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Blacklisting of China’s DJI in US threatens to scramble drone industry

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Anyone who has already ordered a Mavic 2 as a Christmas present for the drone enthusiast in their lives should consider themselves lucky. The aircraft, which sells for about $1,500, contains a top-of-the-range camera and is one of the flagship consumer models sold by its maker DJI.

But on Friday the US commerce department added DJI to a list of sanctioned Chinese companies which it says have been involved in helping carry out human rights abuses. The move will make it far harder for the company to secure American supplies, and threatens to scramble the global market for camera drones, which the Chinese manufacturer dominates.

A commerce department official said on Friday that DJI was being added to the list because its products had been used in human rights abuses in China and elsewhere.

In 2017 the company reportedly announced a deal for “strategic co-operation” to provide police drones to the public security bureau of Xinjiang, the northwestern Chinese region that is home to a network of internment camps built to hold people deemed to be a threat to the state.

DJI said on Friday it was “disappointed” about the commerce department’s decision, adding: “Customers in America can continue to buy and use DJI products normally.”

In the past DJI said it believed it was being targeted for commercial reasons because it dominated the global market for commercial camera drones.

Brendan Groves, head of regulatory and policy affairs at Skydio, a rival drone maker based in the US, said “it’s surprising that DJI wasn’t on the list sooner”.

Mr Groves, a former attorney who used to lead the justice department’s drone efforts, said that DJI had profited “to the tune of hundreds of millions of dollars a year on the horrific surveillance state that the Chinese have established over the last four years in Xinjiang”.

Since DJI was founded in 2006, it has successfully seen off almost every other competitor thanks to its almost unique ability to manufacture high-end technological equipment at prices ordinary consumers can afford.

It does not release its sales figures, but industry estimates calculate DJI makes somewhere between 70 per cent and 80 per cent of the world’s commercial drones, and over three-quarters of those sold in the US.

These box-shaped, remote-controlled flying objects have attracted enthusiasts from model aircraft flyers to serious photographers, who bought an estimated 7m of them in the US this year.

DJI is now trying to work out what effect the move will have on its supply chains, but many of its models do rely heavily on US equipment. Its Zenmuse XT thermal camera accessory, for example, uses a camera built by the Californian company Flir, while its Spark mini drone uses a processor made by Intel.

Intel declined to comment. But Flir said it would “continually align our strategy to reflect future public policy changes, as they are adopted”.

The sanctions are similar to those the commerce department imposed on Huawei, the Chinese telecoms company last year, although the department said on Friday it would review any licence application to supply products deemed necessary to tackle infectious diseases. DJI’s drones have been used to deliver critical supplies during the coronavirus pandemic without having to risk human contact, and to spray surfaces with disinfectant.

Apart from that narrow group of products, however, the US government said on Friday it would treat any application to sell sensitive technology products to DJI with a presumption of denial.

Spencer Gore, founder of the US start-up Impossible Aerospace, said: “This move most likely makes many DJI products impossible to build today without a major redesign.”

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Some close to the company believe it will be able to survive the immediate effect of the sanctions, since it can secure many of its supplies from outside the US. But they worry the reputational damage done will deter other customers — especially public bodies such as fire and police departments which often use DJI drones — from buying the company’s products.

Mike Winn, chief executive of DroneDeploy, which supplies software used to create aerial maps, said: “The biggest thing here could just be the confusion and uncertainty in the markets. [DJI drones] are used in San Diego by the police to respond to crime scenes more quickly.”

He added: “Four of the five biggest seed companies rely on DroneDeploy and fly hundreds of drones over their customers’ crops.”

For DJI, even bigger threats loom on the horizon. Earlier this year, the White House drew up a draft order that would have prevented federal agencies from using drones made with Chinese parts. And in an even more significant move, it would also have banned such drones from flying over federal lands, which account for 28 per cent of the US.

Some in the industry believe White House officials are now trying to resurrect that order, especially after Congress balked at including similar terms in its recently-passed National Defense Authorization Act.

Others believe, however, that an incoming Joe Biden administration is likely to take a less confrontational attitude towards the Chinese technology industry, and will be more likely to listen to the warnings of US suppliers who say they are being caught in the crossfire.

