Summary: As the productivity of America's workforce deteriorates, compounded by stagnating participation in the labor force, automation and robotics are becoming increasingly critical technologies for employers of all sizes. Some of the largest, particularly Amazon, are now at risk of running out of workers in just a few years due to high churn rates.

Amazon has long been a leader in deploying robotics in their warehouses and other logistical operations, but just this month announced the first launch of a fully-autonomous floor unit. Walmart is continually deploying similar technologies in their distribution centers via a partnership with AI specialist Symbotic, which just went public a few weeks ago via a SPAC merger. 

Related ETFs and Stocks: Global X Robotics & Artificial Intelligence ETF (BOTZ), Robo Global Robotics and Automation Index ETF (ROBO), Symbotic Inc. (SYM)

Amazon is a Beacon for Warehouse Robotics Tech

Over the course of its life, TechCrunch reports Amazon Robotics has deployed more than 520,000 robotic drive units across its fulfillment and sort centers. Their latest deployment, Proteus, may be the most transformational launch of the entire last decade, given its fully autonomous nature.

Proteus is meant to move large carts throughout its warehouses, safely navigating itself around human employees, unlike some of its past robots that has been separated into a caged area. VentureBeat notes Amazon has launched an additional warehouse system known as Cardinal, a robotic arm that can lift and move packages weighing up to 50 pounds. The company says Cardinal, which should be deployed next year, utilizes computer vision systems which let it pick out and lift individual packages, even if they’re in a pile.

As MRP has previously noted, Amazon begun its automation drive in 2012 with the acquisition of material handling technology company Kiva Systems for $678 million. The company followed that with the launch of its own cloud-based robotics platform, AWS RoboMaker, and an additional purchase of warehouse robotics startup Canvas Technology Inc. in 2019.

Robotics has become an even more critical pursuit for Amazon in the past couple of years – particularly in the wake of COVID-19 and a resulting boom in ecommerce. Increased demand for delivery of goods was so immense during the worst of the pandemic that that the company was forced to hire hundreds of thousands of new workers in the span of a few months, spending more than $500 million to increase wages in 2020.

Decline of the American Workforce Advances Automation

A rising problem for Amazon, however, is that they are simply running out of workers – making their deployment of automation technologies like robotics ever more critical.

Internal research from the company, obtained by Vox’s Recode and reported on earlier this month, found that Amazon could run out of employees to hire by 2024. This is due to the company’s high level of turnover (or churn), meant to capitalize on the efficiency of fresh employees and eliminate complacency or fatigue that could weigh down longer-term employees. Unfortunately for Amazon, that strategy has managed to cut through the equivalent of its entire front-line workforce year after year.

Recode notes Amazon’s attrition rate was 123% in 2019, jumping to 159% in 2020. That was significantly higher than turnover rates across the broader US transportation and warehouse sectors at 46% and 59%, respectively, in 2019 and 2020, according to Bureau of Labor Statistics (BLS) estimates.

It’s not just Amazon that’s running up against a wall in the labor market. Even firms with regular levels of churn are facing continual issues with sufficient staffing levels. Total nonfarm job openings in the US, also known as job openings and labor turnover (JOLTS) and measured by the BLS, were only slightly off all-time highs at 11.4 million in April – the most recent month of data that has been reported.

A major cause for this shortage of workers across the board is a persistently subdued participation rate in the US labor force. Prior to the pandemic, the participation rate – the number of people in the labor force as a percentage of the civilian noninstitutional population – was 63.4%. That compares to just 62.3% in May 2022; a difference of more than -200,000 workers. Essentially, over the course of more than two years, the labor force has not recovered to pre-pandemic levels while the economy has. Even prior to the pandemic, the participation rate had been in decline for two decades, falling nearly continuously from a peak of 67.3% in February 2000.

Additionally, nonfarm labor productivity in the US tumbled by an annualized -7.3% in the first quarter of 2022. That sudden decline was the steepest contraction in labor productivity in nearly 75 years. The decline was driven by lower output, sliding -2.4%, despite a 5.4% gain in hours worked. Compounding the decline in productivity, unit labor costs in the US nonfarm business sector surged by 12.6% in in Q1. Throughout the past year, unit labor costs increased 8.2%, the largest annual increase since Q3 1982.

Judging by this latest array of data, labor is increasingly expensive and scarcer, while simultaneously becoming less productive. Given that trend, automation may not only be a preferable solution for many occupations, it could become a necessity.

Walmart Deploying Bots, Startups Raising Cash

Amazon is not the only major ecommerce retailer expected to continue scaling up its use of robots. Gartner predicts that 75% of large enterprises will have adopted some form of intralogistics smart robots in their warehouse operations by 2026.

In May, Walmart expanded its partnership with AI supply chain tech group Symbotic, rolling out the group’s pipeline of robotic solutions and software automation platforms at all 42 of its regional distribution centers. Per IoT World Today, Symbotic’s system features mobile robots that can move stock, and robotic arms to pack and unpack items, processing 1,700 cases per hour.

Symbotic, which was backed by Softbank and others to the tune of a $5.5 billion dollar valuation, just concluded a SPAC merger to take the company public that raised $725 million. Its equity valuation was also boosted to $10 billion by the end of the company’s first day of trading on June 8. Along with Walmart, which now owns an 11% stake in the company, the Financial Times reports Symbotic serves Albertsons, C&S, and others, reporting a $11.4 billion backlog of committed sales.

Smaller startups around the world, like Poland’s Nomagic, continue to pick up consistent fundraising rounds. TechCrunch reports Nomagic has developed a robotic arm that can identify and pick out an item from an unordered selection (say, from objects in a box) and then move or pack it into another place. The company recently raised $22 million.

In China, warehouse automation firm Hai Robotics has announced a $100 million series D+ funding round. That cash was piled onto an additional $215 million raised throughout 5 prior fundraising efforts. The company’s Haipick bot uses autonomous case-handling robotic systems (ACR) to store and retrieve up to eight cases at a time in tall, narrow storage aisles. By condensing aisles, Modern Shipper writes that the Hai system is able to increase storage density between 80% and 130% while improving warehouse efficiency by as much as four times.

Summary: Nearly two months ago, MRP highlighted rising demand for commercial satellite imagery and associated data from three key firms in the industry. At the end of May, all three of the firms we highlighted, Maxar, BlackSky, and Planet Labs, were recipients of billions of dollars' worth of new federal contracts spread out over the next decade.

The conflict in Ukraine has served as an "internet moment" for geospatial intelligence that can be utilized inside and outside of wartime by media and government agencies alike, providing a much-improved ability to visualize and map out training grounds, armored vehicles, and troop movements. BlackSky saw revenue nearly double in the first quarter of this year while Maxar cut its net loss by 92%.

