a day back in April to like 6,000 dollars a day now. What happened there and why is that price just collapsed?

 

SM: It just deflated so rapidly. That thing was so much more volatile than Bitcoin back in 2017, 2016. The first thing you heard was the sanctions scare, the volume type of fleets back when, it’s almost a year ago or so. And so the Dalian Tanker Fleet was a large fleet or VLCC supertankers. 2 million dollars a piece and about 40 of them. So that created a scare hype in the market that there’ll be a shortage of vessels which were allowed to go to certain ports or most ports.

 

What happened was that the US, they used that as a means to improve the negotiation when it comes to the Phase 1 Trade Deal. And so they loosened up on those waivers, and eventually that was the main issue.

 

Then came the floating storage situation as a result of COVID and then that spike the price again. After that, it has come down quite a lot. So that’s moving a lot of oil back in Q2. And then it just quickly plummeted because Saudi just went from over 9 million barrels a day down to 6. That killed off the demand.

 

We saw occupancy of the VLCCs go from more than 50% down to early 40s. And these are 802 operating VLCCs worldwide, 600 something Suezmas and 1,053 Aframax. It’s a lot of barrel space out there available still today. So obviously, the prices have dropped.