Daily Sources 5/21

1. MOODY'S DOWNGRADES JAPAN'S CREDIT PROFILE

On the grim economic news from Japan yesterday, Scott Peterson at Japan Economy Watch reports that Moody's has downgraded the country's credit profile to Aa2 from AAA. Peterson comments:

"[The Japanese government's] net debt number is likely to exceed 100% of GDP in 2009. Moody's noted that very little of this debt is held by non-Japanese. Of course, one of the primary causes of this is the fact that much of this debt was issued at extremely low interest rates. So it was relatively unattractive to foreign investors. Japan's government debt amounts to the country's citizens avoiding taxation now with the expectation that the country's future productivity will be great enough support repayment of the debt in the future without ruinous taxation levels."

2. CHINALCO WILL ACCEPT SMALLER SHARE IN RIO TINTO TO SMOOTH DEAL

Brett Foley and Rebecca Keenan at Bloomberg report that Chinalco has indicated that it would accept a smaller share in Rio Tinto in an effort to overcome Australian government opposition to it proposed $19.5 billion investment in the company. Chinalco is reportedly open to reducing its proposed stake to 15%, and letting Rio sell convertible bonds to other potential shareholders.

"'There is one thing they want and that is a meaningful interest in the company,' said Ric Ronge, who helps manage the equivalent of $775 million, including Rio shares, at Pengana Capital Ltd. in Melbourne. 'Everything will be done to ensure that the deal does go through.'"

I suspect that a substantial amount of Chinese interest in taking a share in commodities corporations worldwide is based on the desire for better data.

3. RUSSIA WILL NOT ATTEND MAY OPEC MEETING, EXPENSIVE RUBLE ON EXPENSIVE OIL UNDERMINES NON-ENERGY BASED CORPORATIONS, RUSSIAN NUCLEAR RENAISSANCE WELL UNDERWAY

Mark Sweetman at Bloomberg writes that RIA Novosti quoted Russian Deputy Prime Minister Igor Sechin as saying Russia was unlikely to send a delegation to the May 28 OPEC meeting in Vienna. Meanwhile, Emma O’Brien at Bloomberg reports that Roland Nash, chief strategist at Renaissance Capital, has pointed out that the 15% rebound in the ruble-dollar exchange rate is undermining the competitiveness of non-energy businesses in the country.

"'They need to create a domestic capital market that’s able to absorb the excess value created by the commodity-producing sector,' Nash said. 'Russia needs huge investment in its infrastructure but at the moment all the money goes offshore into things like US Treasuries.'"

Meanwhile, Der Spiegel reports on the progress of the nuclear renaissance in Russia, whose nuclear energy chief, Sergei Kirienko, agreed to a "strategic alliance" with Peter Löscher, the CEO of German electronics giant Siemens.

"It is hard to believe, but German energy policy is up for debate in Russian classrooms. The students at Kuochkina's school pay rapt attention to a multimedia show in which a virtual professor praises the electricity generated by nuclear power. At the end of the film, a growing orange tree appears on the screen, symbolizing the growth of the Russian nuclear industry. The message is clear: Things are going uphill fast.

Nuclear power is back in vogue in Russia, as if the meltdown at the Chernobyl nuclear power plant had never happened. The giant country has plans to build 26 new domestic reactors by 2030, and 20 more abroad."

4. MORE DONOR MONEY FOR REFUGEES FROM SWAT VALLEY CONFLICT

Kamran Haider at Reuters reports that Minister of State for Finance Hina Rabbani Khar told journalists that "donors" had pledged $114 million to aid those displaced by the fighting in Swat Valley on top of the $110 million promised by the US as announced yesterday.

"That sum would go toward a flash appeal that the United Nations will launch on Friday in a bid to raise up to $600 million, she said."

5. TALIBAN IN UNCONFIRMED REPORTS ON NEGOTIATIONS WITH U.S. PUT EMPHASIS ON TIMETABLE FOR NATO WITHDRAWAL

Dexter Filkins at the New York Times reports that leaders of the Taliban and other forces fighting the NATO-Afghan coalition are negotiating with middlemen terms for a potential peace agreement, with a focus on a timetable for a pull out.

"The discussions have so far produced no agreements, since the insurgents appear to be insisting that any deal include an American promise to pull out — at the very time that the Obama administration is sending more combat troops to help reverse the deteriorating situation on the battlefield. Indeed, with 20,000 additional troops on the way, American commanders seem determined to inflict greater pain on the Taliban first, to push them into negotiations and extract better terms. And most of the initial demands are nonstarters for the Americans in any case.

