Thursday, February 19, 2009

Daily Sources 2/19

1. Andrew Batson at Real Time Economics posted last night a translation of parts of the remarks made by Fang Shangpu--the deputy director of China's State Administration of Foreign Exchange--in a press conference. Some excerpts of the excerpts:
"Regarding the issue of purchases of US treasury bonds, Premier Wen Jiabao in his February 1 interview with the UK’s Financial Times explicitly stated that whether China continues to buy, and how much it buys, will be decided in accordance with China’s needs, as well as the requirement to preserve and increase the value of the foreign exchange reserves."
This appears to be official boilerplate as he repeats the same idea just a bit later.
"With the current international financial crisis still continuing, spreading and deepening, we firmly oppose trade and investment protectionism. We also hope that the major reserve currency countries can take active measures to effectively deal with the financial crisis and economic recession, in order to recover economic growth and financial stability as soon as possible, effectively protect the interests of investors and strengthen investor confidence."
"Investors" here means Chinese government investments in US sovereign and agency bonds. "Investment protectionism" is a barrier to China's external resources policy, like the US Congress's decision to block the acquisition of UNOCAL by CNOOC and probably meant as a direct reference to Canberra's recent decision to review Chinese investments in Australian mining companies. That said, Fang seems to say that Beijing will continue to purchase dollars in pursuit of domestic stimulus:
"For the next step, we will actively support the nation’s need for foreign-exchange funds to expand domestic demand and increase imports, and provide financing support and facilitation to companies’ foreign investments to help build the national economy."
Well worth reading--and if you have Mandarin, the post includes a link to the full Chinese transcript. Chen Deming, China's minister of commerce, has an opinion piece in today's Wall Street Journal Asia which reiterates SAFE's warning against protectionism. He stresses how much demand China added over 2008 and Beijing's commitment to stimulate it in the face of the crisis:
"Today's unprecedented financial crisis has inflicted a severe impact on China and other countries as well. China's economic growth has slowed, exports have plunged and unemployment pressure has mounted. Yet even so, China still firmly believes that trade protectionism isn't a solution to the world's problems. In 2008, amid a contraction in global trade, China imported $1.133 trillion worth of goods from countries around the world -- an 18.5% increase over the prior year. These imports are boosting the economic development of China's trading partners. Since the crisis broke out, the Chinese government has decisively put forward a series of measures aiming at stimulating domestic demand. Given the size and openness of our country, the growth in China's domestic markets can be translated into greater market potential and investment opportunities for other countries. This year China will continue to increase imports and send buying missions abroad for large-scale purchase of equipment, products and technology."
Well worth reading in full. Nadia Rodova at Platts has a follow up story on the news of Beijing's loan agreement with Rosneft and Transneft which reports that Rosneft has made clear that the oil contracted for under the agreement will be paid for at the market rates prevailing at the time of deliveries. Deliveries--of 300 kb/d for 30 years--are slated to commence in 2011. (for the story a few days ago, see Daily Sources 2/17 #5.) Meanwhile, Dale Crofts at Bloomberg reports that Petrobras announced it had signed a $10 billion loan agreement with China’s Development bank today. This comes after raising $1.5 billion in 10 year bonds via the capital markets on February 4th, just a week after stating that credit on the international markets was too dear (see Daily Sources 2/5 #8). I imagine the terms of this most recent agreement are generous.

2. Yves Smith quotes at length from a Lloyd's List article--not made free to the public--which throws cold water on the notion that recovery in the Baltic Dry Index is an indicator that global trade has bottomed.
"Box throughput at Singapore, the world’s largest container port took a 19% dive in January this year to 2m teu compared to 2.4m teu for the first month of 2008.

Singapore’s sharp drop in volumes in particular reflect the collapse in the Asia- Europe trade where it is a key relay port transhipping exports from surrounding countries to Europe and the Middle East.

... Hong Kong, saw January throughput plunge 23% in January..."

"At Malaysia’s largest port, Port Klang, the picture was not much better. Port Klang Authority general manager Lim Thean Shiang told local press that the port had seen a 16% drop in volumes in the first month of the year compared to January 2008."
"China’s Ministry of Transport said throughput of the country’s coastal ports has fallen for three consecutive months on a month-on-month term. China coastal ports handled 8.2m teu in January, down 15% from the same month last year and 10% from December.

The country’s third largest port, Shenzhen, saw throughput fall by 18% to 1.5m teu in the first month of this year. The proportion of empty boxes at east Shenzhen’s Yantian port district has risen from 60% to 80%, according to the city government....

The picture was equally grim for one of Southeast Asia largest exporters with the country’s [Indonesia's] trade minister Mari Pangestu forecast that its exports could fall by at least 20% this year."
The explanation of the recovery of the BDI so far--an increase of iron ore imports by China's steel industry--seems insufficient to explain the rise in the index, but the port traffic data is especially grim.

