Geopolitical Update – April ‘24

1. Chips – The New Global Arms Race

2. Iran Attack Effects on Oil

3. Alliances in the Pacific are Growing Rapidly

4. LNG Exports Lawsuit

5. Long Mexico

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Chips – The New Global Arms Race

This past month has seen a flurry of headlines which showcase the intensifying scramble of multiple nations to secure their seat at the table of the next big global commodity – semiconductors.

In the early part of the 20^th century, as the British Navy switched its primary fuel source from coal to oil, the race to secure petroleum rights by whatever means necessary kicked off the commodity’s arms race that forever shifted the geopolitical posturing of the West’s involvement in the Middle East (a shift we’re still grappling with today).

Today, its semiconductors that are realigning the world in real time, and every country that has the ability to do so, is opening up their checkbooks to ensure they don’t fall behind and become beholden to one or two countries controlling a commodity that will play a vital role in the geoeconomics and geopolitics of the next century:

A few of the headlines:

1. The world’s largest semiconductor company, Taiwan Semiconductor Manufacturing Company (TSMC), has been awarded a total of $11.6 billion in a CHIPS grant ($6.6 billion) and loan ($5 billion). TSMC plans to open 3 new fabs in Arizona which would support AI, High Performance Computing, 5G/6G communications, and more. This is part of the CHIPS and Science Act funding package, which was signed in 2022 and earmarks $280 billion to boost domestic chip research and production.

2. Vietnam is offering tax breaks and other perks to onshore semiconductor companies to help develop the sector domestically. Nvidia and Samsung are already looking to expand their presence in Vietnam, which has one of the highest-rated education systems in the world and is preparing to train 50,000 engineers by 2030, Nikkei reported.

3. Japan has approved $3.9 billion in subsidies for chipmaker Rapidus, to help build its semiconductor capabilities domestically.

4. The Netherlands said it would spend $2.7 billion on local infrastructure to ensure ASML, the company with a monopoly on Extreme Ultraviolet Lithography (EUV) equipment (which is required to create the intricate patterns on silicon wafers which make up a semiconductor), does not expand abroad.

5. The U.S. awarded nearly $20 billion in incentives to Intel (the largest the U.S. has granted to any single company via the CHIPS Act) to build out new chip foundries across Arizona, New Mexico, Ohio, and Oregon. Separately, Intel has also received a $3.5 billion investment from the U.S. Government to enhance the production capacity of advanced chips for military and intelligence purposes.

6. Reutuers has reported that the U.S. is set to award Samsung with up to $6.6 billion in chip subsidies to expand its Texas operations. The subsidy will go toward construction of four facilities in Taylor, Texas, including a $17 billion plant that Samsung announced in 2021.

In addition to these offensive moves, the U.S. and China are also playing defense to try to slow each other down.

From International Intrigue:

1. “The U.S. is considering sanctions on Huawei chip suppliers. Washington is reportedly considering sanctions against Chinese semiconductor companies linked to China’s telecoms giant, Huawei. Internal U.S. discussions on the matter began last year after Huawei unveiled a smartphone containing a surprisingly fast processor, despite the introduction of U.S. restrictions on chip sales to China.

2. China bans Intel chips from government computers. Beijing is releasing new guidelines phasing out the use of semiconductors from U.S. companies AMD and Intel from government PCs and servers. The new rules also seek to sideline Microsoft’s operating system in favor of domestic software as Beijing pushes towards autonomy from Western tech.”

3. The Wall Street Journal reported on April 15^th that Chinese authorities have directed their national telecom networks to phase out the use of foreign chips, part of efforts to reduce reliance on U.S. semiconductor giants. The move will particularly affect Intel and AMD, which have been major suppliers of networking processors to China in recent years.

Here’s a great take from the Internatinoal Intrigue team that helps contextualize just how important the symbolism of this arms race is:

“Sometimes world history looks like a straight path, while other times it looks like a pendulum swinging back and forth through the centuries.

This feels more like a pendulum day, with at least two big ones swinging right through this semiconductor story:

• Industrial policy: the first English reference to capitalism was potentially in Alexander Hamilton’s 1791 vision for a government-led shift to a manufacturing economy. The pendulum then swung away from government intervention last century, and now it’s swung back again with the Chips Act and other forms of industrial policy.

• Foreign policy: the US has historically lurched between periods of wanting to venture out to slay foes, and other periods of wanting to hunker down and pull up the drawbridge. Reviving its home chipmaking is another possible sign the U.S. is hunkering back down.”

If you want to nerd out and learn everything about semiconductors, including how we got to this point where only a handful of companies can compete in this highly concentrated value chain, Shane Parrish does a great job on this The Knowledge Project podcast.

Iran Attacks Effect on Oil

Per Anas Alhajji (one of the best O&G analysts out there)

“Figure (1) shows Iran’s oil production markedly increasing in the last two years despite sanctions. Looking at last month’s crude production, it reached 3.188 mb/d, higher than production a year earlier by 611 kb/d. Since early 2021, production has increased by about 1 mb/d.

Despite the potential for Middle East tensions to disrupt oil markets, following an Iranian drone-and-missile attack on Israel, prices have remained relatively stable. Traders seem to believe the attack is a limited response rather than an escalation to wider conflict. There's confidence that OPEC+ can compensate for any supply issues with their spare capacity, and the market is accustomed to Middle East conflicts not significantly affecting oil supplies.

We now know the media and some analysts exaggerated the impact of the Iranian attack on Israel on the oil market. Oil prices declined slightly today (4/15/24). But the main story is that the price did not increase and did not increase significantly. 

