Author: Barclay Butler

The Spiralling Price of Cocoa Beans

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Chocolate producers will soon be increasing the prices of favourite chocolate bars and making them smaller. Why? Because consumers will have to be the ones to pay for under investment, supply line problems and inconsistent weather that is hitting the growers of cocoa beans. In the the past few months the rise in the price of cocoa beans has been relentless, which is reflected in the futures market in London when on Tuesday 28th February 2024, the cocoa futures traded at a record high of GBP5,827 per tonne as opposed to a year ago when the price was GBP1,968, an increase of 296.08%.

There are a number of factors impacting the rise in cocoa prices: one of which is weather. In Ghana and the Ivory coast, who between them produce circa 66% of the worlds cocoa beans, (Ghana 16%, Ivory Coast 50%) poor weather has affected crop yields. Furthermore, El Nino returned in 2023 (which occurs every three to five years) which brings very dry heat preceded by unseasonal heavy rainfall to both Ghana, the Ivory coast and the rest of the region. Data released by the ICCO (International Cocoa Organisation) forecasts that the cocoa crop on a global basis will be 11% less than last year.

Experts advise that the current situation is far from being temporary. Whilst it is agreed the current price surge is down to El Nino together with speculators in the financial markets going big time into futures, there are deep structural problems underpinning a lack of production along with massive underinvestment. Problems that are here to stay. However, many commentators wonder that with the prices being so high, reinvestment in cocoa farms should not be a problem.

Today many farmers’ trees are suffering from swollen shoot virus, which is transmitted by mealy bugs, and cocoa pods are rotting thanks to a fungal disease, caused by the high humidity created by heavy rainfall. The only way to combat swollen shoot virus is to rip out the trees and many farmers in Ghana are saying that most of their trees are ending their life cycle. Whilst there are new seeds that can adapt to the climate change, many farmers do not have the money to invest, and as such are moving into alternative easier to produce crops such as Cassava (a tuberous root from which cassava flour, breads, tapioca and a type of starch are derived).

Many of the farmers have not got the cash to buy pesticides and fertilisers and have not planted new trees since the year 2000. So, why do the farmers have no money to invest? One simple answer is the companies/individuals in the middle are taking advantage of the difference in the sales price to the farmers and current price in the markets. For example, on Monday 4th March 2024 in New York, cocoa future prices were traded at USD6,648 per tonne, yet one farmer in Ghana gets paid USD1,700 per tonne. Experts advise that unless the situation is addressed, yields will only get lower and lower, with the obvious result being the end product of chocolate prices going through the roof.

In the pas, both the Ivory Coast and Ghanaian governments have taken steps to protect farmers from low prices by forming an export cartel modelled on OPEC (Organisation of Petroleum Exporting Countries). The price per tonne to farmers is based on the average price of the previous season and is to protect them from bad times but also in the good times such as now, the farmers cannot benefit. Furthermore the cartels, Cocobod (Ghana Cocoa Board) and CCC (Conseil du Café-Cacao – Ivory Coast), justify the low prices as they are supposed to provide new trees, pesticides and fertilisers, but in truth this rarely happens.

The put it simply, cocoa farmers are being shortchanged and, though production is falling, demand globally for chocolate has doubled in the last twenty years. The ICCO has released data predicting that in 2024 demand will outstrip supply to the tune of 370,000 tonnes. In the meantime, chocolate makers have adapted to market conditions and analysts advise that last year Mars shaved 10 grams off their standard size galaxy bar and repacked the smaller size at the same price. This is a standard practice when the cost of cocoa rises, sell consumers smaller amounts of chocolate at the same price or produce confection with no chocolate at all. 

Many chocolate companies are focusing their marketing on filled or lower-chocolate products, and recent data released suggest that over 40% of segmented or moulded chocolate bars that are currently being sold in the United States are filled with other products such as caramel, fruits or nuts. This shift to lower chocolate products were on display in adverts during the recent Super Bowl (2024), where circa 124 million people saw M&M’s (Mars) filled with peanut butter and Reese Cups (Hershey’s) filled with added caramel. Other methods of cost savings by some companies is replacing cocoa butter (circa 20% of cocoa butter makes up an average milk chocolate bar) with a cheaper substitute such as palm oil. Most of the switches though are on non-premium applications such as fillings in bakery items and thin coatings, such as those found in granola bars, rather than on the premium or traditional chocolate bars.

At the ports in the Ivory coast as of 11th February 2024, data released show that cocoa arrivals totalled 1.09mt so far for this season, reflecting a fall of 33% year on year. Experts are predicting that Ghana’s crops could be as much as 25% lower year on year, taking stocks to their lowest levels in over ten years. However, despite the prices for consumers (both household and business), destruction of demand has not been enough to balance the market which suggests that a further increase in prices will be needed to balance supply and demand. Indeed, looking at data released for grinding* for Asia, North America and Europe, grindings for 2023 were down overall by circa 4% year on year, where in Asia grinding fell by 5% year on year, North America fell by 9% year on year and Europe fell by 2% year on year.

*Cocoa Grinding – This is the process of converting cocoa nibs (also known as cacao nibs, which are crumbled bits of dried cocoa beans which grow on the cocoa tree) into fine powder then into chocolate. They need to be ground at high speed for several days  in order to become smooth craft chocolate bars. 