Related ETF & Stocks: SPDR S&P Aerospace & Defense ETF (XAR), Maxar Technologies Inc. (MAXR), BlackSky Technology Inc. (BKSY), Planet Labs PBC (PL)

On April 26, MRP highlighted the key role satellite imagery is playing in the US’s monitoring of Russia’s attack on Ukraine. Government agencies and media sources alike have been bombarding satellite companies for photographs, 3D mapping, and other data, prompting the firms to expedite the expansion of their constellations. This was referred to as geospatial intelligence’s “internet moment” by Bill Rozier, the vice president of marketing at publicly traded satellite imagery provider BlackSky.

Just about a month later, on May 25, the US National Reconnaissance Office (NRO) announced they’d be funding three firms with billions of dollars in defense contracts throughout the next decade as part of its Electro-Optical Commercial Layer (EOCL) program. Each of those chosen firms, Maxar Technologies Inc., BlackSky Technology Inc., and Planet Labs, were direct focuses of our April intelligence briefing on this budding industry.

Maxar, in a securities filing, said its 10-year EOCL contract is worth up to $3.24 billion, with a five-year base contract of $1.5 billion and optional contracts worth up to $1.74 billion. BlackSky’s contract is valued at up to $1.02 billion over 10 years. Planet was more secretive about the value of its deal with the NRO since it is currently in a quiet period in its lead up to their quarterly earnings call. More details should be available on June 14 when they report.

As TechCrunch writes, commercial imaging capabilities in orbit have likely outstripped many assets put in place over the last few decades by the NRO. It’s not particularly feasible to launch a new, “secret” constellation that provides the level of coverage those providers do, so they’re just going to pay for the kind of high-level access the companies always knew would be valuable.

Use Cases Demonstrated in Ukraine

Uses for satellite monitoring have been plentiful throughout the last year, even long before the formal invasion of Ukraine began. As far back as June of 2021, when MRP first began covering Russia’s buildup of their troops in the southwest of the country near the border of Ukraine, satellite images were instrumental in helping the government agencies and media outlets observe Russian training sites, armored vehicles, and other military footprints. By the end of the year, Maxar had already locked up more than $100 million in new defense and intelligence contracts.

Just before Russian troops begun their invasion of Ukraine, The Wall Street Journal notes satellites were detailing the Kremlin’s plans. When Mr. Putin said his troops massing at the border were pulling back, satellites showed the opposite, and that Russia had built a bridge from Belarus for tanks to cross a river into Ukraine. Planet Labs was able to spot the bridge because its fleet of roughly 200 satellites scan all of Ukraine once a day, Planet co-founder and Chief Executive Will Marshall told the Journal.

Space News has reported the NRO and the National Geospatial Intelligence Agency more than doubled their purchases of commercial electro-optical imagery over Ukraine since the conflict started. Since the start of the year, Axios reports Maxar has been cited by the media more than 54,000 times. Much of this data is also being made available to Ukraine to aid their military operations.

As we highlighted in April, satellite imagery has also been used to ascertain more a more accurate number of military and civilian casualties. For example, Maxar’s satellite photographs helped confirm ground-level footage showing bodies in the streets of Bucha, a suburb of Kiev, as well as grave trenches and other evidence in the city that may be indicative of what US President Joe Biden has referred to as “war crimes”. As WIRED Magazine writes, a new government-funded Conflict Observatory, partnered with Yale University’s Humanitarian Research Lab, the Smithsonian Cultural Rescue Initiative, and several other private firms will use open-source investigation techniques and satellite imagery from the National Geospatial-Intelligence Agency's commercial contracts with private companies to continue collecting evidence of possible war crimes.

Earnings and Valuations

Though revenue is booming and profitability improving for satellite imagery firms, valuations in the sector have been deteriorating for some time. The aforementioned NRO contracts provided a quick boost to share prices, but most remain well-off of previous highs reached in autumn 2021.

Per CNBC, Maxar reported $405 million in first quarter revenue for 2022, up slightly from a year prior, with an adjusted EBITDA profit of $84 million, a 25% increase. Maxar’s order backlog fell 14% from the fourth quarter to $1.6 billion. On a per-share basis, Seeking Alpha notes the Westminster, Colorado-based company posted a per share loss of -$0.10, but net loss was trimmed to -$7 million from -$84 million a year ago. Maxar has been the best performing stock in this industry, mostly keeping pace with the S&P 500 over the last 8 months.

BlackSky reported record revenue of $13.9 million in the first quarter, up a whopping 91% from the prior year period. Adjusted EBITDA showed a loss of -$9.5 million, a 53% improvement YoY. BlackSky’s full year 2022 guidance projects revenue between $58 million and $62 million – but Via Satellite notes that is down significantly from when the company first announced plans to go public in February 2021 and projected $114 million in revenue for 2022. Since BlackSky completed its SPAC merger with Osprey Technology Acquisition Corp. on September 9, 2021, the stock has plummeted roughly 80%.

As we mentioned earlier, Planet Labs will post their latest quarterly results next week.

Summary: Ethereum is closing in on a major milestone as part of its ETH 2.0 upgrade that will cut energy usage by 99% and issuance of the blockchain's native token, Ether, by 90%. After several prolonged delays, a "merging" of Ethereum's current main chain and the "beacon" chain of ETH 2.0 is now expected to take place between August and October of this year. This will initiate the use of a new proof-of-stake consensus on Ethereum, effectively squeezing miners out of the equation and replacing them with "validators". 

The first iteration of this merge is scheduled to begin next week on Ethereum test networks, continuing development throughout the next few months. There is already more than $23 billion worth of Ether now deposited in the ETH 2.0 staking contract, indicating just how much anticipation there is for the launch of the upgrade.

Related Assets: Ethereum (ETH-USD), Grayscale Ethereum Trust (ETHE)

After numerous delays, the largest Ethereum network upgrade to date, referred to as ETH 2.0, is finally moving ahead at full speed.

As MRP previously defined it in our original report on the blockchain network, Ethereum is a decentralized, open-source blockchain featuring smart contract functionality and serves as the largest platform for other tokens to be built out on top of. Other popular cryptocurrencies like ChainLink (LINK), Uniswap (UNI), USD Coin (USDC) and many others are Ethereum tokens built on the ERC-20 standard, making them compatible with Ethereum’s main network (mainnet).

Ethereum’s Native token, Ether (ETH) has long been the second largest cryptocurrency behind Bitcoin, now making up 19% of the entire cryptocurrency market. ETH’s current exchange rate in USD terms is equivalent to about $1825 as of this writing, generating a market cap of $220.6 billion. A significant part of ETH’s growth has been its presence as the leading blockchain for decentralized finance (DeFi) protocols, blockchain developers’ quest to offer banking services without the necessity of actually needing traditional banking institutions, as well as non-fungible tokens (NFTs), which MRP has previously covered in detail.

Ethereum Shifts from Mining to Staking

Following speculation that a long-awaited upgrade to ETH 2.0 will likely be solidified by a “merging” of the current Ethereum blockchain and the ETH 2.0 "beacon" chain within the August - October period of this year. This merge is a major milestone that will mark a point of no return on the Ethereum network. The key difference between these two chains is that Ethereum’s current mainnet is secured by a proof-of-work (PoW) consensus (commonly known as mining), whereas the ETH 2.0 chain is secured by a proof-of-stake consensus (PoS).  

