Friday, January 2, 2009

Daily Sources 1/2

1. Philip P. Pan at the Washington Post reports that the political leadership in the Ukraine have been put aside in a joint statement yesterday offering Gazprom $201 per thousand cubic meters of natural gas, up 11.7% from the $180 per thousand cubic meters paid in 2008. The negotiations between Moscow and Kiev have been hobbled somewhat by the fact of the longstanding and bitter feud between Ukrainian president, Viktor Yushchenko, and its prime minister, Yulia Tymoshenko. That said, Gazprom at 10am yesterday cut off all shipments of natural gas through the Ukrainian pipeline system. Also yesterday, Gazprom withdrew its offer of natural gas for $250 per thousand cubic meters to Ukraine after Ukraine rejected it and is now asking for $418, more or less the price paid by Western European customers. Stephen Bierman and Henry Meyer at Bloomberg report that Russia has reacted by boosting the amount of natural gas to Europe via the Belarussian pipeline network. Russia provides about a quarter of Europe's natural gas requirement, 80% of which has historical been sent via Ukraine.
"'The Belarus option is certainly viable and they could put some of the gas through Belarus,' Jonathan Stern, director of gas research at Oxford Energy, said today. 'But it certainly is not the solution. There is some spare capacity within the Belarus corridor but it is probably within the order of 10 percent from Ukraine capacity.'"
Ukraine receives 70% of its natural gas requirement from Russia and is facing temperatures in Kiev of as low as 14ºF. It has natural gas supplies in storage equivalent to about 35% of yearly consumption and so it would seem that the crisis is not likely to be resolved just yet. The Bloomberg article is worth reading in full.

In a related story, Tom Barkley at the Wall Street Journal reports that the IMF plans to lend Belarus $2.5 billion to help the country weather the financial crisis. "Following news of the deal, the Belarus central bank said it will devalue its currency by 20% as of Jan. 2 and raise its key refinancing rate." Belarus paid about $129 per 1,000 cubic meters of gas from Russia in 2008 and may have negotiated a lower price for 2009, but is a staunch ally of Moscow with which it has been mooting the idea of reunification for many years now.

2. Nadia Rodova at Platts reports that Russian crude oil production was down 0.7% in 2008 from 2007, to 488.105 million metric tonnes (9.735 mb/d). Average daily output, as opposed to total tonnage, was down 1% on the year from 9.83 mb/d. Crude output in December was 40.87 million tonnes (roughly 9.62 mb/d.)

3. Alexander Kwiatkowski and Candido Mendes at Bloomberg report that Angola assumed the Presidency of OPEC yesterday.
"Oil from Angola accounted for about 5 percent of total U.S. crude imports in 2007, or 496,000 barrels a day, according to the Energy Information Administration. China imports 500,000 barrels of day of oil from Angola, according to Glencore International AG, the world’s largest commodity-trading company."
4. Li Yanping at Bloomberg reports that manufacturing in China contracted for the fifth straight month in China, as indicated by the CLSA China Purchasing Managers’ Index. The index stood at 41.2 at the end of December, slightly up from the 40.9 seen in November. (Anything above 50 indicates growth; anything below 50 indicates contraction.)
"China’s economic growth may have slipped to 5.5 percent last quarter, the weakest pace in at least 15 years, according to Shanghai-based Industrial Bank Co."
Anything below 8% is considered below the rate required to absorb new additions to the labor market and thus likely to cause instability. In the vein, Lauren Keane at the Washington Post has an atmospheric, finger testing the wind, story about the situation facing migrant workers in China. China's People's Daily reported Wednesday that the People's Bank of China released a report on Tuesday showing that non-cash payments declined by 8.3% year over year in the third quarter.
"The amount of money involved in non-cash payments, including commercial papers and bank cards, was about 157.3 trillion yuan ($22.97 trillion) in the third quarter ...."
Catalan economist Edward Hugh has another analysis at Fistful of Euros more or less calling the latest Chinese data a leading indicator for a second Great Depression.
"Well China isn’t quite in Great Depression mode yet, but manufacturing activity - which forms the core of the Chinese economy and accounts for 43% of all activity - is already very close to a technical recession ...."
Hugh's piece is a long analysis friendly to economic laymen worth reading in full. Brad Setser at Follow the Money argues that the latest data suggests that China is clinging to its traditional export-led growth policy, which flies in the face of the growing evidence that there will export markets are in the process of shrinking, protectionist trade policy or not. Mostly the same argument Setser has been making for a while, but still worth reading.

