Breakfast

Wall Street Breakfast: The Conflict Goes Hypersonic

Wall Street Breakfast: The Conflict Goes Hypersonic

The conflict becomes hypersonic

Russia deployed its new Kinzhal hypersonic missile to Ukraine twice over the weekend, saying it hit an underground munitions depot in Delyatyn on Saturday and a fuel storage site near Mykolaiv on Sunday. Analysts say this is the first time hypersonic missiles have been used in combat, although there have been reports of the weapons being used in campaigns in Syria. China and Russia began testing hypersonic weapons in 2014 and 2016, respectively, prompting the United States to step up its testing programs.

What are hypersonic weapons? Missiles in development, such as boost-glide missiles and air-breathing missiles, are designed to evade defense systems while flying at speeds greater than Mach 5. The goal is to travel at a speed and altitude so high that they are difficult to intercept. , while they can also maneuver in flight relative to the fixed sub-orbital trajectories of ballistic missiles. Some ground-based radars can detect hypersonic weapons, but current systems cannot provide early enough warning to respond to an attack in real time.

Seeking to catch up, the United States is rushing the development of its own hypersonic arsenal. General Dynamics (NYSE:GD) subsidiary Bath Iron Works begins the engineering and design work needed to upgrade the weapon system on three Zumwalt-class destroyers in fiscal year 2023. The project will continue until in 2025, while the hypersonic will be added to Virginia-class nuclear attack submarines by 2028.

Outlook: Former acting Secretary of the Navy Thomas Modly said hypersonic weapons “have already changed the nature of the battlespace, just as nuclear technology did in the last century.” The Pentagon’s FY2022 budget is reflected as such, with hypersonic-related research and development requests pegged at $4 billion, up from $3.2 billion a year earlier. “Engineering isn’t that hard,” added Bryan Clark, a defense analyst at the Hudson Institute. “It will just take time and money to get there.” (22 comments)

Oil tears higher

The rebound in oil prices continues this morning as the war in Ukraine nears the end of its first month with no conclusion in sight. WTI Crude Futures (CL1:COM) increased to 5% above $108 a barrel, after falling to $93 a barrel last week (from $130 the previous week). Russia is now turning to more destructive weapons in Ukraine, as the latter has rejected a demand for surrender from the beleaguered port city of Mariupol.

Other catalysts: The EU is considering imposing an oil embargo on Russia, which could prompt Moscow to shut down flows on the Nord Stream 1 gas pipeline which helps supply the bloc with 40% of its natural gas needs. It comes after Qatar agreed to work on supplying Germany with LNG as it seeks to reduce its long-term dependence on Russian imports. Houthi rebels also unleashed a series of drone and missile strikes on energy facilities in Saudi Arabia on Sunday, temporarily cutting off crude production at one site.

In fact, recent upward pressure on oil saw Saudi Aramco (ARMCO) more than double its profits to $110 billion in the fourth quarter. “We are seeing healthy oil demand. Unfortunately, global spare capacity is declining, combined with low inventories and a lack of investment,” CEO Amin Nasser said following the results, blaming “a transition plan totally unrealistic” for the current price dynamics. . “We are doing our part, but it is not enough. Other industry players also need to do their part and increase investment.”

Alarm bells? The International Energy Agency, which last year urged an end to new oil, gas and coal projects as a way to help the environment, now warns of an “emergency” for the global energy security. The advisory is accompanied by a 10-point plan focused on reducing fuel consumption, although it will be difficult to convince consumers and businesses to play along. Actions include lowering speed limits on highways, carpooling, working from home, eliminating business air travel, taking the train instead of flying, and adopting “car-free Sundays”. (6 comments)

Food protectionism

The conflict in Ukraine has already caused nations to reassess their energy security, but with two of the world’s largest grain exporters at war, food security is also making waves. The Hungarian government now has the ability to buy any grain for export, while Moldova and Serbia have restricted sales of crops like wheat and sugar. Bulgaria has also allocated public funds to boost its national grain reserve, while proposals in France are pressuring the government to stockpile grain for fear supplies will run out.

Bread basket from Europe: Ukraine produces 10% of world wheat exports, 14% of corn exports and about half of the world’s sunflower oil, according to the US Department of Agriculture. Russia is the world’s largest wheat exporter, accounting for more than 18% of international exports.

“What is happening in Ukraine will change our whole approach and vision for the future of agriculture,” said EU Agriculture Commissioner Janusz Wojciechowski. EU officials will meet today to discuss ways to make the food supply more secure, such as allowing the use of set-aside land for protein crops, relaxing state aid rules for grant aid to farmers or offer support to the pigmeat industry.

Go further: Food protectionism is even invading markets outside of Europe. Indonesia, the top palm oil producer, is increasing export duties to make it more profitable for companies to supply the domestic market. Argentina, the biggest exporter of soybean meal and oil, prevents traders from registering shipments for export, while Egypt bans staples such as flour, lentils and wheat to leave the country for three months. “Any stability you get in the country that puts the export ban in place is instability exported to the rest of the world,” explained Joseph Glauber of the International Food Policy Research Institute. (6 comments)

Buffett moves

In his 2022 annual letter to shareholders, Warren Buffett lamented the lack of good investment opportunities, noting that he and his longtime right-hand man, Charlie Munger, found “little that excites us.” That sentiment could change as Berkshire Hathaway (BRK.A, BRK.B) just unveiled an $11.6 billion deal to buy insurance company Alleghany Corporation (Y). The shares of the latter are rising in premarket trading, climbing 25% at over $850 at the time of writing.

Quote: “Berkshire will be the perfect permanent home for Alleghany, a business I have watched closely for 60 years,” the Oracle of Omaha said in a statement.

Recall that Alleghany CEO Joseph Brandon once ran Berkshire-owned General Re before leaving amid the global financial crisis. At one point he was even considered a possible successor to Warren Buffett, but then joined Alleghany in 2012, before becoming Managing Director in December 2021. Alleghany offers a host of different insurance lines, including the sale specialized wholesale, property and casualty, as well as reinsurance transactions.

Next steps: The latest transaction, which was unanimously approved by both boards, includes a 25-day “go-shop” period where the insurer can solicit and review other acquisition proposals. It also means Buffett is delving deeper into the world of insurance, which has been a key driver of Berkshire’s growth into a conglomerate. While Buffett had recently turned to stock buybacks to get his nearly $150 billion stack working, the former contract hunter could be back in action. (10 comments)