Under PoS, “mining” will no longer be required, with miners’ responsibility to validate blocks of transactions on the blockchain being taken over by “validators”. For a more in-depth explanation of mining, please see our recent intelligence briefing, Bitcoin Mining Activity, Adoption of Sustainable Energy Capacity Swells toward All-Time Highs. Miners can still attempt to mine blocks on Ethereum, but with much higher difficulty and, therefore, much higher costs.

Switching to a PoS protocol may also cut Ethereum’s energy usage by 99%, allowing the network to scale to 100,000 transactions per second. It will also eliminate environmental concerns that have surrounded PoW in recent years. MRP has done extensive work rebutting such concerns, primarily concerning Bitcoin mining, but the criticism will likely persist for some time. The merge will is also expected to cut the issuance of ETH by about 90%. Unlike other cryptocurrencies like Bitcoin, ETH has no hard-capped supply and could theoretically expand infinitely. Less ETH in circulation means, of course, less supply and higher demand, which should push the price of the coin up.

Validators Prepare to Propose Blocks

As the name suggests, validators are stakeholders who have at least 32 ETH ($58,400) deposited into the ETH 2.0 staking contract and are assigned a certain share of Ethereum network transactions to validate. As Consensys writes, Ethereum’s PoS blockchain, the beacon chain, is built on a unit of time called the slot. Every 12 seconds, a validator gets chosen to be the block proposer. Once a block of transactions is minted and propagated, an attester committee of validators vote for this block to be part of the canonical chain. If the committee votes in favor of the proposed blocks, the transactions within the block are validated.

Just as miners receive rewards for solving blocks, validators will be issued a reward for proposing blocks. Technically, ETH 2.0’s PoS mechanism and beacon chain have been running the ETH 2.0 deposit contract since December 2020. That contract now has more than 12.76 million ETH ($23 billion) deposited, representing more than 10% of ETH’s circulating supply, and earning an APR of 4.67% according to StakingRewards.com.

Smaller investors who do not have the required 32 ETH to become validators will not be left out in the cold, however. Staking pools, a sum of deposits varying in size that combine to exceed the 32 ETH threshold, have been set up across the crypto space, allowing virtually any amount of ETH to be deposited into the staking contract. The pool then pays out fractional levels of interest, reflective of each participant’s share of the pool. Lido is one of the most popular decentralized staking pools, with deposits on Ethereum worth more than $7.68 billion.

Staked ETH deposits are currently locked into the ETH 2.0 staking contract and can only be withdrawn after phase 1.5 of the network upgrade goes live sometime after the merge. At this time, there is no official date for implementation of phase 1.5, but it is expected to go live sometime in 2022.

Ropsten Merge Imminent, ETH 2.0 Nears 75% Completion

On May 30, Ethereum announced the launch of a new beacon chain on the Ropsten network, Ethereum’s oldest test network (testnet), to provide consensus. Ropsten’s shift to PoS is expected to be completed on June 8, and will be the first step toward the broader merge on the mainnet. Because of its highly close resemblance with the ETH main chain, developers can run real-time experiments on it before adding the updates to the mainnet. According to a blog post by Ethereum: “After the Ropsten transition, two more testnets (Goerli and Sepolia) will be transitioned to proof-of-stake before focus shifts to mainnet.”

Per StakingRewards.com, 61 closed tasks on Ethereum’s GitHub repository indicates 74.39% progress on the ETH 2.0 upgrade. MRP will continue to update our research on ETH 2.0 throughout the summer as the merge gets closer. For all of our research on digital assets and blockchain in one place, see our Weekly Crypto Wrap – delivered every Friday morning.

Summary: Q1 data shows gold demand started the year off strong. However, prices for the precious metal have backed off from their 2022 highs as the Fed begins to tighten up monetary policy. The Dollar has risen strongly on the back of the Fed's plans for several months, depressing the price of gold further.

The minutes from the FOMC's most recent gathering, released yesterday, show the central bank gearing up for two more 50bps rate hikes following one this month. Surprisingly, that release failed to move the Dollar, which could indicate a significant amount of front-running by traders already pricing in a 2% upper limit on the Fed Funds rate. If inflation continues to hold strong, despite the Fed's tightening regime, that could be a positive signal for gold prices moving forward.

Related ETF: SPDR Gold Shares (GLD)

Though all of 2021, central banks added 463 tons of gold to global reserves, an 82% jump YoY. Buying slowed toward the end of the year, but Schiff Gold reports global central banks have begun to re-accelerate their buying this year. Net gold holdings increased by 83.8 tons in Q1 2022, more than doubling the 41.2-ton expansion of central bank gold reserves in the previous quarter.

The World Gold Council reports physical gold demand (excluding OTC) increased 34% YoY to 1,234 tons, the largest increase since Q4 2018 and 19% above the five-year average of 1,039 tons. Meanwhile, gold ETFs had their strongest quarterly inflows since Q3 2020.

That strong demand, largely spurred on by geopolitical uncertainty, helped gold prices start the year strong. Gold crossed the $2,050 per oz threshold in March for the first time since 2020 but has since then weakened by about 10%.

Still, ETF inflows continued into April, as global gold ETFs registered net inflows of 43 tons (equivalent to $3 billion) – a fourth consecutive month of positive flows. Additionally, CNBC reports the Central Bank of Russia resumed gold purchases in their domestic metals market after a two-year absence.

According to Charles-Henry Monchau, chief investment officer at Switzerland-based Syz Bank, Russia resumed gold purchases at a fixed price of ₽5,000 per gram (₽141,748 or $2,268 per oz) between March 28 and June 30.  However, given the Ruble’s rapid appreciation throughout the past several months, touching a seven year high versus the US Dollar (USD) in recent days, Russia has said they will renegotiate that price.

Part of the reason for gold prices being restrained below all-time highs, despite solid demand in the market, is the fact that the metal is priced and traded in US Dollars. Aside from the Ruble, the Dollar has been rising rapidly versus virtually all major currencies, pushing the USD Index (DXY) to 20-year highs this month. Over the last year, gold has slumped about -3% in Dollar terms, but if you were to price gold in Euro, the precious metal is up close to 11%.

The swelling of the Dollar will likely need to be broken before gold can resume any significant move higher.

Part of that will be tied to the US Federal Reserve’s plans in the months ahead as tightening monetary policy typically coincides with a stronger currency. Surprisingly, the greenback hardly moved yesterday after the release of minutes from the FOMC’s May meeting. Following the largest rate hike in 22 years at 50 bps, a majority of policymakers “judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings”, according to the minutes.

At first glance, that seems like a very hawkish sentiment that would push the upper limit of the Fed Funds rate up to 2% for the first time since late 2019. However, the rate hikes were qualified by a need to “expedite” policy to make sure the central bank is “well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.”