6. Eric Watkins at the Oil & Gas Journal reports that Indonesia will continue its price renegotiations for natural gas from Tangguh with China this month. The original 25 year contract for the gas had been for $2.40/MMBtu (~ $13.92/b on a BTU basis.) China later offered $3.80/MMBtu (~ $22.04/b on a BTU basis), but Indonesia declined. (The contracts are sometimes linked to benchmark crude prices on a futures exchange with ceilings and floors, Watkins did not indicate whether the contract was based on a formula or a flat price.) Yesterday the NYMEX natural gas contract for delivery at Henry Hub in February was $5.622/MMBtu (~ $32.60/b on a BTU basis) the UK price was £5.7/MMBtu (~ $8.34/MMBtu or ~ $48.37/b on a BTU basis.)

7. Kartik Goyal and Anil Varma at Bloomberg report that the Reserve Bank of India lowered its benchmark lending rate by 1% to 5.5% today.

8. Ravi Nessman of the Associated Press reports that the Sri Lankan military captured the Tamil Tiger's main headquarters Friday. It is the latest episode in the 25 year long civil war and celebrations erupted in Colombo after the capture was reported. The Tigers immediately signaled they would continue the fight by exploding a suicide bomb near the air force headquarters in Colombo.

9. Amit R. Paley in the Washington Post reports that the US handed over control of the "green zone" yesterday to Iraqi authorities.

The Green Zone was in the heart of Baghdad, the capital city, and as such the transfer was a symbol of the transfer of sovereignty.

10. Mohamed Ibrahim and Jeffrey Gettleman at the New York Times report that the Ethiopian army began pulling out of Somalia's capital, Mogadishu, today.
"It is not clear whether the Ethiopian troops are leaving Somalia entirely or simply redeploying from Mogadishu to other areas of the country. Western diplomats estimate there are still several thousand Ethiopian troops inside Somalia, and many Somalia analysts have predicted that the Ethiopians will linger for some time inside the country or along the border as a buffer against Islamist militants."
That said, last month Addis Ababa indicated that it would withdraw more or less entirely. An Ethiopian official told the AFP that the withdrawal process will take some time, meaning, I suppose, that they may decide to use troops to tip the contest for power in Somalia in favor of one faction or another.

11. Simon Romero of the New York Times reports that Cuba held celebrations yesterday to mark the 50th anniversary of its revolution. In the Washington Post Eugene Robinson argues that it is time for the US to abandon the 50 year policy of embargoing Cuba, which has clearly not produced the intended result.
"US policy for dealing with the rest of the communist world was always to push for more contact and exchange, on the theory that exposure to Western ideas, freedoms and prosperity would hasten communism's demise. It worked.

I'm convinced that it would have worked in Cuba, too. At the very least, if the U.S. government had treated Cuba the way it treated other communist nations, the onus would have been on Castro. If he wanted to keep Cuban society from being infected by democracy, consumerism and other yanqui diseases, he would have had to justify measures to keep Americans and American products out. Instead, he has been able to portray his revolution as a noble David, menaced by a hulking, aggressive Goliath to the north."
This argument has been being made with little practical effect for some time now, with the exception of lifting the ban on sales and donations of food and medicine to Cuba in the late 90s. The difference is that there is evidence that the Cuban-American community is finally coming round to this point of view. Once support for the policy collapses in the Cuban-American community, the embargo will lose nearly all of its political appeal. I suspect, like Robinson, that the only reason Castro has managed to maintain his hold on Cuba is the embargo.

12. In an unusual move, The Wall Street Journal's editorial board today endorsed Sarkozy's remark that "the monetary system should be rethought [within] fixed exchange rates." The board argues that the euro has been a signal success for Europe, but that its volatility against the dollar has traumatized global trade.

"But the world could ... harness the benefits of exchange-rate stability if its political and economic leaders began to discuss how better to coordinate monetary policy. Mr. [Robert] Mundell[, the Nobel laureate and intellectual father of the euro,] suggests, for starters, a mechanism for close coordination among the Fed, the ECB, and the Banks of England, China and Japan."
Mundell also argues that the escalation of financial panic of September 2008 was catalyzed by the sudden rise of the dollar versus the euro. Well-worth reading in full.