Figures released show that in Europe  between 2024 and 2027 the annual growth rate of the chocolate market is expected to expand at 4.95% but with supply contracting prices will increase at a faster rate. Furthermore, in Brussels there are major concerns that cocoa production is linked with child exploitation and deforestation which is contrary to their rules on ethical production. It is reported that due to expanding cocoa plantations, the Ivory Coast has since 1950 lost 90% of their dense forests. Come 2025, the European Union (who import 50% of Ivory Coast’s cocoa yield) will ban any sale of chocolate derived from deforestation under the EUDR (the European Union’s regulation on deforestation-free products), which will potentially push chocolate prices even higher. 

It seems a formality that from restaurants to households the price of purchasing chocolate will continue to appreciate at an alarming rate unless cocoa farmers receive critical investment in the near future. The cost of chocolate may well become prohibitive and could suddenly be classed as a luxury item, as producers of chocolate look to grow output of lesser chocolate products in the marketplace. The figures for Europe show that demand is ever increasing, and Switzerland will particularly suffer as they are the largest per capita consumers of chocolate in the world, with data released in 2023 showing the average person consumed 11.8kg of chocolate in 2022. By 2027, this may all be ancient history, unless pressure is brought to bear on Ghana and the Ivory Coast to reinvest in their cocoa farmers, otherwise enjoying a quick bite of chocolate may be a thing of the past.

Will Renewable Energy Suffer Due to a Shortage of Copper? 

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For those government ministers throughout the world in charge of renewable energy, the year on their lips is 2030, where global renewable energy capacity is expected to grow by 2.5 times. However, governments need to go further to achieve the goals that were agreed at the 2023 United Nations climate talks. Part of the report coming out of this meeting suggests that the biggest challenge to meeting the 2030 goal will be the deployment of renewables and the scaling up of financing in most developing and emerging economies. But there is one more important constituent to consider…

The retooling of transportation and power to run on renewable energy goes a lot further than just political will, it will actually require more copper than the mining companies are currently committed to deliver. The big question is: will the mining companies, who are by tradition cautious (and are having to deal with increasing rigorous regulations) invest the capital required to help the world reach their 2030 goal and beyond? The current belief by experts suggest this will not happen as currently Anglo American Plc is facing a USD39 Billion takeover bid by BHP Group Ltd, suggesting that investment is angled towards mergers and acquisitions rather than increasing growth in production. 

When it comes to conductive metals, copper is second in line after silver, and the comparisons made between the use of copper in renewables compared with non-renewables is staggering. Data released from the Copper Alliance shows that wind and solar farms require more copper per unit of power produced than today’s gas and coal fired power stations. In order for renewable energy to meet future demand more complex grids have to be built, and in order to balance the intermittent supply, millions of feet of copper wiring will be required. Another statistic shows that electric vehicles use twice the amount of copper than petrol driven automobiles.

There are, however, socio and economic barriers in the way of increasing copper production. Experts suggest there is enough unmined copper to serve future world demand, but copper is a bellwether within the global economy falling and rising together with industrial production, and miners for decades have been very wary by increasing production then getting caught out by a drop in demand. Furthermore, on the excavation side, new deposits are getting more expensive and harder to extract, and with ore grade decreasing, more rock has to be excavated to secure the same amount of copper. Environmental scrutiny is ramping up which is also discouraging further investment in production. 

Recent data released suggests that over the next ten years the mining industry will have to spend circa USD150 Billion to cover what is projected as an annual shortfall in supply of 8 million tons. If there are severe copper shortages in the future this would cause a surge in prices affecting smart grids, renewables, EV’s and would slow the pace of turning to renewable energy. Whilst higher prices would incentivise miners to increase production in tandem with higher demand, experts suggest it would take a decade for the world to feel the difference. For those companies manufacturing clean energy technologies, it may well be prudent to try and find, if not an alternative to copper, but a way of using less, otherwise such goals as the 2030 and beyond renewable energy goals may become difficult to achieve.

Bad Debts and Chinese Banks 

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Chinese banks have for years been reluctant to disclose any information on poorly performing loans or outright bad debts. They go to extraordinary lengths to hide these problems usually teaming up with an AMC (Asset Management Company)* where a transaction takes place that removes these loans from their books. So it came as a surprise when the Bank of Jiujiang on the 19th of March 2024 announced that profits for the previous year will probably fall by Circa 30% due to loans performing poorly.

*AMC’s – Chinese Asset Management Companies came into existence in 1998 and were established by the Ministry of Finance with the purpose of professionally managing third-party assets and was considered at that time to be a major landmark in the development of China’s financial system. It marked the transition from an unregulated environment to one where these specialist companies would operate with a defined set of financial parameters, regulations, and standards. 

The deal with AMC’s to hide these bad debts or poorly performing loans is as follows. First, the bank lends to the AMC who in return purchases the toxic loan(s) from the bank. Within the contract between the two parties it stipulates that the AMC will avoid any and all credit risks in regard to the toxic loans they are purchasing. Furthermore, the contract is also riddled with confidentiality clauses that keep either party from disclosing the arrangement, indeed sometimes even to courts. The result is that when the bank comes to declare their profits for the year to their investors they can produce a relatively clean balance sheet. 

