To The Moon

By Tiger Trade Asset Management Research team

Panning for gold | Part I: 2022 major global assets performances review

Panning for Gold | Part II: US, Eurozone, China 2023 Economic Outlook

As for deglobalisation, Credit Suisse star analyst Soltan has a very profound discussion in his War and Industrial Policy. Soltan believes that the key competition in the current economic war lies in the control of technology, commodities, production capacity and key geographical nodes.

The economic efficiency impactfrom the transferof the high-end manufacturing industry chainas well as the investingin resources and supply chain, will determine the new pattern of the industry chain in the next year or even years, and will also bring new investing opportunities.

1.Economic Efficiency Impact: taking semiconductors as an example

On the way to industrial upgrading, China will challenge the current leader, the US. The USis very likely to retaliate by curbing China's development, in which the chip is a crucial link.

As a leader, the US can restrain a wider range of terminal products by relying on chip technical barriers. In order to defend the advantage of barriers, the US has introduced relevant policies to attract industries to return to the US, so as to achieve a more independent and controllable goal.On the other hand, China, which has been clamped down, is bound to vigorously develop related industries, especially more upstream technologies and equipment, to avoid being "pinned down" by Europe and the US.

Under the competition between the two giants, regions heavily involved in the division of labor, such as Europe, also began to increase investment in the entire industrial chain to cope with the deglobalization tide, following the gust of high prosperity of the industry after the pandemic.

Main supporting policies for semiconductor industry in relevant regions:

-EU: Chip Act, subsidies totaling 43 billion euros, target to double the market share by 2030

-US: Chip and Science Act, subsidies totaling 52.7 billion US dollars

-China: Phase II of the National Grand Fund, with a registered capital of 200 billion yuan (about 30 billion US dollars)

Based on the SEMI World Fab Forecast Report, China has the largest number of newly built fabs, followed by America and Europe. The establishment of factories in China Taiwan is driven more by the high prosperity of the industry and the demand for new processes. On the whole, China, the US and Europe are competing to invest in semiconductor manufacturing.

Data source: SEMI World Fab Forecast Report, Chart by Tiger Trade

After the pandemic, the number of newly built fabs has increased significantly under the competitive subsidies and investing of various countries, hence the related production capacity is bound to rise.

Data source: SEMI World Fa Forecast Report, Chart by Tiger Trade

However, the demand for semiconductors, especially personal consumption, is still declining. Since 2012, the Personal Electronics Products field has also been in negative growth for a long time, and the mobile phones consumption has also been in a bottleneck from 2017. The home economics has only driven a wave of consumption, which is rapidly falling after the peak in 2021. The previous purchase wave even overdrew the demand for a period of time in the future, driving the industry into a deeper impact than history.

Data source:Wind, Chart made by Tiger Trade

Huge investments and subsidies will increase the excess supply and lead to excessive supply, which will eventually cause a huge price impact. The current deglobalization will turn countries and regions from cooperation to competition, which will even be accompanied by vicious competition, and eventually end with enterprise bankruptcy.

Just like the memory market around 2010, Samsung's "counter cyclical" investing and excess supply of memory granules led to a sharp drop in prices. As a result, two of the top 5 memory manufacturers went bankrupt, Europe and Japan withdrew from the memory market, and the prices recovered after their bankruptcy.

Data source:Bloomberg, Chart made by Tiger Trade

Besides the contradiction between supply and demand, de-globalization may also raise inflation. Since the 1990s, developed countries have maintained low inflation for a long time. Most of them benefited from an efficient, low cost and scale effect in labor division, which is the result of globalisation. Once the global division of labor weakens and manufacturing costs rise, the past low inflation environment may no longer exist.

Data Source: Wind, Chart made by Tiger Trade

In addition, in the process of reshaping the global industrial chain, some regions that rely on globalization may be hit hard. For example, China Taiwan is constrained by the geographical environment, and its semiconductor industry built under the European and American system is facing an outflow crisis, which may cause great harm to Taiwan's local economy.

In short, deglobalization is bound to have a huge negative impact on the production and economic efficiency of many industries and economies that rely on globalization, andsemiconductors, whichbear the brunt, may be just the beginning.

2.Resources are the king: taking the resources required by new energy as an example

Under the background of deglobalisation, the originally globalized industrial chain is tending to regionalisation for the sake of security, which makes it particularly important for major countries to obtain scarce resources. These scarce resources do not only include mineral resources, energy and food needed for production and life, but also the resources needed for transitioning to new energy under the general trend.

Due to geopolitical security, major countries have issued mineral resource planning strategies and listed down key minerals in recent years. Lithium, cobalt, antimony, tungsten and tombarthite used in new energy batteries are also listed as key or strategic minerals by China, the US, the European Union, Japan, Australia and Canada.

Localization of industrial chain is a new trend of global mining investment. In the post pandemic era, due to the global transformation to clean energy, the contradiction between supply and demand of mineral resources has become prominent. Major powers have raised mineral security to the national strategic level, and provided various tax policy support for mining industry.All kinds of capital in the world are going after key mineral resources, especially new energy metals.

As shown in the table below, the number and amount of mergers and acquisitions of lithium, cobalt and nickel mines increased significantly year on year in 2021.However at the same time, major countries have all controlled investments on key minerals. For example, on November 2nd 2022, out of national security considerations, the Canadian government required three Chinese companies to divest their investment in lithium mining companies in Canada, including their rights under investment.

Therefore, the competition between direct and indirect metal minerals related to new energy is bound to become a major long-term logic under the background of deglobalization.

Source: China Nonferrous Metals News, Chart made by Tiger Trade

Besides lithium, cobalt and other metal elements directly related to the development of new energy, the role of silver in energy transformation shouldn't be ignored. In the past decade, the demand for silver in electrical, electronic and photovoltaic materials has increased year by year, making the total demand for silver expected to hit a 10-year high this year. Furthermore, there has been a supply gap of more than 50 million ounces for two consecutive years.

Data source: The Silver Institute, chart made by Tiger Trade

According to the estimation by Metals Focus, the annual demand for silver in electric vehicle production will continue to increase in the future.

Data Source: Metals Focus

Based on the noticeable increase in silver demand in the new energy industry chain, the proportion of capital expenditure in revenue of major global silver mining companies has been increasing in the recent two years. However, compared with the soaring silver price in 2011-2012, it is still in the early stage of the capital expenditure cycle, and silver supplystill has room to riseand catch up with the demand brought by the development ofthenew energy industry.

Data source: Bloomberg, chart made by Tiger Trade

We believe that both the resources listed in the list of key minerals of major countries and the resources outside the list but have a high demand in the new energy industry chain will be the target of capital competition in the coming years. The supply and demand gap of relevant resources and the evolution of the capital expenditure cycle of relevant mining companies will be a new long-term focus of the main line under the background of deglobalization.

Naturally, with the rise of regional protectionism, not only quantitative investment analysis but also qualitative national industrial policy prediction is indispensable.