13. Daniel Goldstein at Platts reports that the US Department of Energy may begin purchasing crude for the Strategic Petroleum Reserve again in February. The DOE announcement follows calls from Congress that the Administration do just that. The SPR currently holds somewhat more than 700 million barrels of crude oil and has a capacity of 727 million barrels. Prior to the decision in May last year to cut off additions to the SPR, the complex was receiving about 70 kb/d in crude deliveries--mostly of light sweet crude.

14. Bernard Simon at the Financial Times reports that "US hybrid petro-electric sales in November shrank 53 per cent from a year earlier, compared with a 37 per cent drop overall, according to Autodata, a market-research firm. December sales, to be announced on Monday, are to show a similar trend."
"Sales of most hybrid models have dropped sharply. Demand for Toyota’s Prius hatchback, the top-selling hybrid, fell by almost half in November from a year earlier. The Camry sedan was down 57 per cent, and the Ford Escape crossover 35 per cent."
15. Howard Schneider at the Washington Post reports that the Institute for Supply Management's index of industrial production fell by 3.8% in December from November to 32.4. It is the fifth consecutive month in which the index has fallen. (A number above 50 indicates manufacturing growth; below 50 indicates contraction.)
"The group's index of new orders and prices showed them at their lowest levels since the late 1940s. ... The ISM has conducted its survey since 1931."
16. Andrew Martin, at the New York Times, has a very interesting story on the huge surplus of milk on the market.
"Other agricultural sectors are also struggling with a slowdown in demand from foreign buyers because of the global recession and an increase in the value of the dollar, which has made American exports more expensive abroad. The Agriculture Department is expecting steep declines in exports of corn, wheat, soybeans and pork.

But while the government has price-support programs for about two dozen agricultural products, so far milk powder is the only commodity that has sunk low enough to start the flow of government dollars. Some expect that taxpayers will soon be buying blocks of cheese, too, given the plunging price."
It might be inefficient, but ensuring a surplus of food is a very good thing for political stability. That said, countries which are net food importers will have a tough time if surplus producing nations have expensive currencies. Well worth reading in full.

17. Robert Rosenkrantz, the Chairman and CEO of Delphi Financial Group, has an opinion piece in the Wall Street Journal where he argues that capital reserve requirements for bond holdings should not be determined by law on the basis of credit rating agencies.
"For every dollar of equity that insurance companies are required to hold for bonds rated AAA, $3 is needed for bonds rated BBB, and $11 is needed for bonds rated just below investment grade (BB). For banks, the sensitivity of capital requirements to ratings is generally even more extreme.
Since the ratings determine required capital, they have a profound influence on how financial institutions invest their assets -- in effect, the regulatory reliance on ratings makes the rating agencies the de facto allocators of capital in our system. And every actor in the financial system has every incentive to group and slice assets in ways that maximize not their fundamental soundness but their rating."
Given that the ratings agencies have been shown to be in the pocket of the financial industry, this certainly makes sense to me. However, it still seems to me that in order for the financial system to regain some footing, consumers will need to have a reliable sense of what assets and liabilities public corporations hold. Taking the rating agencies out of the law might be reasonable, but it would not resolve this particular problem at all. Worth reading in full.

18. Yves Smith at Naked Capitalism reports on a study by Carmen Reinhart and Kenneth Rogoff which suggests that the on the basis of past financial crises that the economic contractions that follow as a result are usually much larger than normal--non-financially catalyzed--recessions.
"Their latest piece looks at how crises generally progress and resolve themselves. The usual outcomes are worse than most commentators forecast for the US (save the fall in average real estate prices):

1. Real housing price declines average over 35% over a six year period. Note in other crises, residential real estate was not necessarily a focus of the bubble. Even excluding Japan (which has suffered a 17 year housing price decline) the average is over 5 years.
2. Equity prices fall 55% over three and a half years.
3. GDP fall an average of 9% (read that twice)
4. Unemployment increases 7% over previous norms.
5. Government debt "explodes", increasing an average of 86%, but the cause is typically not a banking industry recapitalization, but maintaining services in the face of collapsing tax revenues and counter-cyclical measure ex financial system measures."
Well worth reading in full.

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