The Fed did not discuss the downside risk to economic growth presented by higher rates at length, but their apparent desire to re-assess policy toward the end of the year may be signaling a need to front-load rates now and begin backing off as the year progresses. That would line up well with Fed Chairman Jerome Powell’s previous comments noting there was “something in the idea of front-end loading”. More recently, St Louis Fed President James Bullard has said that front-loading could perhaps lead to the central bank “lowering the policy rate” by 2023. However, that would be contingent upon the Fed getting inflation back toward their long-term target of 2%.

With the Dollar refusing to budge on the minutes release, one could conclude that many traders are front-running expected rate hikes and the Dollar trade has already come close to its peak. If a potential rise in the Fed Funds rate to 2% is already priced into the DXY, that could mean most of the downside is also priced in for gold.

As we noted in our most recent Viewpoint report, Stagflation At Best, MRP still sees significant potential for inflation to continue gathering momentum and remain elevated for some time. We did see a slight decline in the YoY change in the CPI, falling from 8.5% in March to 8.3% in April, but it’s important to remember the “fakeout” move in the June-August period of 2021 when gains in the CPI last begun to subside, falling from 5.3% to 5.2%. That is, before inflation exploded another 63% higher.

Even if inflation has not peaked, we believe that it will be some time before inflation approaches 2% again. According to the Fed’s preferred inflation gauge, the core PCE, YoY inflation is 5.2%. Consistent monthly prints as low as 0.2% through the end of the year would keep the YoY change in that index above 2.8% by December 2022.

If we do continue to see persistently high inflation, in spite of higher rates, that will likely re-ignite the appeal of gold as a hedge against it. It would also likely push down the Dollar, bolstering gold’s market price further. Like the great Nobel economist Milton Friedman, our belief is that “inflation is always and everywhere a monetary phenomenon”. In that vein, we expect the Fed will struggle to clear out the trillions of dollars they have injected into the economy throughout the last two years. 

Summary: Steel stocks have been a rollercoaster in 2022, but the latest news out of the US and China heralds the potential for another breakout on rising infrastructure spending. Though global steel demand will rise only slightly this year after seeing strong gains in 2021, 2023 is likely to be a year of resurgence.

Following US Steel Corp.'s record first quarter, optimism is high among steel producers with mills in America - set to get exclusive access to hundreds of billions of dollars in stimulus spending over the next several years. China will also be launching a wave of industrial stimulus in the coming months, focused on reviving their economy after months of restrictive COVID lockdowns.

Related ETFs & Stocks: VanEck Steel ETF (SLX), Materials Select Sector SPDR Fund (XLB), United States Steel Corporation (X)

In April, the World Steel Association forecast steel demand would grow by 0.4% in 2022 to reach 1,840.2 million tonnes after increasing by 2.7% in 2021. In 2023 steel demand is expected to accelerate further, growing by 2.2% to reach 1,881.4 million tonnes.

Last month, The Biden administration gave a boost to steel mills operating in the US, mandating that American steel be used in infrastructure projects receiving federal funding. More specifically, guidance provided by the White House required 100% US-made iron, steel, and construction materials to be used, as well as at least 55% other manufactured products by cost. Those requirements went into effect on May 14 and Barron’s reports they should provide US steel plants with about 10 million tons of new steel demand from government-led projects – equivalent to roughly 10% of total US demand.

Six months after the signing of President Biden’s $1 trillion infrastructure package, the government said earlier this week that there are 4,300 projects underway with more than $110 billion in funding announced.

Late last month, US Steel Corp. predicted a “best-ever” second quarter on tap, due to growing steel demand from automakers to construction firms. That came after sales for the quarter surged 43% to $5.23 billion, earning the firm a record quarterly profit of $882 million.

Bloomberg notes the company’s upbeat tone echoes Nucor Corp., Cleveland-Cliffs Inc. and Steel Dynamics, which all expressed optimistic sentiments about the market after reporting stronger-than-expected demand.

US Industrial production rose 1.1% MoM in April, bouncing back from a smaller gain of 0.9% in the prior month. Median forecasts in a Bloomberg survey of economists called for an 0.5% gain. On a YoY basis, industrial production increased 6.4%. Capacity utilization at factories increased to a 15-year high of 79.2%, the Fed’s report showed.

The US isn’t the only country leaning on an infrastructure drive to re-accelerate economic growth.

As MRP wrote earlier this month, Chinese President Xi Jinping has called for an “all-out” effort to boost infrastructure last week. While no specific spending increases were mentioned, CNN notes infrastructure investment has already risen by 8.5% in the first quarter of 2022 YoY. Prior to the proclamation, local governments had already drawn up lists of thousands of “major projects” by early April to be initiated this year. Bloomberg reports planned investment for 2022 amounts to at least ¥14.8 trillion ($2.3 trillion). A re-acceleration of Chinese industrial activity could help prices of base metals rebound after a broad weakening of futures across the past few months.

China's crude steel output picked up in April, rising 5.1%, as the world's biggest steel producer made 92.78 million tonnes of the metal last month, data from the National Bureau of Statistics (NBS) showed on Monday. However, that output remained down 5.2% from the same month last year. In the first four months, China made 336.15 million tonnes of the metal, down 10.3% YoY.

Unfortunately, as we wait on the initiation of China’s infrastructure projects, that supply has met relatively underwhelming demand thus far. China's factory activity contracted at its fastest in 26 months last month, as the official Purchasing Managers’ Index (PMI) for manufacturing fell to 47.4 in April from 49.5 in March. April marked a second straight month of contraction as the index fell below the base level of 50.

Satellite images from Four Squares Technology, cited by Bloomberg, show the area of new construction in China’s three main economic belts around the cities of Shenzhen, Shanghai and Beijing fell 57% YoY in March, according to Four Squares. In the belt around Shanghai, the area of new construction fell 83% in the period.

Any sign of faltering demand from China, the world’s largest consumer of commodities, is going to reverberate throughout base metals and processed metallurgical products. Prices for those goods have slumped broadly, punishing mining and steelmaker stocks throughout the past couple of months. Since the start of April, the Materials Select Sector SPDR Fund (XLB) and VanEck Steel ETF (SLX) are down -8% and -18% after a strong start to the year for each.

However, as broad infrastructure spending in the US and China begins to take effect as the year rolls on, and Chinese COVID lockdown measures begin to ease, that should present a boon for steelmakers.

Like the US, Western Europe will likely be relying more heavily on local steel producers due to falling output from Ukraine – typically the world’s 13th largest producer of steel products and the 5th largest exporter to the European Union (EU). Though the EU has proposed suspending tariffs on all Ukrainian goods (including steel) for one year, the Russian invasion has crippled the country’s industrial capacity. Russia has been an even larger supplier but it is becoming increasingly difficult to maintain that relationship with European nations.

 Summary: The war in Ukraine has materially disrupted the export and transportation of agricultural commodities, stoking fears of a global food crisis that could drive millions into famine. Recent setbacks in crop production are further ratcheting up food prices that have already been stoked by severe inflation and climate change.