For a long time the financial regulators were hoodwinked into believing that many of the banks were actually solving their bad debt problem, when in fact things were just getting worse and a number of experts suggest for literally hundreds of banks across China these toxic loans now represent a ticking time bomb. However, NAFR (The National Administration of Financial Regulation established 10th March 2023) the new financial regulatory body has caught on to these subterfuges and have been handing out fines left right and centre some in the region of Yuan200 Million (USD30 Million). Indeed, NAFR, with new heightened enforcement capabilities, are taking debt concealment much more seriously. 

Sadly for the banking institutions many AMC’s have themselves become distressed and are now reluctant to take more bad debt on board. Some decades ago China actually created four centrally controlled AMC’s to take on bad debt and are now currently struggling with one needing a bail out in 2021 to the tune of USD6.6 Billion. This is becoming a runaway freight train of bad debt, and with Bank of Jiujiang’s bad loan book increasing 700% between 2015 and the end of 2023, the whole banking system may soon become imperilled. 

The US Federal Reserve Releases New Scenario Stress Tests for Banks 

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On Thursday 15th March 2024 the Federal Reserve issued new annual scenarios for stress tests for banks which will check their health under extreme economic shocks. These hypothetical shocks will include a collapse of real estate prices (40% drop in commercial real estate prices), and a jobless figure of 10% and will cover 32 banks including some with as little assets as USD100 Billion. Furthermore, the largest and most complex banks will be tested under a scenario where five hedge funds collapse at the same time. These stress scenarios represent the first tests since the collapse of Signature Banks and Silicon Valley in March 2023, which also led to the collapse of Credit Suisse Ag sparking concerns regarding the banking system as a whole.

Interestingly, the Federal Reserve has advised that these hypothetical scenarios will not affect or impact any of the tested banks capital adequacy requirements, pointing out that all results will not be issued until June 2024. These tests were first put in place post 2007 – 2009 Global Financial Crisis to ensure that banks in the United States could withstand further economic shocks and would allow banks to continue to lend to businesses and households despite any on-going shocks. These tests were a result of the Dodd-Frank Act (full name The Dodd-Frank Wall Street Reform and Consumer Protection Act),  that was enacted into law on the 21st of July 2010.

These tests are also very timely as there are growing worries in the financial markets regarding the exposure to commercial real estate (CRE), by a number of lenders, indeed, in January 2024 New York Community Bank sparked a drop in their share price having reported losses on bad CRE loans. The CRE sector (data released show small banks account for nearly 75% of outstanding loans in the CRE sector), has been facing a double whammy on the financial front with falling office occupation (due to widespread adoption of remote work) and high interest rates due to the Federal Reserve’s quantitative tightening measures. Interestingly, the 23 banks that were tested last year passed the tests with flying colours showing under the stress test scenarios they would lose a combined USD541 Billion but would still have double the amount of capital required.

In November, the United States will have their Presidential election most likely between Joe Biden (Democratic incumbent), and ex-President Donald Trump (Republican candidate). If Donald Trump is the victor, financial markets should be reminded that under his reign he signed into law a bill that amazingly reduced scrutiny over banks with assets under USD250 Billion, thus removing the requirement for many regional banks to submit stress testing plus reducing the amount of cash on their balance sheet usually required to protect against financial emergencies. If indeed he tries to do this again, we can only hope that insiders and financial authorities can prevail against this sort of action, otherwise we may have another financial disaster on our hands.

Interest Rates Remain Unchanged in Europe, America, and the United Kingdom

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The European Central Bank

On the 7th of March 2024 the European Central Bank (ECB) kept interest rates on hold for the fourth meeting in succession, the deposit rate of 4% remaining unchanged. The consensus coming out of the Governing Council is that keeping borrowing costs unchanged for a sufficiently long period means that their target inflation number of 2% will be more easily accessible. Indeed, the President of the ECB Christine Lagarde advised that inflation is definitely slowing down but remains sceptical of lowering interest rates at this time. 

President Lagarde went on to say that further data in the coming months, especially by June, should give the ECB a clearer picture regarding a drop in interest rates. Like the Bank of England and the Federal Reserve, the ECB is considering when to announce that inflation is beaten and start the process of unwinding their unprecedented monetary tightening policy. However, like their peers the Federal Reserve and the Bank of England and despite Presidents Lagarde’s coyness on a June 2024 interest rate cut, the indications from the ECB are that a June interest rate cut is in the offing, and as a result money markets are indicating three/four interest rate cuts by the end of the 2024.

The Federal Reserve

On the 20th of March 2024 the Federal Reserve’s FOMC (Federal Open Market Committee) announced that they are holding the benchmark federal funds rate steady at 5.25% to 5.50% for the fifth consecutive meeting. However, officials signalled that they remain confident that rates will be cut in 2024 for the first time since March 2020 and they also revised downward their December 2023 forecast of four interest rate reductions in 2025 to three interest rate reductions. Whilst the Federal Reserve has seen inflation fall from a high of 9.1% in July 2022, the figure sadly ticked up slightly in February 2024 due to the cost of clothes, car insurance, airline fares, gas, rent and shelters. 

