Difficult Resupply

Covid-Hobbled Supply Chains for Rubber and Uranium Cloud Current Earnings Season

Expectations are at the heart of disappointment. Case in point, uranium and rubber gloves. 

As expected, investors are facing the dark effects of Covid-19 as they unpack the bleakest earnings data since the first third of the 20th century. The steel industry is as good an example as any: Both U.S. Steel Corp (X) and mining giant Cleveland-Cliffs (CLF) are among the most shorted material stocks traded these days. The National Association of Business Economics is calling for a 27% decline in real GDP growth, year-over-year. Mass layoffs are planned in mines in Babbit and Silver Bay, Minnesota. 

From there, the economic collapse is reverberating out into the broader energy market that’s reeling from negative values for crude oil, and then off into the macroeconomic horizon. 

But despite the earnings implosion, investor expectations are frankly bullish. Equity prices for both steel and wider industrials have crept up. Investors expect the worst of the Covid-inspired damage to be over. Forward-looking markets are peeking into a future where the economy almost certainly has to improve. 

How many civilization-crushing pathogens can there be? 

The Covid Devil Is in the Details

Researchers, like us, have done little else than hustle down the tiny tangible details behind the changing expectations of the Covid-19 crisis. Over and over, we see the same problem: A global supply chain that’s almost preposterously brittle. Large, centrally managed corporate hierarchies can’t seem to react properly to dynamic market conditions. Razor-thin margins are forcing even ginormous firms to make near-sighted structural changes. And ludicrous vertical market integrations have exposed comical logistics snafus. 

For example, take the emerging mess in rubber. In France, it is a major story that despite the near-limitless market from Covid-care workers for various kinds of rubber used in surgical gloves, the rubber needed to make those gloves is facing a near catastrophic drop in demand.

For reasons nobody can explain, African rubber makers in emerging economies like the Ivory Coast sell strictly to European tire and car parts makers. So as tiremakers like Goodyear, Michelin and Bridgestone retrench like steel makers, demand for African rubber is collapsing. 

Rubber by and large comes out of the major Asian rubber-producing economies in Thailand, Indonesia and Malaysia. In fact, it is a Maylasian outfit, called Top Glove, that controls nearly 25% of the global rubber glove trade. But, Malaysia is nearly 15,000 miles by cargo ship, away from The Ivory Coast. So, while it’s possible for Ivory Coast producers to ship latex to Malaysia, the stuff will curdle to useless rubbery goo by the time it gets there. 

Investors might expect company managers would have anticipated such logistics. And many have tried. In the 1920 no less Henry Ford attempted to build a planned community in the central Amazon. Called Fordlandia, the industrial city would both bring his values for a proper community that so eluded Ford in Detroit and solve for the chronic shortages of rubber. 

But not much has changed.

Consider uranium. The critical strategic supply of the material that goes into nuclear reactors around the world, turns out to be just as fragile as rubber’s. Again, due to unfathomable supply logistics, there are not enough mines to make up for even a few major mine closures. Last week, the largest uranium maker, Cameco (CCJ, $13.74) shuttered facilities near Cigar Lake in Northern Saskatchewan, Canada, due to Covid-19 issues. 

That single closure was enough to send supply shocks through the entire nuclear power industry. 

No Durable Supply 

Of course, Top Glove and Cameco have the means to build factories where the Covid economy requires them. Eventually. But these factories won’t come online quickly. Both rubber gloves and uranium are surprisingly complex to process and ship. Considering the overall slowdown in the global economy, new production in both products is at least a year away. Maybe more. Nobody knows for sure. 

So the next time your designated shopper lines up for hard-to-get products like rubber gloves, just think of the exposure investors face in not having the imagination to sniff out every possible detail about the inputs of what seems worth investing in. 

Because in the Covid-19 economy, even the most basic expectations can be dangerous indeed