Biden officials could decide to issue enough export licences to American companies to ensure DJI continues to function, or even try to remove it from the sanctions list altogether.

Paul Triolo, a China technology policy experts at Eurasia Group, said: “The Biden administration is certainly more likely to listen to those in Silicon Valley who say the Trump administration has been too scattershot.”

One section of Silicon Valley was celebrating on Friday, however.

American drone manufacturers are small in comparison with DJI, but in recent years companies such as Skydio and Impossible Aerospace have found an emerging niche for first-responder and commercial applications.

“It’s hard to imagine a bigger action that would be more impactful to the benefit of American drone makers,” said Mr Gore of Impossible Aerospace.

“The best avenue [now] for risk reduction is to buy American.”



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Emerging Markets

Tech-heavy Taiwan stock index plunges on Covid outbreak

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Taiwan’s stock market, home to some of the world’s biggest tech companies, suffered one of the largest drops in its history as investors were rocked by a worsening Covid-19 outbreak.

The Taiex fell as much as 8.55 per cent on Wednesday, the index’s worst intraday fall since 1969, according to Bloomberg. It finished down 4.1 per cent.

Construction, rubber, automotive and financials — sectors retail investors had been shifting into from technology in recent months — were the worst hit in the sell-off.

The world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Company, which has a 30 per cent weighting in the index, fell as much as 9.3 before recovering ground to be down 1.9, while Apple supplier Hon Hai Precision Industry, also known as Foxconn, dropped 9.8 per cent before paring losses to be down 4.7 per cent.

While Taiwan’s sell-off was related to domestic Covid-19 problems, it followed recent declines in global markets as investors worried about possible inflationary pressures.

The falls came as Taiwan’s government was expected to partially close down public life to contain a worsening coronavirus outbreak — something the country had managed to avoid for more than a year.

“The reason that triggered the escalated sell-off during the trading session is the new [Covid-19] cases to be reported this afternoon, and probably the raising of the pandemic alert level,” said Patrick Chen, head of Taiwan research at CLSA. “On top of that, the market before today was already at a point where the index was at an inflection point.”

Taiwan’s strict border controls and quarantine system and meticulous contact tracing measures had helped it avoid community spread of Covid-19 until recently.

That success, which allowed Taipei to forego lockdowns, helped boost the local economy, which grew about 3 per cent last year and 8.2 per cent in the first quarter of 2021.

But health authorities announced 16 locally transmitted confirmed cases on Wednesday, for three of which the infection source was unclear — a sign of widening spread in the community. Authorities had confirmed seven untraced cases on Tuesday, and domestic media reported that the government might introduce partial lockdown measures.

President Tsai Ing-wen called on the public to be vigilant but avoid panicking.

Taiwan’s stock market rose almost 80 per cent over the past year, peaking at a historical high late last month. It is now down 8.5 per cent from that mark.

Retail investors have increasingly moved out of technology stocks in recent weeks, reducing the sector’s weight in trading volume from almost 80 per cent at its height to just over 50 per cent.

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China factory gate prices climb on global commodities boom

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The price of goods leaving factories in China rose at the fastest pace in more than three years, on the back of a rally in commodities supported by the country’s economic recovery.

The producer price index rose 6.8 per cent in April year-on-year, beating economists’ expectations and surpassing March’s increase of 4.4 per cent.

The rate was driven in part by comparison with a low base last year in the early stages of the pandemic. But it also reflects a global surge in the prices of raw materials that was first stoked by China and now incorporates expectations of recovering global demand.

While PPI prices in China have leapt, economists suggested there was limited spillover into consumer prices and that the central bank was unlikely to react. China’s consumer price index added just 0.9 per cent in April, the National Bureau of Statistics said on Tuesday, although it touched a seven-month high.

“It tells us that demand at this moment is super strong,” said Larry Hu, head of greater China economics at Macquarie, of the PPI data, although he suggested policymakers would see the increase as “transitory” and “look through it”.

“We’re going to see some reflation trends,” he added.

Signs of tightening in China’s credit conditions have drawn scrutiny from global investors eyeing the prospect of higher inflation as the global economy recovers from the pandemic, especially in the US, which releases consumer price data on Wednesday.