Even so, the talks are significant because they suggest how a political settlement may be able to end the eight-year-old war, and how such negotiations may proceed. They also raise the prospect of potentially difficult decisions by President Hamid Karzai and President Obama, who may have to consider making deals with groups like the Taliban that are anathema to many Americans, and other leaders with brutal and bloody pasts. Some of the leaders in the current talks have been involved with Al Qaeda.

While the talks have been under way for months, they have accelerated since Mr. Obama took office and have produced more specific demands, the Afghan intermediaries said."

"'America cannot win this war, and the Taliban cannot win this war,' Mullah Abdul Salaam Zaeef, a former Taliban ambassador and one of the intermediaries, said in an interview. 'I have delivered this message to the Taliban.'

The talks under way now appear to be directed not at individual bands of antigovernment insurgents--the strategy suggested by President Obama--but at the leaders of the large movements.

American officials insist they are not participating in any talks."

A must read.

6. TURKEY NOT MAKING GOOD ON PROMISE TO DOUBLE QUOTA OF WATER FOR IRAQ FROM TIGRIS AND EUPHRATES, IRAQI FARMERS LEAVING FOR THE CITIES, IRAQI PARLIAMENTARIANS CALLING FOR OIL MINISTER'S RESIGNATION

AFP reports that experts are predicting an "agricultural disaster" in Iraq if Turkey continues to withhold waters from the Tigris and Euphrates, the sources of which are in Anatolia.

"The reserves of all Iraqi dams at the beginning of May totalled 11 billion cubic metres (388 billion cubic feet) of water, compared to over 40 billion three years ago, although rain has not been below normal levels this winter."

Iraqi agriculture depends on water from the two rivers for 90% of its irrigation farming.

"Turkish President Abdullah Gul promised in March to double the quota of water allocated to Iraq, during a historic visit to Baghdad, the first by a Turkish head of state in 33 years.

But the promise was not kept, according to Abdullah, who notes that the only bilateral treaty on water sharing came in 1946 when Iraq was hit by fears of flooding."

Prof. Juan Cole argued at the time of the promise that it was in return for the crackdown on Kurdish Workers Party guerrillas operating in Iraq just beyond the Turkish border--see Daily Sources 3/26 #14. The Kurdish Regional Government may be considered by Ankara the real negotiating party in terms of that conflict as of now. The water situation in the rivers gets worse further downstream. Ghassan Awad and Amer Hameed at Xinhua on May 6 reported that Iraqi farmers are migrating to the cities as the agricultural situation has deteriorated steadily since 1980 when Iraq was an agricultural exporter.

"Water shortage, high levels of salinization and desertification are affecting the once glorious agriculture sector in a country which currently imports almost 3 billion US dollars of food commodities annually, according to officials of the agriculture and water resources ministries.

Iraqi marketplaces are replete with fruit, vegetables and seeds imported in low prices especially from neighboring countries like Syria and Iran, a sign reflecting the agriculture deterioration and the consequent farmers immigration to cities."

(h/t Juan Cole at Informed Comment.) Meanwhile, Gina Chon at the Wall Street Journal reports that Iraqi parliamentarians are openly calling for the resignation of oil minister Hussein al-Shahristani. The parliament's energy committee has issued a summons for him to testify regarding the failures of the ministry, see Daily Sources 5/18 #4--but no date for the testimony has been scheduled as of yet. Helpful graph of Iraqi oil production since 2003 from the WSJ:



7. SEC CLINTON SAYS U.S. WANTS NO MORE SETTLEMENT CONSTRUCTION FROM ISRAEL, FORMER AIPAC EXECUTIVES CRITIQUE THE ORGANIZATION'S TAKE ON IRAN, ITALIAN FM ABRUPTLY CANCELS IRAN TRIP ON MISSILE TEST

Herb Keinon and Hilary Leila Kreiger at the Jerusalem Post report that Secretary of State Hillary Clinton told al-Jazeera that "We want to see a stop to settlement construction, additions, natural growth--any kind of settlement activity" following Israeli Prime Minister Binyamin Netanyahu's visit to the US.

"Senior officials in Netanyahu's office said the exact terms of a freeze would have to be worked out, since there had been a number of unwritten understandings on this matter with the previous administration.

For instance, Israel has been working on the assumption that, with tacit agreement from the US, it may build inside the lines of existing settlements in the large settlement blocs that it believes it will retain under any future diplomatic agreement.

It was telling that during his two-day visit to Washington, which concluded on Tuesday, Netanyahu made no commitments on settlements, despite the primacy the Obama administration has placed on the issue.

According to former US ambassador to Israel Martin Indyk, writing on The Daily Beast Web site, 'Netanyahu was completely silent on the settlements freeze in public; in private, I'm told, he said it would be difficult to do.'"

