In today’s Exponential Investor

  • They don’t make ‘em like they used to
  • The not-so-green energy transition
  • The United States’ Achilles heel

Take a moment to check the label on the clothes you’re wearing.

Where were they made?

Malaysia, perhaps. India, China or Bangladesh are other likely contenders. Maybe even Mauritius…

But… most likely not the UK.

Chances are, the clothes you’re wearing right now are better travelled than most people can ever hope to be.

The fibres might be sourced in Europe, spun into yarn in Egypt, woven into fabric in China, dyed in Spain and assembled in Morocco, before finally being sold in the UK.

Fashion is the epitome of globalisation.

(By globalisation, I’m only referring to one aspect of a complex, expansive term – the global, interconnected supply chains of physical goods and commodities.)

For the past few decades we’ve come to accept globalisation as inevitable.

But is that about to change?

Could the pandemic wind back globalisation?

Everyone remembers the first weeks of lockdown. Supermarket shelves were stripped bare. Toilet roll became (for some reason) a precious commodity.

It was like an imagined (and often too real) lifestyle from the Soviet Union.

Part of this was due to panic buying, of course. In many cases, shops simply couldn’t stock shelves fast enough to keep up with shoppers desperate to hoard pasta.

Supply chain disruption also played a part, but it wasn’t the whole story.

Now, supply chain disruptions really are firmly to blame for the shortages of everything from sandwiches to raw materials.

With countries re-entering lockdown to halt the spread of the delta variant, an ongoing semiconductor shortage, the rising price of raw materials, and soaring shipping costs, there’s plenty of obstacles to importing goods into the UK.

In fact, a survey conducted by the Confederation of British Industry (CBI) found that UK manufacturers’ stock levels are at their lowest since records began in 1977.   

So if shipping goods from abroad is becoming so difficult, why don’t companies and governments start producing them closer to home?

That’s exactly what Scott Price, President of UPS International, the multinational shipping, receiving and supply chain management company, is predicting.

This won’t happen overnight, of course. Price predicts that this is a process that will occur throughout the next decade.

But the ability to produce goods more flexibly, and without being at the mercy of events on the other side of the planet, arguably looks more appealing than ever.

One big question springs to mind, however…

If supply chains are ‘regionalised’ – if instead of a t-shirt travelling to six countries across three continents before you even see it in a shop window – then how will this impact costs?

After all, nebulous, continent-spanning supply chains exist because they’re cheaper than simply producing goods at home.

So, will the prospect of rising costs keep existing supply chains in place, or are manufacturers going to trade flexibility for higher costs – which will, inevitably, be passed onto consumers?

What about the green energy transition?

With almost every country ostensibly planning to “build back better” following the pandemic, many are beginning to rub up against the practicalities involved in weaning their economies off fossil fuels.

Take nickel, for example.

The metal is a crucial to the production of many electric vehicle (EV) batteries. And demand for it is set to grow 19 times by 2040, according to the International Energy Agency (IEA – a Paris-based inter-governmental thinktank).

But right now, the world’s largest producer of nickel is Indonesia.

And although Indonesia is planning to ramp up its nickel production, it plans to do so using coal-fired electricity – far from the greenest methods of mining.

For many Western countries, that won’t fly.

Companies are under pressure to not only clean up their own operations, but to clean up their supply chains too.

Simply building electric cars won’t be enough for a company to burnish its green credentials. They’ll soon need to ensure that all the car’s components are sourced sustainably too.

This makes sense. For the green energy transition to work, companies need to revise all aspects of their business.

But it also poses a problem for Western countries: if they can’t use ‘dirty’ Indonesian nickel, they’ll be forced to mine the metal closer to home.

That’s why projects such as Noront Resources’ nickel mine in Ontario, Canada, are drumming up high demand from larger mining companies.

I’ve used nickel as an example here, but a similar argument applies to lithium, cobalt, and a whole host of metals.

The United States’ Achilles heel

There’s one factor that I haven’t mentioned yet: geopolitics.

The United States imports fourteen types of critical metals.

China, meanwhile, exports sixteen types.

If tensions between China and the United States continue to rise, that imbalance is only going to become more severe.

Even in the case of cobalt ore, the clear majority of which is produced in the Democratic Republic of Congo (admittedly, not a bastion of political stability), China still controls 70% of global capacity to convert cobalt ore into useable, chemical cobalt.

So rerouting supply chains around isn’t just an economic imperative: it’s a political objective too.

Until next time,

Nathan Tipping
Research Analyst

PS Just as globalisation seemed once seemed inevitable, many in the financial establishment once felt that crypto was on its way out. How wrong they were. Now, Southbank Investment Research’s resident crypto expert, Sam Volkering, is back with a new prediction – watch his broadcast here.