3. Hiroko Tabuchi at the New York Times reports that the Bank of Japan said today it would purchase ¥1 trillion (~$10.7 billion) in corporate bonds, extend its purchases of commercial paper and maintain its benchmark lending rate at 0.1%. Ron Harui and Kim-Mai Cutler at Bloomberg report that Barclays Capital analyst have noted that credit default swaps have risen to as much as 120.7 this week, in what they argue is a sign that the markets are reassessing their valuation of the yen as the best fiat store of value.

4. Eurointelligence reports that Poland has entered into talks with the European Central Bank regarding entering the European Exchange Rate Mechanism II. In brief, ERM-II establishes a band within which the adopting country's currency will trade against the euro. Yesterday, P O Neill at Fistful of Euros posted that the European Commission released its economic assessment of EU member states and announced it had begun "excessive deficit procedures" for six member countries whose deficits exceed 3% of GDP. They are Ireland, Greece, Spain, France, Latvia, and Malta.

5. Meanwhile, Lynnley Browning at the New York Times reports that UBS, the largest bank in Switzerland, had agreed to turn over the names of investors suspected of using the bank to avoid taxes. The bank has admitted to conspiring to defraud the IRS and agreed to pay $780 million to settle the case.
"But to some, turning over any names at all heralds the end of the secret Swiss bank account, whose traditions date to the Middle Ages.

'The Swiss are saying that this is the end of Swiss banking as they knew it,' said Jack Blum, an offshore tax specialist. 'Nobody will trust the security of the Swiss bank account.'"
To me, this is a better indicator of the stresses the international financial system is under than much of the news we get. When institutions abandon customs over 500 years old, "once in a century" is rendered an understatement. (The second, by the way, seen from Europe, given that the Bank of England cut rates to the lowest seen since its inception 315 years ago. see Daily Sources 1/9 #2.) The credibility of the argument that Switzerland will have to join the monetary union has just gone up considerably.

6. RIA Novosti reports that Naftogaz announced today via its website that it will likely be unable to keep current on its payments for Russian natural gas. The statement reads:
"The national joint stock company Naftogaz of Ukraine is giving notice of the possible deterioration of the situation with payments to Gazprom following a disastrous growth in utility companies' debts to its structures."

7. Steve Bryant at Bloomberg reports that the Turkish central bank cut its benchmark interest rate by 1.5% to 11.5%, "the lowest since Turkey began inflation targeting in 2002."
"The bank’s fortnightly survey of businessmen and economists on Feb. 9 showed expectations for inflation falling to 7.16%, below the bank’s goal of 7.5% at the end of this year."
8. Ayesha Daya, Haris Anwar and A. Craig Copetas at Bloomberg report that the United Arab Emirates is preparing a plan to stabilize its financial sector.
"'If we want the banks to lend again to real estate, then obviously governments will have to put a plan,' Sultan Ahmed bin Sulayem, who also sits on a committee studying the effects of the global credit crisis on Dubai’s economy, said in a Feb. 17 interview in his office. 'I know, I am aware, that the central bank and the federal government are taking steps to lend money.'"
9. Geoff King at Platts reports that Norwegian E&P company DNO said today that tie-in operations connecting the Tawke oil field to Iraq's northern pipeline are nearly complete and that the company is set to substantially increase production. "The company said in September that output from Tawke was averaging 11 kb/d but that this could be increased to 90 kb/d." Meanwhile, Juan Cole at Informed Comment reports that Iraqi-Kurdistan Prime Minister Nechirvan Barzani is stoking fears of an Arab-Kurdish civil war should the US withdraw prior to a final agreement on the region's status. In late November, Kurdistan received a shipment of arms from Bulgaria without seeking approval from Baghdad while complaining that al-Maliki was attempting to establish a praetorian guard answerable only to him. (see Daily Sources 11/24 #7.) Prof. Cole also reports rumors that several factions upset with the centralizing policy of al-Maliki are conspiring to set up a vote of no confidence.

10. Pamela Constable, Karen DeYoung and Haq Nawaz Khan at the Washington Post report that neither the Pakistani government nor their Taliban counterparts in Swat are willing to formalize the accord announced Monday. (see Daily Sources 2/17 #4.) The reaction in the press to the potential deal has been something close to incredulous. However, I think that Secretary Clinton had the right idea when she refused to comment on the issue more than to say that she was waiting to find out what the notion behind the deal was before making a conclusion.

From my far remove I regard the problem that Pakistan faces--and which the Taliban addresses--as lawlessness. If there is no sheriff in Swat who will obey the decisions of Islamabad without some sort of ratification by the local Islamicist political leaders, then there is, in effect no law. If the appeals process established by the accord were to be governed by the national judicial system, then the Sharia courts would be re-incorporated into the central government. (Also, if I understand correctly, Pakistani law already gives some jurisdictional precedence to Sharia and Sharia Courts in some instances--family law, for example. Given that my understanding is correct, that would mean that the move was entirely consistent with the Pakistani Constitution.) Secretary Clinton is absolutely right to have been so circumspect with regard to the accord--it may provide Islamabad with some needed breathing room in the current strongly centrifugal environment.