Post-meeting statements/comments were nearly identical to those made at the post meeting interviews in January 2024, being that rate cuts will not be made until the Federal Reserve is more confident that inflation is moving towards the 2% target. Experts have predicted that interest rate will be cut three times this year but there are doubts as recent data shows inflation is slowing and remains at 3.2%, meanwhile financial analysts and traders are betting that the first interest rate cut will be announced this June. Chairman Jerome Powell reiterated his vow to keep interest rate elevated as the fight against inflation continues. 

The Bank of England

The Bank of England’s MPC (Monetary Policy Committee) on the 21st of March 2024, maintained Bank Rate at 5.25% by a majority vote of 8 to 1 as official data released showed that inflation had receded to 3.4%, its lowest level in over two years. However, whilst headline inflation has been receding rapidly, the Bank of England is very aware of prices in the service sector and wages where price growth is still in excess of 6%. The Governor of the Bank of England Andrew Bailey was quoted as saying “Britain’s economy is moving  towards the point where the Bank of England can start cutting interest rates”. Interestingly within the 8 to 1 majority and for the first time since September 2021 none of the MPC members voted for a rate hike, and two hawks (Jonathon Haskel and Catherine Mann) became part of the no-change majority with Swati Dhingra being the one vote for a cut in interest rates. 

When asked the question ‘Were investors correct to price-in two to three rate cuts in 2024?’, Andrew Bailey replied “It is reasonable for markets to take that view”, while stressing that he would not confirm or endorse the size or the timing of the cuts. As a result experts within the financial markets have raised their bets for a first cut in June 2024 as Governor Bailey confirmed that the UK was on the way to winning the battle against inflation. Interestingly, Chancellor of the Exchequer Jeremy Hunt has alluded to an October 2024 general election, so in order to avoid criticisms of bias towards the government and to assert their independence, any interest rate cuts will have to be made sooner rather than later.

What is Bank Liquidity and Why is it Important?

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The global financial crisis of 2007 – 2009 is a classic example of what happens when banks do not have enough cash to pay their debts, e.g., all those items on the liability side of their balance sheets. The reasons for the named financial crisis have been written about and discussed and dissected many times, which is why banks and other financial institutions have to adhere to very strict rules implement by their own authorities, on the back of the Basel iii Agreement*.

*The Basel iii Agreement was implemented in 2009 after the global financial meltdown, this agreement was produced by the Bank for International Settlements in conjunction with 28 central banks from across the globe. This agreement was designed to promote stability in the international banking sector and is a set of reforms to mitigate risk that require banks to keep certain levels of liquidity and maintain certain leverage ratios.

Simply put, banks are now required to maintain adequate cash or assets that can be easily turned into cash to meet the demands of depositors and financial market counterparty transactions in the event of an economic shock as seen in the global financial crisis and in events in March 2023. If liquidity rules are revoked in any way the results can be catastrophic as in the failures of Silicon Valley Bank and Signature Bank in March 2023, which also resulted in a run on other banks.

These failures were put down to President Donald Trump signing into law a bill that reduced scrutiny on banks with assets under USD250 Billion. This was down to the naive thought that with the extra liquidity now available to certain banks, they would be able to invest the funds profitably. What became clear, however, is that these financial rules make a huge difference, and are truly there to stop banks failing. 

Sadly, it appears that despite financial disasters, lessons are never learned and the next financial crisis could be just around the corner. If this is the case, it is hoped that throughout the major financial centres in the world, the banks have got their houses in order. Indeed, last year the vice president of the European Central Bank announced that banks in Europe had robust liquidity and high capital ratios and depositors would be safe in times of economic stress. Furthermore, recent announcements from the Federal Reserve in the United States advise they will stress test thirty two large lenders in scenarios under severe economic shock.

Today it appears that financial authorities and regulators have put in place (or are putting in place) sufficient regulations and stress tests that will satisfy the Basel iii agreement. However, extreme vigilance must be constant by authorities and political masters should be advised to keep well away from the rules and regulations of banking systems. Financial shocks always come as a surprise, so it is always important to make sure that the regulations implemented to protect society are followed to a letter, and not just undone the moment someone forgets about the last crisis.

The Global Housing Market Crisis of 2023

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Sadly, for many people throughout the world, higher interest rates besetting global property markets are diminishing the prospects of home ownership. In 2022 central banks started employing quantitative tightening monetary policy and raising interest rates in their fight against inflation, the resultant shock that rippled through global housing markets gave way to the reality that the real estate boom was at an end, marking a finish to the millions made by people across the globe.

It would appear that higher interest rates are here to stay for a while longer, keeping borrowing costs high, this together with a shortage of homes are keeping prices elevated. This has resulted in those homeowners who have had to reset their loans facing increased financial hardship, whilst in many areas housing is now less affordable. For instance, in the United States the home market is dominated by the 30-year mortgage and today it is effectively frozen, as buyers are being squeezed because those with lower interest rate mortgages are reluctant to sell. 

In each country across there are differing scenarios, but in the end they are all dragging down global economies, as whether they rent or buy, people are using more of their net income for housing. Take for example Canada and New Zealand, where those who bought at the top are now struggling with higher repayments on their loans. Across the world landlords are suffering from distress and in many areas higher interest rates have negatively impacted on the building of homes. 