Vertical farming technology could present a long-term solution to future catastrophes like this and may be implemented at an accelerated rate throughout the next decade. Indoor farms are able to operate 365 days a year, allowing for stable output regardless of weather patterns or harvest cycles. These farms require only a fraction of the water use of traditional farming and can be constructed in urban areas, limiting transportation time and costs. Investor interest in these farms is likely to rise further as a global food crisis looms.

Related Stocks: Invesco DB Agriculture Fund (DBA), Hydrofarm Holdings Group, Inc. (HYFM), AppHarvest, Inc. (APPH), CubicFarm Systems Corp. (CUBXF)

Global Food Crisis Fears Spread, Shortages Persist and Inflation Rises

A multitude of factors converging at the same time has the world concerned about food supply-chains and affordability, prompting some world leaders to address the potential of a global food crisis.

One of those factors affecting food production is climate change, specifically the ongoing drought depleting crop yields. MRP has repeatedly reported on the situation, yet the outlook continues to worsen as the summer season rapidly approaches.

According to AP News, climate experts reported that March was the third-straight month of below-average rainfall across the United States. In the Pacific Northwest, experts are predicting that the region will experience the driest summer on record, with 71% of the area already covered in drought.

State governments are telling farmers in both California and Oregon that they will be receiving a fraction of the water allocation they normally do, the third straight year that farmers will struggle to produce strong yields in the face of dwindling water supplies.

In Arizona, CNBC notes that farmers take up roughly three-quarters of the state’s water supply to irrigate their crops. However, water cutbacks have led some farmers to sell their land to solar developers or leave farms completely empty and conserve any water they have on hand.

This issue is not unique to just the United States. In China, unpredictable weather events caused by climate change have damaged 30 million acres worth of crops last year, pushing up the price of food. These events are only forecast to occur more frequently, which has led the Chinese government to push for stronger food security, per Bloomberg.

Meanwhile, the Russian invasion of Ukraine has only intensified the crisis. Scientific American writes that the ongoing conflict between the two countries, coupled with more frequent and intense climate disruptions, could combine to create a worldwide food crisis.

As MRP has recently highlighted, Russia and Ukraine account for a significant portion of the world’s agricultural needs and fertilizer supply, both of which are significantly limited as the war drags on.

Egypt, Turkey, Indonesia and Bangladesh are the top importers of wheat from Russia and Ukraine. Nearly 50 countries, including some of the world’s poorest countries, depend on those two sources for more than 30 percent of their wheat needs, according to the U.N. Food and Agriculture Organization.

The war has made virtually every component of the global food supply chain more expensive. Supermarket prices around the world are expected rise as much as 20%, while at least 44 million people are at risk of famine, per The Week. Russia’s invasion has created “catastrophe on top of a catastrophe”, notes the UN World Food Program.

Some experts have an even worse outlook. Soaring food prices could send more than a quarter of a billion people in poverty this year, says Oxfam International. The latest warning has caused US Treasury Secretary Janet Yellen to convene a meeting of top international financial officials to discuss the potential global food-security crisis, which she has called “an urgent concern.”

While short-term solutions to the food crisis have yet to reveal themselves, avoiding a similar situation in the future is just as important to solve. Part of that solution is increasing the investment put into the development of vertical farming technology, a process that generates higher crop yields with much less waste.

Vertical Farming Technology and Food Security

Vertical farming has seen its adoption rapidly accelerate over the last few years, yet it still remains a niche part of the agricultural industry. MRP last reported on hydroponic systems back in January, noting that further investment is key to boosting vertical farming development, which now appears crucial to avoiding future food crises.

Farmers around the world will have to increase their crop yields by 70% over the next 30 years to meet the demand from rising populations, doing so with much less water supply.

Yields can be maximized with indoor farms as they are able to operate 365 days a year, while traditional farming methods are limited based off harvesting cycles and weather patterns. Additionally, since these structures are vertical, the number of crops grown per acre is significantly higher. Utilizing vertical indoor cultivation methods, crops can be grown with roughly 10% of the water that is demanded by field-grown crops, per Produce Grower.

MIT Technology Review found that Smart Acres, a vertical farming startup based in Abu Dhabi, can produced 20 times the greens in a year that traditional farming methods would on the same square meters of land.

While most vertical farms start out with just leafy greens, many are beginning to expand their operations to other crops, including strawberries and tomatoes. EcoWatch notes that the process is currently very energy intensive and unprofitable for farms that try to produce grains and wheat.

However, Senthold Asseng, agriculture professor at the University of Munich, finds it “quite conceivable to increase the global mean annual per-hectare wheat yield by a factor of 6000” if the technology continues to develop.

The New York Times recently reported on vertical farming, stating that venture capitalists continue to be drawn toward these startups as supply-chain disruptions facing the agriculture industry and climate change are significantly hampering crop yields. 

Per a report from ResearchandMarkets.com, the total value of the vertical farming industry is expected to reach $9.7 billion worldwide, up from just $3.1 billion in 2021. The number of deals in the sector accelerated last year as well, reaching 33 transactions worth roughly $960 million in 2021, up from $484 million in 2019.

With food scarcity and affordability concerns spreading around the globe, vertical farming provides an environmentally friendly solution to achieving higher yields and much less water consumption. The technology has its drawbacks, including high startup costs and energy intensiveness that have weighed on profitability, yet investment continues to pile into the industry and climate friendly initiatives could help lessen the cost of energy put into these farms.

As climate change accelerates and the war in Ukraine drags on, vertical farming is likely to see greater investor interest as a global food crisis looms.

Summary: Shipping markets have been thrown into disarray once again, this time being slammed with a double whammy. Just as the Omicron variant began to fade and COVID-19 restrictions eased, the Russian invasion of Ukraine brought about a new wave of disruptions, complicating global shipping markets once again. Additionally, COVID-19 cases have begun ramping up China, specifically in Shanghai where port operations have slowed and created significant backlogs.

While these supply-chain disruptions have previously sent global shipping rates soaring, rates have remained relatively flat in recent months. Global ports, excluding China, have seen the number of ships waiting off the coast decline year-to-date, and a constant rise in inventories could point toward weakening global demand. Supply-chain disruptions are forecast to continue through the end of the year, but the effect on global shipping markets may be more depressed than in prior years.

Related ETF and Stocks: SonicShares Global Shipping ETF (BOAT), Danaos Corporation (DAC), A.P. Møller – Mærsk A/S (AMKBY), COSCO SHIPPING Holdings ADR (CICOY)

Russian Invasion and Shanghai Lockdown Complicates Global Shipping

The global shipping industry is heading into its third-straight year of constant supply-chain struggles, and while disruptions were originally projected to ease throughout the year, the Russian invasion of Ukraine has upended shipping logistics once more.

The three largest container shipping lines, Maersk, CMA CGM and MSC, have completely suspended operations to and from Russia after the country initially invaded Ukraine, which is expected to cause a major decline in shipments if no alternatives are found soon.