11. Steven Bodzin at Bloomberg reports that according to a confidential document obtained by the wire service that Venezuela's plans to boost crude production by 12% in a joint venture would cost $18.4 billion as opposed to estimates given in June by the Energy and Oil Minister, Rafael Ramirez, of $8 billion.
"'It will be very tricky for companies, big or small, to get that level of funding,' said David Thomson, a Latin America energy analyst for Wood Mackenzie in Edinburgh. 'Even if there wasn’t a credit crunch on, raising $10 billion to $20 billion for Venezuela wouldn’t be the easiest.'

Given past nationalization moves by Chávez, a self-avowed revolutionary socialist, Thomson said, 'Banks aren’t going to touch it with a bargepole.'"
Given that Chávez looks to be President for life, I suspect that even given the long term perspective of the oil and gas industry, even policy-driven investments would be few in number. That said, Total recently indicated that it would turn to Venezuela in preference to Brazil (see Daily Sources 2/17 #6) and they may be convinced that they will receive preferential treatment because Chávez's movement is modeled in part on the Fifth Republic and there are few state companies with the requisite technical capabilities for developing the Orinoco belt. (see Venezuela vs ExxonMobil.) Still, $18.4 billion would be an awfully big bet on historical sympathy.

12. Robert DiNard at the Barrel reports that President Obama will make his first visit abroad--for six hours--to Canada today, where he will meet with Canadian Prime Minister Steven Harper. Canada is America's largest trading partner and our largest source of crude oil--and an important part of the Obama Administration's energy strategy going forward. That said,
"Beyond oil sands development, the future Canada-US energy relationship will also hinge on how well the countries bilaterally handle their shared power grid. The US will not be able to get to its ultimate goal of a far more energy efficient grid without Canada, and it is uncertain how much money and effort Ottawa is willing to spend on this, or other energy infrastructure.

The newly minted US economic stimulus package contains around $11 billion in spending on the transmission system, while Canada's stimulus plan contains C$0 (US$0) for smart grid development. Canada is leaving the matter to each province, hardly a promising framework for a continent-wide solution."
Well worth reading in full, though I am unclear on how long Harper will be the primary point of contact, considering that he shuttered the parliament to put a stop to a no confidence vote in December. Keith Johnson at Environmental Capital notes that Jeff Rubin, chief economist at Canada’s CIBC investment bank, argues that the suspension of investment in Canada's oil sands due to the low price environment will in due course create another supply side shortage:To wit:
"Rather than growing by close to 400,000 barrels per day, due to rapidly expanding oil sands production, total Canadian production is likely to rise by only a third of that by 2010. Hardly an auspicious picture for the Canadian oil sands, a region that the IEA expects will be the single largest source of new crude supply, almost three times as important as Saudi Arabia over the next two decades […] If oil prices were to stay at current levels, [global] production, instead of plateauing around 88 million barrels per day by 2012 as we had previously forecast, would decline at an accelerating pace between now and 2015. By 2015 production would decline to around 76 million barrels per day, a level roughly 10% lower than last year’s level."
I do not think that this forecast, however, will persuade many financial authorities to pursue policies which would destroy the significant economic stimulus (a progressive one at that) rendered by cheap oil in the near term. In related news, John M. Broder at the New York Times reports that the EPA is expected to regulate carbon emissions for the first time.
"The environmental agency is under order from the Supreme Court to make a determination whether carbon dioxide is a pollutant that endangers public health and welfare, an order that the Bush administration essentially ignored despite near-unanimous belief among agency experts that research points inexorably to such a finding.

Lisa P. Jackson, the new EPA administrator, said in an interview that she had asked her staff to review the latest scientific evidence and prepare the documentation for a so-called endangerment finding. Ms. Jackson said she had not decided to issue such a finding but she pointedly noted that the second anniversary of the Supreme Court decision, Massachusetts v. EPA, is April 2, and there is the wide expectation that she will act by then."
Oil sands production emits considerable carbon--at levels similar to coal.

13. Calculated Risk posts on the recent unemployment numbers from the Department of Labor.
"The four week moving average is at 619,000, the highest since 1982.

Continued claims are now at 4.99 million--another new record--above the previous all time peak of 4.71 million in 1982."

14. Jack Healy at the New York Times reports that the producers price index rose by a seasonally adjusted rate of 0.8% in January. "Producer prices excluding volatile food and energy costs rose 0.4 percent"

15. The EIA reported today that crude oil stocks fell 200,000 barrels to 350.6 million barrels for the week ended February 6. According to a Bloomberg survey, analysts had expected a 3.2 million barrel build. The stock level is well above the five year historical average for this time of year, but still below the recent high seen in July 2007. Gasoline stocks grew by 1.1 million barrels, in the upper range of the historical average, and in contrast to analyst expectations of 500,000 barrel draw. Distillate stocks fell by 800,000 barrels and are still above the historical range. Taken in isolation, the news is mixed, given that the stocks level for crude is still historically high and the reduction of refinery utilization is matched by a build in gasoline--as the price of gasoline climbs, crude may follow until European arbitrage opens up. That said, considered alone the build in gasoline stocks should presage a drop in price.

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