Experts suggest that the “Golden Age” of single family homes is ancient history with the cost of home loans doubling in some parts of the world. If potential home buyers bought just after the global financial crisis then in most parts of the world owners would now have built up a substantial amount of equity. They predict that the next ten years will be an uphill battle for many new home buyers or even for those looking to trade up. For example, in the United States the current 30-year mortgage is circa 7.4% and over the next decade is expected to be around the 5.5% mark, whereas in the comparable low early part of 2021 it was 2.65%. In 2011 the average 30-year mortgage was circa 3.9% and slowly reduced over the next decade, making it the optimal time to buy.

Interestingly, back in the 1980’s, John Quigley, an economist at the University of California, Berkeley, identified what was to be known as the lock-in effect. Between 1978 and 1981 mortgage rates had doubled from 9% to a staggering 18%, which left millions of households paying well below the market rate for mortgages . Therefore, to purchase a new home meant adding possibly unsustainable costs to the monthly household bills, which was a powerful reason to not to move, hence the lock-in effect.

Economic incentives quite often make people forget lessons learnt in the past, as Quigley’s “lock-in effect” was quietly forgotten as interest rates fell back. However, this all changed when the Covid-19 Pandemic hit. In 2020 the US housing market briefly shut down, then a housing boom exploded (not seen in decades) due to a combination of plummeting borrowing costs and stimulus payments. For the first time in fourteen years existing home sales hit six million annually. The market was seeing house hunters purchasing homes far from the coast (the most popular areas before the pandemic), mainly due to the new remote working policies. Today, the quantitative tightening policies of the Federal Reserve has reduced demand and reduced supply even more due to Quigley’s “Lock-in Effect”

Unfortunately for home buyers, even as inflation begins to recede and central banks reverse their strict monetary policy of interest rate hikes, they have to face the reality that borrowing costs on their mortgages may never return to the lows during the fifteen years seen since the global financial crisis. In the past, if interest rates shot up, consumers were confident that rates would return to what was perceived as normal. They would be able to struggle through the higher rate or take on mortgages with a view to refinancing at a later date when interest rates once again fell. Today, these options will not be available because as previously stated, higher interest rates and costs look like dragging on for quite a number of years. 

Experts in the United States are referring to the housing market as the start of the glacial period due to the collision of the highest mortgage rates in a generation (timeline 20 – 30 years ), a low inventory and rising prices. As a result, recently released data shows sales of previously owned homes having dropped to their lowest level since 2010, with contract closings in October falling by the most in the last twelve months and dropping by 4.1% from September of this year. Further data released from ICE (Intercontinental Exchange Inc) show that the housing market in the United states is the least affordable in forty years. The data further confirmed that circa 40% of average household income is now required to purchase your average home. 

Expert analysts predict that in 2024 the housing market will feel the most severe effects of higher interest rates and sustained higher mortgage rates as they estimate transactions in this market will fall to their lowest levels since the 1990’s. The glacial period that is being deferred on the United States housing market will have many knock-on effects. For instance, families may be forced to live together, and as the elderly age without moving, homes will be kept off the market which could have been made available for purchase by younger buyers. Furthermore, there are a vast number of homeowners who are unaffected by the increase in interest rates (as 30-year mortgages were negotiated when interest rates were low), and they are also sitting on a near-record amount of equity. In other circumstances, there may have been forced sales or foreclosures which would have opened up purchasing opportunities for potential buyers. 

Away from the United States things are just as bad in many housing markets with New Zealand being an extreme case. New Zealand enjoyed possibly one of the largest pandemic booms as in 2021 property prices rose by an incredible 30%, and according to data released by the Reserve Bank, circa 25% of the then current stock of mortgage lending was taken out in 2021 and a fifth were first time buyers. However, mortgages are only fixed for three years or less, and interest rate hikes of 5 ¼% since October 2021 have sent mortgage repayments through the roof. The Reserve Bank has estimated that household disposable income that is used to finance mortgage repayments will be circa 20% by June 2024 up from a low in 2021 of 9%, more than double of what they were paying. However, thanks to strong wage growth many households are just about managing.

In China the property slump is not driven by interest rate hikes, but two years ago a government led clampdown on developers borrowing was the forerunner to a growing crisis. Today, China’s property market, which once accounted for 30% of the economy, is struggling with unresolved debts and slow sales leading to an economic decline. Potential buyers have been reluctant to invest in homes yet to be finished, due to a legal system that is not prepared to restructure debt and spreading defaults by home builders. However, the government has advised that it will target selected developers for financial aid, but insist the funding is to finish housing projects, not to repay debt.

In Canada many citizens profited from the housing boom of the last decade, and by 2020 had come to own more than two homes which, in British Columbia and Ontario, accounted for just under 33% of housing stock. However, data shows the introduction of higher interest rates meant that in a city such as Toronto owning a condo was now yielding only circa 3.5% after mortgage repayments and costs whilst Canadian Government Bonds were paying 5%. The high rates of interest have certainly put a damper on interest in new housing purchases, whilst some with investment properties are facing negative cash flows, forcing owners to sell, if indeed they can find buyers. 