Bloomberg reports that Russia imports and exports combined total roughly 3% of the global containerized trade. While that may seem insignificant, Maersk, the world’s second largest container shipper, owns 31% of Russian port operator Global Ports, which is being slammed with restrictions and sanctions.

Swiss-based MSC, the world’s largest shipping company, announced that it has implemented a temporary stoppage of all cargo bookings in and around the Baltics and Black Sea, per Reuters.

According to Business Standard, at the start of the conflict over 100 ships were stranded in the Black Sea, with five of them being struck with missiles resulting in casualties. As full-scale conflict rages on between Russia and Ukraine, global shipping lines are likely to remain extremely cautious about sailing around the area.

Not only has the war in Ukraine disrupted shipping logistics, but COVID-19 disruptions have created significant backlogs once again.

In Shanghai, home to the world’s busiest port for container traffic, a massive outbreak of COVID-19 caused China to enact a city-wide lockdown, causing significant supply disruptions with transport and logistics under severe pressure, Barclays Bank economist Jian Chang stated.

Seko Logistics announced that the disruptions in Shanghai have caused an 80% decrease in container pickups from outside the lockdown area, creating enormous backlogs and slowing ship transfers, per FreightWaves.

These backlogs are not limited to just Shanghai, either. Terminals at the Chinese Port of Ningbo, the world’s busiest in terms of cargo tonnage, are experiencing equipment shortages amid freight diversions from Shanghai, adding to the level of cargo on docks that cannot be transported.

While ports in Shanghai remain operational, CNN notes that the COVID-19 outbreak has caused the number of vessels waiting to load or discharge skyrocket to a record high at the end of March.

Shipping disruptions have typically led to higher freight rates which have propelled the shipping industry to record-breaking profits in 2021, a trend that MRP has continually highlighted, most recently in February.

While ongoing supply-chain struggles have kept freight rates historically elevated, they have mostly declined year-to-date, which could point toward a decrease in global demand for goods.

Freight Rates Yet to Rise, Inventory Build Up Could Mean Falling Demand

As previously mentioned, the cost of shipping has exponentially risen since the start of the pandemic. In early April 2020, the Freightos Baltic Index (FBX), which measures the average cost of shipping 40-foot containers across 12 major maritime trade lanes, was priced at roughly $1,467 per 40-foot container.

In September 2021, the index climbed as high $11,109 per container, nearly 10-times as high as the start of the pandemic. However, rates may have reached their peak.

Since September, the FBX has fallen roughly 16%, hitting a three-month low of $9,280 per 40-foot container for the week ended April 8th. 

The FBX is not the only freight rate index that has shown significant declines in recent months. The Drewry World Container Index, which uses 8 route-specific indices, has fallen 22% to $8,042 per 40-foot container after peaking in mid-September. Despite the recent fall, the index remains roughly 64% higher than a year ago.

The steady decline can be attributed to a multitude of factors. Maritime Executive reports that the drop in rates has many experts questioning if rates have peaked due to low demand and full inventories. Shabise Levy, CEO of Shifl, a shipping technology platform, points out that the decline could also be due to the fact there has been a decrease in sales as China enters its traditional pot-Chinese New Year lean season.

According to Shifl’s analysis, trans-Pacific container spot rates between China and the US East and West coast ports were down by nearly half between January and March 2022.

Outside of China, ship backlogs are also easing at some ports. The Marine Exchange of Southern California recently reported that the number of container ships waiting off the coast of California reached a new low at the beginning of April, down roughly 66% since January.

While freight rates stalling at elevated levels is not necessarily a bad thing for global shippers, a buildup of inventories and falling global demand could be.

US wholesale inventories rose 2.5% in February, matching a record monthly increase set previously in December 2021, and most economists see further inventories increases throughout the year.

Zac Rogers, professors of supply chain management at Colorado State University, told MarketPlace that many large retailers still have plenty of inventory because they looked to stock up when supply chains were more congested last year.  Retailers aren’t placing their normal orders for goods that they typically do in the spring since they have left over inventory from last winter.

Consumer spending has also begun to retreat to typical pre-COVID levels amid strong inflation, while retailers are slowing their orders in the face of high fuel prices in the trucking industry.

Bank of America also recently downgraded nine transport stocks “on demand concerns and pricing declines”, FreightWaves notes, which may have a knock-on effect on the ocean freight industry.

Freight volume has also slowed in the Port of Los Angeles, heading down to 0% annual growth after hitting 20% annual growth in container shipping last year, per Bloomberg.

It appears likely that shipping rates have reached their peak, but those costs are expected to remain significantly elevated compared to pre-pandemic levels throughout the year. Demand for ocean freight soared as supply-chain struggles caused retailers to scramble and pay premiums to receive their goods on time, but the recent build up in inventories could signal a slowdown in demand and keep rates cooling off.

Global shippers are still primed to rake in strong revenue in 2022, but it is increasingly unlikely that these recent disruptions lead to record-setting profits after last year’s blowout performance. 

 Summary: Video game investments tripled in 2021 to a record $38.5 billion and the remarkable pace of dealmaking looks primed to continue through 2022. Following Microsoft’s acquisition of Activision-Blizzard for nearly $70 billion in January, Sony has made two key acquisitions of their own, expanding their video game portfolio. Sony is also revamping its PlayStation subscription service to compete with Microsoft’s Xbox Game Pass, both of which should keep consumers tied to the platforms and boost profits.

Sales in the video game industry appear to have plateaued thus far in 2022, with overall spending showing slight declines year-over-year. However, spending remains significantly above pre-pandemic levels, meaning the rise in demand for video games is being sustained thus far. Metaverse and blockchain technologies have also boosted investor interest in gaming, a trend that is set to continue throughout the year.

Related ETF & Stocks: Wedbush ETFMG Video Game Tech ETF (GAMR), Microsoft Corporation (MSFT), Sony Group Corporation (SONY)

Video Game Deals Pick Up Steam, Microsoft & Sony Ramp Up Competition

Investment into video games and game-related technologies soared to a record high in 2021 and could have further room to run this year.

A report from DDM Games Investment Review found that total game-related investments jumped from 406 deals worth $13.2 billion in 2020 to an astounding 765 deals totaling $38.5 billion in 2021. IPOs also surged in 2021 from $20.6 billion raised in 10 IPOs in 2020 to $109.4 billion over 35 IPOs raised last year.

Forbes notes that the DDM report typically comes in earlier, yet the delay this year was caused by a massive influx of blockchain-related game investment in the last quarter of the year. However, even without those blockchain investments, the video game industry still would have shattered 2020’s record performance.

Joe Minton, president of DDM, found that 50 percent of all transactions in gaming in the fourth quarter of 2021 were investment transactions for blockchain gaming, which he notes as “astonishing”. Minton believes that dealmaking in 2022 is almost certain to continue at prodigious levels in 2022 based off of record pandemic revenues, record-levels of consolidation and increased interest in the metaverse and blockchain technologies.