Worth reading in full. In the meantime, Daniel Luban at LobeLog reports that AIPAC's former top Iran analyst, Keith Weissman, was interviewed in the Jerusalem Post by former AIPAC chief lobbyist Douglas Bloomfield in which:

"Weissman said Israel’s worries about Iran getting a nuclear weapon are understandable, but despite some of the rhetoric coming out of Teheran, the Iranian leaders 'are not fanatics and they’re not suicidal. They know that Israel could make Iran glow for many years.'
...
Trying to separate the issues, even refusing to endorse the two-state approach, 'is part of the sophistry of people like [Binyamin] Netanyahu who want to avoid confronting the peace process,' he said. 'Iran’s ability to screw around in the Israel-Arab arena would be severely impaired by pressing ahead on the Palestinian and Syrian tracks instead of looking for excuses not to.'"

Also well worth reading in full. Meanwhile, Guy Dinmore at the Financial Times reported yesterday that the Italian foreign minister, Franco Frattini, abruptly canceled a trip to Iran.

"Italy’s foreign ministry said it called off the two-day trip because Mr Ahmadi-Nejad, who is campaigning for re-election next month, wanted to meet Mr Frattini in the city of Semnan where the Iranian president had just announced the successful launch of a medium-range missile capable of hitting Israel.

The Italian delegation was about to leave Rome but had not boarded its plane when the decision was made to cancel, one person present told the FT.

Mr Frattini, who would have been the most senior European government official to visit Iran since Mr Ahmadi-Nejad was elected in 2005, expressed his regret over a 'lost opportunity' to discuss Iran’s role in stabilizing Afghanistan and Pakistan."

Dinmore reports that the UK secretary of state called to try and dissuade Frattini from the trip on the news of the launch.

"European allies had expressed dismay that Italy was about to break with EU policy of shunning high-level contacts with Iran over its nuclear program."

8. OBAMA ENDORSES US-UAE NUCLEAR ACCORD

On the news yesterday that the US-UAE nuclear accord was under pressure after Congress was shown video of a member of the confederation's aristocracy beating a merchant, Jay Solomon at the Wall Street Journal reports that President Barack Obama gave official backing to the agreement under which the US would share nuclear technology to enable the construction of nuclear power plants there.

"The Obama administration touts the UAE agreement as a model for the peaceful development of nuclear power internationally. Abu Dhabi has agreed to extensive United Nations inspections of its nuclear facilities and says it will buy nuclear fuel from international suppliers.

The UAE has renounced its right to enrich uranium or reprocess plutonium, which minimizes the risk of nuclear materials being diverted for military purposes, according to US officials."

US officials have said on the record that they regard the issue of the video and the nuclear agreement to be separate issues.

9. NIGERIAN OIL MINISTER SAYS CONFLICT HAS SHUT IN OVER 1 MB/D CRUDE PRODUCTION

Platts reports that Nigerian oil minister Odein Ajumogobia told local papers today that over one million barrels a day of crude oil production has been shut in by the conflict with rebel groups.

"'The irony of it is that onshore is the cheapest to produce and therefore, the return on that investment is greater, but that is where we have most of the shut-ins,' the minister said."

A senior official with the Nigerian National Petroleum Corporation said yesterday that the country was producing 1.7 mb/d, somewhat under its OPEC quota of 1.74 mb/d.

10. SHIPPING EXPERT FORECASTS THAT HALF OF LISTED SHIPPING COMPANIES WILL GO UNDER IN NEXT 12 MONTHS, DEEMED "ALARMIST" BY SOME


Tony Gray and Rajesh Joshi at Lloyd's List report that Paul Slater, chairman and chief executive of First International, predicted that the next 12 months will be especially difficult for the three main shipping sectors--containerships, dry bulk and tankers--as their market valuations have halved and their cash reserves erode.

"'I feel that more than half of the public shipping companies will go into either bankruptcy or administration within 12 months,' Mr Slater said.

'For me to say that I think that these companies will run out of cash within a 12-month period is not an outrageous statement given the fact that where the markets are today is far worse than at the end of the 1990s.'"

Other experts responded to the forecast by calling it "alarmist." Worth reading in full.

11. ASIAN GDP CONTRACTIONS SHARP ON EXPORT DECLINES, REPORTS ON GLOBAL DISINFLATION

Rebecca Wilder's weekly summary of global economic data at News N Economics plots the GDP contractions due to the collapse in exports of five Asian economies:



She also notes that disinflationary pressures--deflationary in some--are strong across a wide spectrum of economies. Well worth a look.

12. MEXICAN GDP CONTRACTS AT ANNUALIZED RATE OF 21.5% IN Q1

Bob Davis at the Wall Street Journal reports that yesterday Mexico reported that its economy had shrunk by an annualized rate of 21.5% in the first quarter.