Elsewhere, Europe is facing a housing crisis, as a collapse in home building threatens an increase in shortages over the next five years. Those countries that are hardest hit are among the wealthiest with building permits in France down by over 25% in seven months through to July 2023, and in Germany building permits were down 27% in the first half of 2023. In fact, when Olaf Scholz’s coalition took power in Germany in 2021, the Chancellor’s pledge of adding 400,000 new homes per year was sadly way behind schedule. In fact experts suggest that Germany won’t reach this figure until 2026 at the very earliest.

There is a massive construction crash in Europe with governments reluctant to spend any more funds than are absolutely necessary as they continue the battle against inflation in the post-covid era. Recent data shows that in Sweden in the first ten months of 2023, 1,145 companies within the construction industry filed for bankruptcy, an increase of 32% from 2022. 

Many politicians are advocating more spending on housing, even the Labour party in the United Kingdom (polls suggest a shoo-in at the next general election) are promising to overhaul the planning system and build 1,500,000 over the next term of parliament. However, as in many countries a manifesto promise and reality are often many miles apart. The German government has offered to boost public investment and simplify licensing procedures, but what analysts describe as a tepid response is not expected to make any significant impact. 

Without government investment and private sector investment many citizens across the world  will be unable to buy their own homes destroying the dreams of home ownership. The only winners appear to be those buyers in the United States locked into the 30-year mortgage when interest rates were at their lowest. The rest of the world can only hope that the property market returns to relative normality, but how long that will take is anybody’s guess.

Will the United Kingdoms’ Interest Rates Fall Soon?

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The financial markets are betting that, despite the negative comments by the heads of the European Central Bank (ECB), the Federal Reserve and the Bank of England, interest rates will fall in the first three to six months of 2024. The loudest negative voice pouring cold water on interest rate cuts is the Governor of the Bank of England, Andrew Bailey.

With the United Kingdom economy flirting with recession and inflation falling below 5% everyone from the Prime Minister downwards to first-time home buyers are saying that interest rates must surely fall soon. Indeed, recent data released from the British Retail Consortium showed inflation dropping to 4.3% in November of this year (a drop of 0.9%), the lowest level since June 2022. 

Despite the good news regarding inflation, after a visit to the North-East, the Governor of the Bank of England said interest rates will not be cut in the foreseeable future. On top of that he reiterated the same point that was made after the last MPC (Monetary Policy Committee) meeting, that it is too soon to have this conversation, which is the Bank of England speak for “go away”. 

The 2% benchmark figure for inflation will not be reached until the end of 2025 as advised by the Bank of England itself. So, whilst the Prime Minister Rishi Sunak has met his political promise of halving inflation, from an economic standpoint it has little significance. Indeed, inflation has dropped from a high of 11.1% in October 2022 to 4.6% in October 2023, but Andrew Bailey has advised that halving it once again could be very difficult. 

The Bank of England are quick to point out that much of the recent falls in the inflation figures are due to falls in Ofgem’s energy price cap, as the spikes caused by the war between Russia and Ukraine come out of the inflation figures. However, to do this again and again would surely be nigh on impossible or exceptionally difficult. The Governor also pointed out that to get to the 2% inflation target is a game of two unequal halves. He went on to say the second half is “hard work” with the remaining task being done by restrictive monetary policy. He further added that the drop in inflation by 2% from 6.7% in September to 4.6% in October, (due to the fall in the energy cap as mentioned above) will not be repeated again.

Interestingly, one highly respected financial institution has advised that their experts are now predicting a 50 basis point interest cut in the fourth quarter of 2024. They went on to say that with the loosening in the labour market interest rates may be reduced by the Bank of England earlier than predicted but expect the bulk monetary easing to take place throughout 2025 culminating in the 2% interest rate target. There are obviously differing views within the financial markets as to when interest rates will be cut, but for first time home buyers and those households struggling with bills and mortgage repayments, the sooner the better.

Gold Hits Record High December 2023

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This week, gold touched an all-time high of $2,135.39 as the metal continued on a rally which started in early October of this year and has seen the metal gain 16%. Gold last reached a record high back in August 2020, when the Covid-19 pandemic sparked a rush into gold as a safe haven. As the world becomes more volatile, the old adage of gold being a safe haven tends to make it increase in value.

This of course can be seen in the continuing war between Russia and Ukraine, as well as the continued conflict between Israel and Palestine, providing a geopolitical risk as a reason to invest in gold. Furthermore, the dovish stance being taken on interest rates by the Federal Reserve in the United States has given the gold price some staggering momentum.

When the Federal Reserve first started hiking interest rates, assets such as bonds became more lucrative for investors due to the higher yields on offer. Consequently, the demand for gold lessened due to the fact the metal carries no interest rate thus diminishing investor appeal. Conversely, when interest rates come down the appetite for gold increases, and the prospect of easing money supply and reducing interest rates appears to have been confirmed by recent comments coming out of the Federal Reserve.

Analysts are advising that gold’s surge towards a record high was aided by Federal Reserve Governor Christopher Weller, who indicated that interest rates will not have to be increased to get inflation to return to 2%. Further dovish remarks followed from the Chairman himself, Jerome Powell, who said the central bank’s policy rate was now well into restrictive territory, which suggests that rate increases have now concluded.