MRP highlighted Microsoft’s massive acquisition of Activision Blizzard in an all-cash deal valued at roughly $70 billion back in January, and since then dealmaking has continued at a strong pace. Following Microsoft’s blockbuster deal, Sony agreed to purchase videogame maker Bungie for $3.6 billion at the end of January.

The deal activity gives console makers additional ways to compete against each other and gain an edge as they can provide content from these game developers exclusively for their customers at launch or through a subscription service. Jefferies analyst Andrew Uerkwitz believes that Sony and Microsoft are in a “multiyear arms race of sorts for talent and developers”.

More recently, Sony has purchased Haven Studios, another video game developer, for an undisclosed amount that will strengthen Sony’s exclusive video game portfolio.

Both Microsoft and Sony are also shifting some focus toward subscription services. Microsoft has already introduced its Xbox Game Pass, which has amassed more than 25 million subscribers. Bloomberg has called it a sort of Netflix for video games, which has helped Microsoft outperform Sony in the streaming market thus far.

CNBC reports that Sony is now launching a new gaming subscription service to try and narrow the gap between itself and Microsoft, which is set to arrive in June. Sony said the new tier-based subscription service represents a major evolution for PlayStation consoles, noting that the subscription service has grown tremendously over the last decade.

Activity in the sector highlights the sustained rise of the video game industry. While some of the heights set during the pandemic over the last two years may not be reached, the sector has clearly proved itself as more than a pandemic fad and is likely to see increased investor interest in the coming years.

Video Game Sales Still Elevated, Metaverse Boosts Interest

Video game sales have seen slight year-over-year declines over the last few months after a record-shattering 2021 came to an end. Per the most recent NPD Group report, February 2022 consumer spending on video games fell 6% year-over-year to $4.4 billion. Year-to-date spending is also down 4% compared to the same period last year, coming in at $9.1 billion thus far.

The biggest drag on sales has been hardware, as Microsoft and Sony continue to struggle with supply-chain disruptions despite still riding high demand for new consoles carrying over from last year, VentureBeat notes.

However, it must be noted that despite the recent declines, NPD group states that sales are still up historically over previous years. Spending on video games in the US totaled roughly $44.9 billion in 2019, $56.9 billion in 2020 and $60.4 billion in 2021, illustrating the fact spending is still significantly elevated when compared to pre-pandemic levels.

Further, demand for video games has not substantially waned, hardware disruptions are simply the biggest factor weighing video game sales.

A survey conducted by LoopMe and researcher IDC found that 63% of global consumers said they have increased their gameplay time, with the findings indicating that 75% of the gains in mobile gaming activity will be a part of the new normal in consumer behavior.

A report from Deloitte recently found that more than 80% of both men and women in the US play video games, with half of smartphone owners saying they play a game on their phone daily. 49% of US video game players have stated playing video games has taken time away from other entertainment activities.

Additionally, the rise of the metaverse will continue to be a significant driver of growth in the long-term for the gaming industry. Deloitte recently stated that younger generations are behaving in a way that suggests they will live their lives online and embrace the metaverse. Of the 23% of US gamers that have attended a live in-game event, which are common on metaverse platforms, 82% of them made a purchase because of that event, with 65% of purchases being digital goods and 34% physical merchandise. Deloitte sees this as a steady blurring of the lines between real and virtual worlds, a good sign for video game manufacturers looking to capitalize on the metaverse.

THEME ALERT

After video game investments shattered records last year, the pace of deal making in the industry is already off to a strong start in 2022 and should spark additional interest in the sector throughout the year. Video game giants Microsoft and Sony are likely to continue looking to acquire video game developers and boost their gaming portfolios and capitalize on the sustained rise in demand for video games.

The number of consumers spending time playing video games remains elevated compared to pre-pandemic norms and the development of the metaverse should keep the gaming industry incredibly relevant in the coming years.

MRP added LONG Video Games to our list of themes on November 23, 2021, after it became clear that strong video game sales were much more than a pandemic phase. Additionally, major tech and gaming companies continued to take an interest in metaverse technology, a trend that is likely to continue over the next few years.

Since adding LONG Video Games to our list of themes, the Wedbush ETFMG Video Game Tech ETF (GAMR) has returned -17%, underperforming the S&P 500 decline of -2% over that same period.

Summary: Countries around the world are setting aside massive amounts of funding for green hydrogen projects, aiming to develop a new alternative to fossil fuels. Germany is working on acquiring significant supplies of green and blue hydrogen in the Middle East as it weens off of Russian natural gas supplies. Green hydrogen is increasingly cost-competitive with rising oil and natural gas prices.China, the world’s largest emitter of greenhouse gases, recently outlined plans to significantly increase their green hydrogen production by 2025 to meet the rising demand for renewable energy. Meanwhile, the US is beginning construction on the world’s largest green hydrogen project in Texas, likely to spur additional investment into the development of green hydrogen as demand for the alternative fuel rises.

Related ETF & Stocks: Global X Hydrogen ETF (HYDR), FuelCell Energy, Inc. (FCEL), Plug Power Inc. (PLUG)

Interest in Hydrogen Energy Ramps Up in Response to Russian Invasion, Climate Goals

Demand for hydrogen energy is primed to receive a significant boost as the European Union continues to look for ways to ween off Russian oil and natural gas imports. While hydrogen is not the only solution to counter the energy crisis, it is likely to play an increasingly important role in the renewable energy transition that should accelerate throughout the decade.

There are three main forms of hydrogen energy. Gray hydrogen, generated from natural gas, is not carbon neutral and has yet to see an uptick in demand as prices have soared alongside oil and natural gas. Blue hydrogen, produced from natural gas, yet the carbon emissions are captured and stored, meaning it is commonly referred to as carbon neutral or low carbon.

Green hydrogen, meanwhile, is produced by using excess renewable energy like solar and wind, and is viewed by many sectors as the key to harmonizing the intermittency of renewables, which is key for the EU to move through a rocky energy transition.

Plug Power CEO Andy Marsh recently told Yahoo Finance that the Russia-Ukraine war will accelerate the shift to green hydrogen and other forms of renewable energy.

Similarly, BloombergNEF and Rystad Energy reported that the global conflict is opening the door for additional investment into the green hydrogen resources. Per PV Magazine, Rystad believes the war in Ukraine has “turbocharged” the green hydrogen production sector, with green hydrogen becoming much more cost-competitive than its blue and gray counterparts.

The EU has already announced plans for a €300 million funding package for hydrogen development, and there are several European countries looking to boost their investment as well.

Germany Vice-Chancellor Robert Habeck recently went to visit the Middle East in hopes of securing supplies of natural gas, as well as green and blue hydrogen. According to Maritime Executive, Germany was able to obtain more shipments of natural gas from Qatar while also signing long-term agreements with the UAE for green and blue hydrogen.

Habeck said the agreement will strengthen their achievement of climate goals through the addition of green hydrogen from solar energy, while also helping their energy security as the hydrogen shipments will begin this year.