China’s PPI index remained mired in negative territory for most of 2020 following the outbreak of coronavirus, but has started to gather momentum this year. Gross domestic product growth in China returned to pre-pandemic levels in the final quarter of 2020.

An industrial frenzy in China has stoked demand for commodities such as oil, copper and iron ore that make up a significant portion of the index and have helped to push it higher. 

Policymakers in China have moved to tighten credit conditions, as well as attempted to rein in the steel sector. Ting Lu, chief China economist at Nomura, said the relevant question now was “whether the rapid rise of raw materials prices will dent real demand, given pre-determined credit growth”.

Retail sales in China have lagged behind the growth rate of industrial production, putting downward pressure on CPI, which has also been weakened by lower pork prices that rose sharply on the back of African swine fever. Core CPI, which strips out food and energy, rose 0.7 per cent in April 

Julian Pritchard-Evans, senior China economist at Capital Economics, said that producer prices were feeding through into the rebound in consumer prices, but also suggested that pressures on the former were “likely to be mostly transient”.

He added that output prices for durable consumer goods were rising at their fastest level on record.

China’s rapid recovery has been driven by its industrial sector, which has churned out record quantities of steel and fed into a construction boom that policymakers are now trying to constrain. On Monday, iron ore prices hit their highest level on record, while copper prices also surged.



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Iron ore hits record high as commodities continue to boom

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The price of iron ore hit a record high on Monday in the latest sign of booming commodity markets, which have gone into overdrive in recent weeks as large economies recover from the pandemic.

The steelmaking ingredient, an important source of income for the mining industry, rose 8.5 per cent to a record high of almost $230 a tonne fuelled by strong demand from China where mills have cranked up production.

Other commodities also rose sharply, including copper, which hit a record high of $10,747 a tonne before paring gains. The increases are part of a broad surge in the cost of raw materials that has lasted more than a year and which is fanning talk of another supercycle — a prolonged period where prices remain significantly above their long term trend.

The price of timber has also hit a record high as US sawmills struggle to keep pace with demand in the run-up to peak homebuilding season in the summer.

“Commodity demand signals are firing on all cylinders amid a synchronised recovery across the world’s economic powerhouses,” said Bart Melek, head of commodity strategy at TD Securities.

Strong demand from China, the world’s biggest consumer of commodities, international spending on post-pandemic recovery programmes, supply disruptions and big bets on the green energy transition explain the surge in commodity prices.

Commodities have also been boosted by a weaker US dollar and moves by investors to stock up on assets that can act as a hedge against inflation.

The S&P GSCI spot index, which tracks price movements for 24 raw materials, is up 26 per cent this year.

Strong investor demand pushed commodity assets held by fund managers to a new record of $648bn in April, according to Citigroup. All sectors saw monthly gains with agriculture and precious metals leading the way, the bank said.

Agricultural commodities have had an especially strong run owing to rising Chinese demand and concerns of a drought in Brazil. Dryness in the US, where planting for this year is under way, is also adding to the upward rise in prices. Corn, which is trading at $7.60 a bushel and soyabeans at $16.22, are at levels not seen since 2013.

“From a macro economic environment to strong demand and production concerns, the ingredients are all there for the supercycle,” said Dave Whitcomb of commodity specialist Peak Trading Research.

Rising copper and iron ore prices are a boon for big miners, which are on course to record earnings that will surpass records set during the China-driven commodity boom of the early 2000s.

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JPMorgan reckons Rio Tinto and BHP will be the largest corporate dividend payers in Europe this year, paying out almost $40bn to shareholders. Shares in Rio, the world’s biggest iron ore producer, hit a record high above £67 on Monday.

Brent crude, the international oil benchmark, has crept back up
towards $70 a barrel, which it surpassed in March for the first time in
more than a year, recovering ground lost as the pandemic
slashed demand for crude and roiled markets.

Supply cuts by leading oil producers have helped to bolster the market
as consumption has begun to recover around the world.

While some Wall Street banks have hailed the start of a new supercycle, with some traders talking of a return to $100 a barrel oil, others are less convinced. The International Energy Agency said oil supplies still remain plentiful meaning any talk of a supercycle is premature.



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