However, risks to oil installations and tankers in the region remain. The danger is not from the government of Iran but from some fringe groups that support Iran, even individuals who are not affiliated with any groups. Most of the risk stems from the reaction to the strong support of the United States and European countries to Israel. Some people in the Arab world were angered by what they called the double standard since most of the countries did not condemn the Israeli attack on the Iranian Consulate in Damascus. Hence, the risk now is from loose groups and individuals, not the officially-affiliated groups.

Will the Biden Administration tighten oil sanctions on Iran because of its attack on Israel? In our view, any tightening of sanctions will not involve oil. The Biden administration doesn’t want oil prices to go higher before the elections. However, Biden will be under pressure from Republicans to do something.

What about after the election? If Biden wins, we believe he will want to continue appeasing Iran for several reasons, including its role in Yemen, Lebanon, Syria, and Iraq. He also wants to reach some sort of a nuclear deal.

If Trump wins, we believe he will tighten the sanctions during his first week in office. Initially, the impact would be limited, but will get larger over time.”

Alliances in the Pacific are Growing Rapidly

Note: we just released a deep dive on the Australia/US/UK security alliance, AUKUS. Have a read here.

While most of today’s Geopolitical attention is being paid to Israel – Hamas/Hezbollah/Iran/Houthis, Pacific nations are quickly rearranging their geostrategic posturing in historic fashion in anticipation of a future ‘U.S. - China Event’ - whatever and whenever that may be.

Some Updates:

• The U.S. is pushing for Japan to become a more integrated member of AUKUS, as Biden hosted Japanese Prime Minister Fumio Kishida at the state dinner a couple weeks back. According to Jacob Shapiro of Cognitive Investments, the conversation included “greater coordination and integration between the military forces of both countries, including the formation of a joint defense council that could support more defense-related exports of equipment produced in Japan. And officials agreed on new cooperation on ventures in space and collaboration between research institutions working on artificial intelligence, semiconductors, and clean energy.” And per reports from the FT, the deal will restructure the U.S. military command in Japan to give it more operational authority to coordinate with local counterparts.

• From the Japan Times, “Recognizing Japan's strengths and its close bilateral defense partnerships with all three countries, we are considering cooperation with Japan on AUKUS Pillar II advanced capability projects,” the defense chiefs from the three countries said in a statement.

• Japan is the first country to be formally considered to join Pillar II (we’ll be writing a more in-depth piece on this in the next couple of next weeks), ahead of other U.S. allies, including Canada and New Zealand, the two other members of the “Five Eyes” intelligence alliance that also groups the United States, United Kingdom and Australia.”

• UK + Australia: The UK and Australia signed another security pact a couple of weeks back and announced Canberra will invest $3B in Rolls-Royce’s nuclear reactor facilities in the UK as a step towards the future AUKUS submarine. The agreement aims to make it easier to consult on issues of national security and conduct joint military exercises. 

• Japan + Philippines: Tokyo and Manila are in talks to deploy Japanese troops to the Philippines, plus finalize a reciprocal access agreement that would allow the two armed forces to train and exercise in each country. 

• China + Indonesia: Xi Jinping met with Indonesian President Elect Prabowo Subianto (a deviation from Xi’s typical stance of meeting with new Presidents only after they are in office) to discuss “friendship and cooperation, promote an equal and orderly multipolar world and a universally beneficial and inclusive economic globalization, strengthen multilateral cooperation, and safeguard the common interests of developing countries.” Reading between the lines, China needs a lot of Indonesia’ nickel – remember, resources dictate geopolitical alliances.

• Read our deep dive on Indonesia and the importance of their Nickel production here.

LNG Exports Lawsuit

16 U.S. states, led by Louisiana, have filed a lawsuit challenging Biden’s LNG pause. As a refresher, in late January the Biden Administration paused approvals for pending and future applications to export Liquified Natural Gas (LNG). Why he actually did it is up for debate (Climate Change seems to be the filler explanation for just about every decision these days, but domestic energy costs and national security are also plausible).

Regardless of the ‘why’, Louisiana Attorney General Liz Murrill held no punches in her press release for the lawsuit: “Instead of supporting clean energy production right here at home, the Biden administration is hijacking the global energy supply chain to the detriment of Louisiana, our nation, international stability and developing democracies abroad.”

That being said, the pause only applies to pending and new approvals of export capacity, which does not include the already approved export terminals, the capacity of which is substantial.

This could however be an issue in the long run, especially for the U.S.’s primary recipients of LNG, in particular Europe, as they continue to seek sources other than Russian piped gas:

Why you should still be bullish Natural Gas?

“Despite the mild weather, growing inventories, and falling prices, we remain incredibly bullish. Analysts underestimate the impact of slowing shale growth ahead of the looming wave of new LNG export capacity arriving later this year. Despite pervasive bearishness, we believe 2024 will be the year Henry Hub converges with international prices, which are currently nearly six times higher.” – Goehring & Rozenchwajg

Long Mexico

The U.S. - Mexico - Canada Agreement (USMCA), the free trade deal signed in 2020 under then-President Trump and which substituted NAFTA (the North American Free Trade Agreement which was created in 1994), is starting to pay big dividends for Mexico.

According to the Wall Street Journal, “Some of the biggest U.S. companies in artificial intelligence have asked their Taiwanese manufacturing partners to step up production of AI-related hardware in Mexico, seeking to diminish reliance on China.

Taiwan-based Foxconn, the world’s largest contract electronics manufacturer, and other Taiwanese companies are heeding the call and investing more in Mexico.”

The North American nations “hope to replace products imported from Asia as much as possible,” said James Huang, chairman of the Taiwan External Trade Development Council. “Based on this consensus, Mexico is poised to become the most important manufacturing base for the USMCA.”

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