Khaleej Times recently wrote that the UAE could become one of the biggest suppliers of hydrogen to Europe as more and more countries look for renewable energy sources in the coming years.

The news comes after Germany has already set aside $5.9 billion for domestic green hydrogen production and $1.7 billion internationally. Further, Reuters reports that Germany will be providing equipment for Finland’s first ever green hydrogen plant, which is expected to reduced Finland’s carbon emission by 40,000 tons per year over the next decade.

However, the rise of green hydrogen is not limited to Europe, as both the US and China have made significant strides in the development of green hydrogen projects and initiatives.

In the United States, airlines have been exploring ways to replace jet fuel with cleaner alternatives. Hydrogen fuel is a viable long-term solution for the aviation industry to curb their carbon emissions, and interest in this option has picked up in recent weeks.

Canary Media reports that Delta Air Lines and Airbus Co. announced a partnership last week to explore the development of hydrogen-powered aircraft, a “very meaningful” first step in the path toward hydrogen aviation.

Similarly, US startup Green Hydrogen International revealed plans to construct the world’s largest green hydrogen project in Texas earlier this month, powered by solar and wind energy. The 60GW hydrogen project is currently looking to use green hydrogen to power SpaceX rockets, but it also will be positioned to capitalize on the growing demand for hydrogen across the United States.

China, a global leader in green hydrogen production, has also updated their strategies to further the growth of the hydrogen energy industry. Per Recharge News, China has unveiled a national 2025 target for green hydrogen, with plans to produce 100,000-200,000 tons over the next few years. That target will be crucial in limiting the country’s carbon emissions and push it closer to its carbon neutral goals.

Green hydrogen will remain a key part of the global renewable energy transition, and the latest developments surrounding the Russian invasion of Ukraine are only accelerating its adoption. With Germany, China and the United States all announcing new green hydrogen projects, it’s likely additional countries will follow suit and spark a sustained rise in demand for green hydrogen production.

Summary: The airline industry's recovery appears to be accelerating as travel demand comes roaring back. Despite rising jet fuel prices putting upward pressure on ticket prices, travelers are willing to spend more as they look to unleash a wealth of pent-up demand. COVID-19 cases in the United States have been subsiding for several months, further bolstering positive sentiment towards travel and leisure spending.

February bookings for US travel recently surpassed pre-pandemic levels and, if fuel costs stabilize, the upcoming summer season could one of the strongest ever. Delta Air Lines has announced the company is experiencing unparalleled demand for its services while United Air has recovered 70% of its 2019 business travel operations. The aviation industry appears confident in its ability to post strong revenue figures in the first half of the year, even though the second half of the year remains more questionable for some of the top US carriers.

Related ETFs: Defiance Hotel, Airline, and Cruise ETF (CRUZ), U.S. Global Jets ETF (JETS)

Travel Demand to Come Roaring Back in the First Half

As fears surrounding the COVID-19 pandemic begin to subside following Omicron’s momentous rise and subsequent fall, consumers appear ready to unleash their pent-up demand for travel and leisure.

According to a recent survey from Tripadvisor, 45% of Americans are planning to travel this March and April, including 68% of Gen Z travelers. That number will climb higher as the summer season rapidly approaches, as 68% of American adults will vacation this summer, per another survey by The Vacationeer.

The Vacationeer found that 25% of respondents say they intend to ‘revenge travel’, likely spending more money than ever before after being stripped of the opportunity to vacation over the last two years.

The aviation industry looks primed to receive a significant boost from consumers ready to spend big on travel plans. Reuters recently reported that US carriers are experiencing an “unparalleled” increase in demand which has resulted in Delta Air Lines reporting the highest ticket sales in the company’s history last week.

Delta’s competitors United Airlines and American Airlines also stated demand for their services is higher than it has ever been, noting that business traffic is rebounding faster than expected.

According to The Hill, American Airlines CEO Doug Parker said that the carrier recently had multiple days of sales that were 15% higher than previous records, showing travel demand could be nearing multi-year highs.

Last month, domestic flight bookings surpassed pre-pandemic levels for the first time, with travelers spending $6.6 billion on flights in February, 6% higher than the same month in 2019. Katherine Estep, spokesperson for Airlines for America, noted that travelers have been eager to book tickets as “COVID-related restrictions in all 50 states have been lifted”, which is likely to increase the number of consumers returning to the skies.

Recent developments have the airline industry rethinking their first-quarter forecasts. Per CNBC, Delta expects its total first-quarter sales to come in at 78% of 2019 levels, up from its January forecast for a recovery as little as 72% of 2019 levels. American Airlines also expects its first-quarter revenue to be just 17% below the same quarter in 2019, an improved forecast from a 22% drop off predicted in January.

United Airlines said bookings for future travel have improved “close to 40 points since the first week of 2022” while business traffic has increased more than 30 points since the peak of the Omicron impact in January 2022.

Southwest Airlines, meanwhile, has recovered the strongest thus far, raising its revenue outlook to as much as 92% of 2019 levels.

This first half of 2022 looks promising enough to jumpstart a recovery across the airline industry, yet there are still some key headwinds that the sector will have to overcome to keep those profits high in the second half of the year.

Rising Fuel Costs Yet to Hamper Demand But Threats Remain

Data from the International Air Transport Association (IATA) shows that jet fuel prices have now climbed to $135 a barrel in March 2022, up from roughly $70 a barrel in March 2021 and $15 a barrel at the depths of the pandemic two years prior.

In response to higher fuel costs, airlines have increased their ticket prices and passed the extra cost onto consumers. For now, that has yet to dampen consumer appetite for travel.

BBC News reports that Delta is planning on introducing fuel surcharges on international flights, which account for 35% of its business, and increase US ticket prices. Ticket prices could rise anywhere from 5% to 10% just from jet fuel costs alone, yet airlines are confident that demand for travel will remain strong through these increases.

Delta President Glen Hauenstein has said the airline has had no issues covering the rising fuel costs thus far given the surge in bookings, and he remains very confident in the company’s ability to recapture 100% of the fuel price run up in the second quarter through the end of the summer, notes USA Today.

The fact consumers have yet to postpone their travel plans in the face of rising ticket prices bodes well for the aviation industry’s recovery. With the summer season rapidly approaching, fliers are expected to spend more than ever before which will send airline revenues closer to pre-pandemic levels.

However, there are still some threats that may derail the sector’s recovery. JetBlue remains cautious about the outlook for travel demand in the second half of the year, primarily due to persistent high inflation and the expectations of higher interest rates, per Reuters.

Further, if oil prices were to continue to rise throughout the year, depending on how volatile markets stay surrounding the conflict between Russia and Ukraine, airlines’ profitability would take a hit.

For now, airlines appear primed to report impressive profits in the first half of 2022 on unprecedented consumer demand for travel and strong pricing power. The aviation industry’s recovery has certainly been a bumpy one since the depths of the pandemic, but it now looks like clear skies for US carriers as pent-up demand for leisure and travel can finally be unleashed.