13. TOTAL NORTH AMERICAN RAIL TRAFFIC FOR YEAR ENDED MAY 16 DOWN 18.3%

Atlantic Systems Inc.'s weekly Railfax report is out, total rail traffic (in 13 week rolling averages for the US, Canada, and Mexico) is down about 20% year over year:



Total rail traffic for the year ended May 16, year over year, is down 18.3%, a bit lower than total rail traffic for the year ended May 9 of 18.1%. Cargo down the most are metals--down 47.2%--and autos, down 50.4%. The volume of coal transported by rail is down 8.2%.

14. MIDWESTERN FARMLAND VALUES DECLINING

Jeff Wilson at Bloomberg reports that Federal Reserve Bank of Chicago survey released today shows that the value of farmland in five midwestern states fell by 6% in the three months to April 1 on corn and soybean price declines from last year.

15. MIT UPDATES 2003 STUDY ON POTENTIAL ROLE OF NUCLEAR POWER IN U.S. ENERGY MIX, NEW TECHNICAL ANALYSIS SAYS OIL TO GO PAST $70/B

Keith Johnson at Environmental Capital reports that MIT has updated its 2003 study on the role nuclear power could play in the US energy mix going forward.

"Building nuclear plants is still a lot more expensive than building coal- or gas-fired plants, and nuclear-generated electricity is still more expensive than either fossil-fuel option: 8.8 cents a kilowatt for nuclear versus 6.2 cents for coal and 6.5 cents for gas, MIT figures.

There are two ways around that cost gap. A hefty price on carbon emissions of $25 a ton would narrow—though not close—the gap. If Congress passes a cap-and-trade bill to tackle climate change, there will be a price on carbon, though it won’t initially be anywhere near $25 a ton."

Nat Gas, on a BTU basis, traded (on NYMEX July contract over July contract) at a $38.27/b discount to oil. NYMEX oil July over ICE monthly gas contract for July, sells at a $36.29/b premium on a BTU basis to gas. Brent July over ICE nat gas July sells at a $34.84/b premium to gas on a BTU basis.

This appears to be due to a) large stockpiles of gas, b) large new supply of gas, and c) staggering industrial production declines globally ... and most importantly in exporting nations.

A 0.3 cent premium to coal seems a reasonable price to pay for lower emissions. Course, more demand = higher price, so the premium will grow--but the carbon taxes under consideration would certainly make natural gas more economic than coal for some time.

My suspicion is that $100/b oil or more will kill any export-based recovery--and thus industrial production recovery--but it's hard to say. (Obviously I haven't had time to read the MIT study, but it can be found here.) On the question of oil price, Mark Shenk at Bloomberg reports that Veronique Lashinski, a senior research analyst for Newedge USA LLC in Chicago, wrote in a client note that technical analysis indicates that having broke through the $60/b level, crude prices are to head to $73/b. This follows the analysis in early May by Jordan Kotick that crude may jump to $71.55/b if the June contract breaks through $56.10/b--see Daily Sources May 5/5 #5. Paul Horsnell, also at Barclays, also suggested on May 14 that inventories would start falling, meaning that it was a question of when, not if, prices go to $70/b--see Daily Sources 5/15 #9. This also followed the analysis by JBC Energy on May 5 that traders holding crude in storage in tankers offshore would start unloading them. Storage has indeed come down--though the inventories are so high, and demand so low, it still seems that fundamentals would argue for a lower price. Goldman Sachs in late April forecast that all available crude storage would be full by June. (These last two also at Daily Sources 5/5 #5.)

16. LARGE & DENSE CITIES PER CAPITA ENERGY CONSUMPTION SMALLER THAN SMALL CITIES IN SAME RATIO AS LARGE ANIMALS PER CELL CONSUMPTION IS LESS THAN SMALL ANIMALS

Finally, Free exchange has a fascinating post mentioning Steven Strogatz muse that naturally occurring mathematical phenomena may explain how much energy cities consume:

"For instance, if one city is 10 times as populous as another one, does it need 10 times as many gas stations? No. Bigger cities have more gas stations than smaller ones (of course), but not nearly in direct proportion to their size. The number of gas stations grows only in proportion to the 0.77 power of population. The crucial thing is that 0.77 is less than 1. This implies that the bigger a city is, the fewer gas stations it has per person. Put simply, bigger cities enjoy economies of scale. In this sense, bigger is greener."

"Now comes the spooky part. The same law is true for living things. That is, if you mentally replace cities by organisms and city size by body weight, the mathematical pattern remains the same.
...
[C]onsider the elephant or the mouse as an intact animal, a functioning agglomeration of billions of cells. Then, on a pound for pound basis, the cells of an elephant consume far less energy than those of a mouse. The relevant law of metabolism, called Kleiber’s law, states that the metabolic needs of a mammal grow in proportion to its body weight raised to the 0.74 power."

Social organisms, we are.