THE BIG BILL
The CHIPS Act is law, but does it matter?
The big industrial policy story of the week: On Tuesday, President Biden signed the Chips and Science Act of 2022 (CHIPS Act) into law. The 280 billion USD legislation is intended to strengthen US semiconductor manufacturing, research and development, and supply chain security – for the sake of domestic US industry, of course, but also competition with China. The law features over 52.7 billion USD for semiconductor manufacturing, including 2 billion for so-called legacy chips that are essential to the auto and defense industries; a 25 percent tax credit for domestic investment in semiconductor projects; and 200 billion USD for chip-related research.
In other words, the CHIPS Act constitutes a lot of dollars going to a strategic domestic industry. It is a signal that Washington is getting serious about today’s production-based international competition. But the CHIPS Act is also wildly inadequate for this competition. First, the legislation skews toward semiconductor R&D, leaving core, more upstream nodes of the semiconductor value chain (read: packaging and testing, material inputs, and the markets into which semiconductors are sold) largely unaddressed; it focuses on expertise not the ability to make. Second, the CHIPS Act fails to address the reality that much of this R&D risks flowing to China – thanks in large part to Beijing’s capture of leading international semiconductor companies.
Finally, and the biggest issue: Semiconductors, while of course important, are only one slice of the industrial competition underway. If it takes the US two years, bipartisan consensus, and a near-perfect alignment of the stars to address every other slice, nothing will happen. That leaves one huge question moving forward: Is the private sector ready to take the initiative? Will the US private sector treat the CHIPS Act as a signal from Washington to start rethinking economic logics and proactively investing in domestic production, in semiconductors and beyond – on the assumption that regulatory and geopolitical dynamics will support the bet? Or will they keep waiting on Congress to dole out cash before making moves?
Gas prices are down, but the fuel scramble continues
Global oil prices are edging lower; US retail pump prices fell below 4 dollars per gallon this week. But there is more to the energy picture than oil and gas. LNG and coal prices are still climbing, thanks in no small part to upward pressure from Asian demand. South Korea and Japan are rushing to buy extra cargoes of LNG to boost storage and avoid winter shortages, especially after summer heatwaves and amid ongoing uncertainties about the Russia-Ukraine war. These moves to secure supplies outside of existing long-term contracts require outbidding European buyers, further squeezing the already-tight global LNG spot market – and exacerbating international shortage. And if Asia is squeezing LNG prices, Europe is doing the same for coal. The EU’s ban on Russian coal came into effect this week. Now, member states have to find supplies elsewhere, including Australia and Indonesia. This is putting new pressure on the global market and lifting the Asian coal futures curve substantially.
Plus, there are wildcards in this week’s energy picture. Japan has announced that it intends to keep its 30 percent stake in the Sakhalin-1 oil and gas project in Russia, because it is an important source of fuel imports (and everyone these days needs fuel). Not that Tokyo has much choice in the matter: Russia this week banned investors from “unfriendly” nations from selling shares in key energy projects, including the Sakhalin-1.
Turkey plays metals middleman
Turkey is playing a key intermediary role in facilitating sales of metals to Russia, according to the head of the Istanbul Ferrous and Non-Ferrous Metals Exporters’ Association. With Russian access to metals from the West restricted due to sanctions, Russian buyers are turning to Turkey to serve as its “bridge and warehouse.” Similarly, EU companies are turning to Turkey as a conduit to sell their metals to Russia, according to the industry group. Data bears this out: Turkey’s metal exports to Russia rose by 26 percent year-on-year by August 8. This is just the latest example of the leaks in the West’s sanctions war on Moscow – and how readily the international private sector finds workarounds to it. It
Tesla locks in more nickel – but China got there first
Tesla has signed deals worth 5 billion USD to secure nickel materials from Indonesia for its lithium batteries, according to an Indonesian government official. The carmaker hasn’t confirmed the news publicly, but it would be in line with the company’s globe-spanning effort over the past year to secure deals with nickel suppliers. As for the latest contracts with Indonesia, the official said that Tesla has begun buying “two excellent products” produced by nickel processing companies operating in the country’s Morowali Industrial Park. What was less emphasized in the interview: The facility is a joint-venture that’s two-thirds owned (p.12) by Chinese metals giant Tsingshan.
A US productivity slump