Wall Street Breakfast: Crisis On The Rhine

Crisis on the Rhine

Fresh Episode! Weekend Bite, a Seeking Alpha original series. This week, Sam Ro, CFA, founder of the TKer newsletter, joins us to discuss labor hoarding, the inflation report and the resurgent meme stock craze. Kim Khan also shares what investors need to watch next week in regards to the housing market in Catalyst Watch.

An economic slowdown in Germany is now more likely than ever as fresh troubles on the Rhine River pose a headache for shipping and heavy industry. Levels at Kaub, a key point on the waterway west of Frankfurt, are poised to breach 40 centimeters (15.75 inches) on Friday, and will continue to dwindle in navigability in the coming days. Below that marker, it’s not economical for many barges to transit the river, which is used to ship everything from oil & gas and coal to chemicals and grain.

What happened? Weeks of dry weather have weighed on Europe’s major waterway, with shallow depths preventing barges from loading their full volumes. The effects could ripple through the continent for months, just as the region is on the brink of recession from the war in Ukraine and untamed inflation. Economists estimate the Rhine disruption could knock half a percentage point off Germany’s growth this year, adding to the significant price pressures seen across many Western European countries.

“We’re expecting this situation to continue towards the end of the year,” noted Toril Bosoni, head of the IEA’s oil market division, adding that conditions could be more precarious for landlocked countries in central and eastern Europe that normally get energy deliveries via the Rhine.

Making preparations: Chemical maker BASF (OTCQX:BASFY) hasn’t ruled out production cuts as it placed orders for shallow-water barges and uses more rail to transport goods. Utility Uniper (OTC:UNPPY) warned that it cannot bring enough coal by train to run its plants at full capacity for an extended period of time, threatening output at Germany’s coal-fired power stations. Crisis teams at Thyssenkrupp (OTCPK:TKAMY) are also meeting daily as the steelmaker uses ships with lower drafts to keep up supplies.

Big Mac comeback

Nearly six months ago, McDonald’s (MCD) closed all of its restaurants in Ukraine due to the Russian invasion. Now, it’s planning on reopening them, following in the footsteps of other Western brands that unlocked their doors earlier this month, like KFC and Pizza Hut owner Yum! Brands (YUM). To restart its 109 locations across the country, McDonald’s is working with suppliers to get products to restaurants, while launching stronger safety protocols as the war still rages in Ukraine’s east.

Quote: “We’ve spoken extensively to our employees who have expressed a strong desire to return to work and see our restaurants in Ukraine reopen,” said Paul Pomroy, corporate senior vice president of international operated markets. “In recent months, the belief that this would support a small but important sense of normalcy has grown stronger.”

McDonald’s has continued to pay its more than 10,000 employees in the country throughout the crisis, and established an employee relief fund several months ago. The latest move seeks to help restore a “small but important sense of normalcy” and will be conducted as part of a phased reopening in Kyiv and across western Ukraine. The decision by McDonald’s will also help out the Ukrainian economy, which is expected to contract 35% this year, according to the IMF.

Over in Russia: McDonald’s and other global brands found themselves in a pickle after suspending operations due to the humanitarian crisis and unpredictable operating environment caused by the Kremlin. In response, Mickie D’s sold its businesses to an existing licensee in May, offloading a portfolio of 850 restaurants to local franchise owner Alexander Govor, who renamed the chain “Vkusno & Tochka.” Prior to the sale, McDonald’s noted the closure of its Russian locations had been costing the business around $55M per month. (5 comments)

Rivian Automotive

Will Rivian (RIVN) eventually become a formidable competitor to Tesla (TSLA)? Investors are trying to size that up following the EV maker’s Q2 results. Shares wobbled between gains and losses after-hours, though largely remained near the $40-level, in a similar story that has taken place since the company went public in November. IPO hype initially saw the stock hit as high as $180, before starting to gradually decline to a lower evaluation, even touching lows of under $20.

Mixed sentiment: First off, Rivian lost $1.7B during the quarter, which is a great deal of money even for a company that is in the early stages of production. That puts it in a place to conserve cash and hustling to fill customer purchases, with around 98,000 pre-orders on its books from customers in the U.S. and Canada. With regards to guidance, Rivian still expects to record a whopping $5.5B EBITDA loss in 2022, up from the $4.8B estimate it disclosed three months ago.

“We’ve seen unprecedented levels of inflation, especially across our raw material inputs and lithium prices,” announced CFO Claire McDonough. “We’ve also experienced increased costs in regard to our expedited freight expenses.”

Outlook: Despite building fewer than 7,000 vehicles in the first half, Rivian reaffirmed its goal of producing 25,000 EVs this year (a second factory shift will be added by the end of the current quarter). The EV maker also said its current models will not be eligible for new federal tax incentives passed in the Inflation Reduction Act, but it could bag subsidies of up to $40,000 per vehicle for the large electric commercial vans it’s building for Amazon (AMZN). Rivian currently produces the R1T electric pickup, while the smaller and less expensive R2 SUV is due out in 2025. (21 comments)

Easing guidance

The CDC has revised recommendations for COVID-19, easing the guidance on isolation for unvaccinated people upon exposure to the virus. Per the latest advice, the agency no longer recommends unvaccinated individuals to quarantine after exposure, the same guidance previously issued for vaccinated and boosted people who were exposed to COVID. Those who hadn’t been vaccinated or received booster shots can instead wear a mask for ten days and get tested on day five after the exposure.

Snapshot: The update guidance puts more responsibility on individuals, rather than schools, businesses and employers. Americans also no longer have to social distance, or stay six feet away from each other, as 95% of Americans have some degree of immunity, whether from vaccinations, COVID exposure, or both. Immunocompromised people, or those who have had shortness of breath due to the virus, should still isolate from others for 10 days.

“We’re in a stronger place today as a nation, with more tools – like vaccination, boosters, and treatments – to protect ourselves, and our communities, from severe illness from COVID-19,” said Dr. Greta Massetti, chief of the field epidemiology and prevention branch at the CDC. “This guidance acknowledges that the pandemic is not over, but also helps us move to a point where COVID-19 no longer severely disrupts our daily lives.”

Go deeper: The CDC is ending the test-to-stay policy, which allowed the students of close contacts who test positive for COVID to remain in schools only if they tested negative and remained asymptomatic. The agency no longer recommends testing people in schools who don’t have COVID symptoms, which was a previous strategy to head off potential outbreaks. (63 comments)

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