This potential end to rate hikes will prove beneficial to gold, as the metal tends to struggle under higher rates whilst benefiting from lower rates. Therefore, as mentioned above, gold is not only rising from geopolitical risks, (also 41% of the world’s population will go to the polls next year,) but from traders aggressively pricing in rate cuts from March 2024. Indeed, experts advise that the swaps markets are now predicting a better than even chance of a rate reduction in March 2024, and are pricing in a cut in May of the same year. The recent decline in the value of the dollar has also spurred investor interest in gold as the metal is usually valued against the greenback. 

Experts suggest that gold may well go higher as there are many investors still on the side-lines, which increases the possibilities  of further spikes/rallies in gold. Previous gold bull markets have been driven by investors using exchange-traded funds or ETFs*, but analysts advise that investors in the mechanism have seen sellers for much of 2023 down 20% from the high of 2020. 

*Gold ETFs – This is a very popular way for investors to buy gold as they do not have to go through the process of owning the metal. Gold ETFs enjoy good liquidity and investors can buy and sell shares of the ETF on the stock exchange. When a purchase of shares is made the fund manager must buy the equivalent amount in physical gold. This not only will increase the price of gold but can act as a signal to the broader market that demand is increasing thereby impacting investor sentiment.

Furthermore, experts advise that the current price of gold (down at the time of writing form the high of USD2,135.39 to USD2019.17) may well be underpinned by the continuing support of purchases by governments and central banks. For example, Poland has bought circa 300 tonnes of gold in the past few years falling in line with the Eurozone average of gold to GDP ratio. This is a covert requirement* and as such analysts suggest Poland will buy an additional 130 tonnes of gold. 

*Covert Requirement – is referred to because some central banks within the Eurozone (e.g., Belgium) refuse to be transparent with regard to the gold reserve alignment on the grounds of professional secrecy. 

Market sentiment appears to favour a bull run in 2024 as experts predict that the Federal Reserve will cut US Dollar interest rates four times in 2024. However, if inflation figures do not match market sentiment and rates are put on hold or even hiked once more, traders and investors will not hesitate to cut their positions and gold will fall back to weaker levels.

Is it Time for the USD25 Trillion Global Cargo Trade to go Digital?

Written by Barclay Butler on . Posted in Industry, News & Reports. Leave a Comment

Paper documents still rule the world in global cargo trade. Indeed within this USD25 Trillion business, there is, at any one time, four billion paper documents in circulation. Importers, exporters, banks, brokers, financiers et al all rely on paper documents, which finance and move global resources around the world. It is a system that has seen little change since the 19th century and yet paper documents are frequently subject to fraud (i.e., fake or altered), get lost, and can with any particular journey add huge amounts of time.

With regards to time, data released by experts within this area suggest that the time to process a single bill of lading (paper document along with others) required for the transportation of goods, from issuance to customs clearance which for example includes preparation, issuance, shipper to bank, shipper bank to buyer bank, buyer bank to buyer, submission for customs clearance is circa 16.4 hours. Digitisation will dramatically reduce the time spent on processing.

Company lawyers are still today flying many miles to get a bill of exchange signed off at the last minute. This happened in Singapore in the late 2000’s where a lawyer flew to Hong Kong from Singapore and back in one day, (circa 5,000 miles) in order to have a bill of lading signed off by a client. Typically, this process does not happen every day but digitisation would reduce this process to minutes.

Below are examples of the main type of paper documents usually required under a documentary letter of credit that underpin global trade.

· Bill of Exchange or Draft

· Airway Bill (if air freight)

· Road Transportation Document (if road freight)

· Bill of lading

· Pro Forma or Commercial Invoice

· Insurance Policy and Certificate

· Certificate of Origin

· Inspection Certificate

· Packing List

· Warehouse Receipt – when kept in safe custody after goods arrive.

Based in Paris the ICC (International Chamber of Commerce) currently estimates that circa 1% of transactions within the global trade financing market are fraudulent equating to roughly USD50 Billion per annum. The principals involved, such as traders, banks, other financiers and parties, have, according to recently released data, lost USD9 Billion in falsified documentation over the last ten years. Experts are saying that sending duplicate documents to banks involved in a transaction or falsifying documents are the easiest types of fraud to commit.

Examples of fraud can be seen in the metals market which, going back in history and up to today, has been beset by fraudulent scandals. Some of the latest incidents have encompassed some of the world’s leading trading companies and houses including warehouses connected to the London Metal Exchange (the world’s benchmark futures market for base metals) which were proven to have shortcomings. In the world of metals, the commodity or collateral is usually underpinned by the likes of shipping documents (e.g., quantity ownership, location of goods and quality) and warehouse receipts. Such documents are open to fraudulent misrepresentation, such as being fake whereby the material maybe fictitious, or a single cargo may be pledged for multiple loans which is referred to as over-pledging.

In February of this year a well-known company within the metals industry was left facing a loss of circa USD500,000 as the nickel they had purchased did not contain the nickel as specified in documents. Their modus operandi with nickel was to purchase a cargo of nickel aboard ships then on sell that cargo when the ship reached its destination port. However, on one occasion when investigators in Rotterdam checked the contents of a container containing nickel, they found the contents to be of much lower value materials.

In 2020 a well-known energy group purchased copper from a Turkish supplier, but despite documents confirming the cargo was copper, when the containers were opened, they were full of painted rocks. The list of frauds perpetrated within the metals market is very long indeed, and of course fraud is not just found within metals but anywhere that has paper documentation. It would appear therefore that in order to reduce fraud across the industry, digitisation is the only way forward.

Many advocates of digitisation suggest now is the time to go digital, and make use of blockchain technology. In fact, they go on to say that such technology exists today, resulting in a massive decrease in fraudulent transactions. Furthermore, experts advise that that digitisation will be a boost for the sector, as digitised or electronic bills of lading would increase global trade volume by circa USD40 Billion due to a reduction in trade friction (the reduction in time and paperwork) especially in emerging markets. A very important point as muted by experts suggest from an ecological standpoint that by reducing friction in the container trade (e.g., paper documents), 28,000 tress per year could be saved.

An example of less friction has recently been seen between BHP Group in Australia who shipped nickel in containers to Chinese buyer Jinchuan. The transaction was financed by banks domiciled in each country, and using the ICE Digital Trade Platform the full documentation process amazingly took under 48 hours. Interestingly, 65,000 companies (including leading commodity producers) use the ICE Digital Trade Platform, which provides paperless global management solutions, which include digitisation, automation, and accelerates trade and post-trade operations, finance, logistics, compliance and visibility. Whilst 65,000 companies may sound a lot, remember there are still over four billion bits of paper underpinning global trade in circulation at this very moment.

Detractors say that online hacking is an obstacle to digitisation, but the plain fact is that hacking is a lot more difficult than altering a piece of paper. Indeed, expert opinion advises that that circa USD6 Billion could be saved in direct costs by the major shipping lines if they decided on full adoption of digital bills of lading. Furthermore, it is suggested that financiers such as banks would be more willing to finance those counterparts who are considered to be smaller and riskier if the sector went digital.

Currently, the industry is only transacting 2% of global trade via digitisation. However, change is in the air as ten of the world’s top container shipping lines (nine of which are responsible for in excess of 70% of global container freight), have by 2030, committed to digitalising 100% of their bills of lading, (50% by 2028). Happily, some of the worlds largest and most renowned mining companies have given their vocal support to digitisation, these include Anglo America PLC, Vale SA, Rio Tinto Group and BHP Group Ltd, who are all looking to digitise the bulk shipping industry.

So why is that with all the support for digitisation within the industry, only 2% of global trade has been digitised. The answer is a simple one, as the greatest stumbling block to digitisation is Legal. Whilst shipping companies, insurers, traders, banks and other financiers have all got the wherewithal to go digital, at present the only document recognised by English Law that gives the holder title and ownership to a particular cargo is a paper bill of lading. As a result, any deal or transaction which is not legally secured will not receive funding from a bank or cover from an insurance company, and without either of these two participants there will be no transactions.

As a result of this impasse, on the 20th of July 2023 the Electronic Trade Documents Act 2023, having received royal assent, came into effect on the 30th of September 2023*. This act gives the same legal powers to digital documents as paper ones. This represents a massive step forward, as English Law has legally controlled this industry sector for centuries and underpins circa 90% of global commodities and other trade contracts. France is expected to enact similar legislation towards the end of 2023 whilst Singapore (also a centre for maritime law), passed a similar Act or legal framework in 2021 and in 2022 conducted its first electronic bill of lading transaction.

This act is also based on a Model Law** as adopted by the United Nations, as being a transnational body, it is important that they pass statutes that are acceptable to all countries throughout the world. It has been welcomed by many companies throughout the industry and the Trafigura Group has gone on record by saying “We believe this is one of the solutions which would help in reducing documentary fraud”.

*Electronic Trade Documents Act 2023 – The UK Law Commission published their draft bill in March 2022, which this act is largely based on, and it set out the basis of how, under English law trade, documents can 1. Be dealt with and 2. Exist in electronic form, such that an electronic trade document can have the same effect as a paper trade document. The Act goes on to state that a person may possess, indorse and part with possession of an electronic trade document, and anything done in relation to an electronic trade document has the same effect in relation to the document as it would have in relation to an equivalent paper document. This Act amends the Carriage of Goods by Sea Act 1992 and the Bills of Exchange Act 1882.

**Model Law – UNCITRAL (The United Nations Commission on International Trade law) Model Law on Electronic Transferable Records 2017, aims to enable the legal use of electronic transferable records both domestically and across borders. It applies to electronic transferable records that are functionally equivalent to transferrable documents or instruments. Transferable documents or instruments are paper-based documents or instruments that entitle the holder to claim the performance of the obligation indicated therein and allows the transfer of the claim to that performance by transferring possession of the document or instrument. Transferable documents or instruments typically include bills of lading, promissory notes, warehouse receipts and bills of exchange.

The challenge facing the industry is change. People and companies get stuck in their ways and sometimes it is hard to adopt new processes when the current ones have been in existence for hundreds of years. There are many faults with paper, but it is something that everyone across the ecosystem understands, and whilst there is a global approval of digitisation, few are ready or even keen to be the first to dip their toes in the new waters. Experts have rightly expounded on the fact that if digitisation is to work, then everyone across the supply chain must adopt the same data standards, so that communication can move in the most effective way ensuring verification in a truly interoperable manner.

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