Daily Sources 7/22

1. DO COAL STOCKS INDICATE GLOBAL RECOVERY?; WTO SAYS GLOBAL TRADE TO CONTRACT 10% IN 2009

Thomas MacLeod yesterday at Seeking Alpha deduced from the performance of global coal ETF KOL, the US DOW Coal Index, and the global steel ETF SLX that energy consumption globally is up and thus is the global economy beginning a rebound.

"The commodity that we believe is more representative of pure changes in economic fundamentals is coal. It is difficult to manipulate, its supply is not so affected by political or natural events and it is comparatively difficult and expensive to store, which effectively weeds out speculators.

Moreover, coal is a genuine industrial commodity with over half of the world’s electricity generation being powered by coal fired power stations. It is integral in the production of steel and can be converted to produce crude and other industrial chemicals.

In order to analyze the behavior of coal we look at the movement of coal stocks relative to major market stock indices. This eliminates the impact of stock market movements so we can ascertain the movement due to changing expectations of coal demand and supply. In essence, outperformance of coal stocks suggests global economic expansion."

Of course, the performance of coal stocks does not represent a one-to-one ratio to consumption. The latest data on coal volumes shipped by train, for example, still shows 8% down year over year, which suggests that in North America, anyway, it is difficult to deduce a rebound on the basis of coal volumes. Meanwhile, Jonathan Lynn and Kazunori Takada at Reuters reports that the WTO has forecast that world trade will shrink by 10% in 2009.

"The WTO said however the contraction appeared to be slowing.

'Our figures showed that Asian countries may be leading a recovery in global trade,' [Director General Pascal] Lamy told a news conference in Singapore, where he was attending a two-day Asia Pacific Economic Cooperation (APEC) trade meeting."

2. IMF SAYS CHINA COULD STAND MORE STIMULUS IN CONTRAST TO WORLD BANK ASSESSMENT, CHINA INDICATING THAT IT WILL USE ITS FOREIGN CURRENCY RESERVES TO FUND CHINESE FIRM EXPANSION OVERSEAS, IN PARTICULAR RESOURCE PLAYS, CHINESE OIL IMPORTS IN JUNE WAY UP IN CONTRAST TO OFFICIAL COMMENT THAT STOCKPILING OVER

Timothy R Homan at the Bloomberg reports that the IMF has indicated in its first executive-level review of China in three years that there is scope for more fiscal stimulus in that country.

"The IMF’s assessment is a clash with the World Bank, the international development-aid agency also based in Washington, which last month advised China to delay until 2010 any additional stimulus. It also comes as China is already recording an acceleration in its expansion, and as its central bank takes steps to avert bubbles in stock and property markets."

In the April G-20 meeting in London, the Obama administration secured from the IMF a pledge to open up the selection process for the executive directorship of the organization in return for opening up the process for the head of the World Bank, traditionally an American. Some expect China to win the top spot when the next head of the World Bank is selected, but in order for Beijing to have had a real shot, it needed to open up the country to official review from the international financial institutions again. Meanwhile, Brad Setser has some remarks on the recent report that China intends to use its reserves to support the overseas acquisitions of Chinese firms.

"That of course is China’s right. China clearly has more reserves than it really needs, and thus can take some risks with its reserves.

But it also has consequences. If Chinese firms are explicitly backed by China;s reserves, it gets harder to argue that their expansion reflects a purely commercial calculus. China’s government presumably will deploy its assets to pursue China’s strategic as well as its commercial goals.

In some sense it is surprising that China has decided to be so explicit about its new desire to use its reserves to support Chinese state firms. China’s government could have achieved the same result by quietly putting more foreign currency on deposit in the state banks, and having the state banks lend those funds out to firms looking to expand abroad."

Kate MacKenzie at FT Energy Source notes,

"In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

'Everyone is saying we should go to the western markets to scoop up [underpriced assets],' said Chen Yuan. 'I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.'"

Meanwhile, Platts notes that Chinese apparent oil demand is up in June. I have reconfigured their data into a barrels per day format:



3. GERMAN ROLE AT ECB MAY BE ESPECIALLY PROBLEMATIC FOR COORDINATING GLOBAL RECOVERY, ECB ARGUES THAT ITALY'S ADOPTION OF THE EURO HAS CUSHIONED THE COUNTRY'S ECONOMY FROM ITS POLITICAL INSTABILITY

Jörg Bibow at the New America Foundation has an interesting piece on the German role in determining monetary policy for Europe and why it is presenting a serious obstacle to an effective global response to the financial crisis. Key excerpts:

"Within German 'stability culture' the Bundesbank's part was to enforce discipline, both budgetary discipline and wage discipline. The result was not only low inflation, but inflation lower than inflation of Germany's trading partners. And that is an important factor within any system of pegged nominal exchange rates: over time a country with relatively low inflation gains in competitiveness which is boosting its export performance. Stability policy worked well under the Bretton Woods regime, establishing both Germany's export-oriented growth strategy and the Bundesbank's claim to fame as inflation fighter."

"Exporting the German model to Europe through the Maastricht regime meant inflation would be low across Europe, while all countries would try to balance their budgets at the same time. When German stability policy was jointly applied across Europe in the early 1990s, the predictable result was domestic demand stagnation and rising unemployment. Even by 1996 it looked as though EMU was not going to fly because stagnation kept budget deficits above the 3% ceiling across the continent. Luckily, the US 'new economy' boom and strong US dollar came to the rescue, and eleven countries qualified in the spring of 1998 to launch the euro in January 1999. In other words, laboring under the Maastricht constraints, Europe failed to generate sufficient homemade demand growth, but benevolent external forces allowed the euro to get off the ground just on time."

"What does all this mean for the collective action problem which, as I said at the start, the world is facing today? Recovery from the ongoing global crisis requires everyone to pay their dues and pull their weight. Built into the German model is a strategy to rely on the recoveries of others to sponsor one's own. The German model has become the European model (pace the U.K). ECB president Jean-Claude Trichet said as much in 2004 when Euroland was last hoping for external sponsors of recovery: 'Growth starts with exports, then passes on to investment and then to consumption. That is the normal sequence for Europe in this phase of the cycle.' (FT 22 April 2004). The trouble is that Europe's economy is as large as America's or even larger, and the German model wholly unsuitable for a large economy. In addition, Europe has its hands full with its own homemade crises, crises which are largely the consequence of the German model as well. Recent statements made by key German policymakers clearly indicate that enlightenment is not a realistic prospect."

Bibow makes the especially uncharitable comment that perhaps Berlin needs to relearn the lessons of the Great Depression, but there he clearly misses the point. Perhaps Belin needs to unlearn the lesson, which clearly has as its main pivot the notion that hyperinflation led to the political instability which eventually ushered in the NAZIs to political ascendancy. That (nastiness) aside, the piece is worth reading. Meanwhile, the European Central Bank has published a working paper by Marcel Fratzscher and Livio Stracca which argues that the adoption of the euro has insulated Italy from its political instability.

"The paper focuses on political events in Italy over the past 35 years and asks whether the adoption of the euro in 1999 has helped insulate Italy’s financial markets from the adverse consequences of its traditionally unstable political system. We find that important political events have exerted a statistically and economically significant effect on Italy’s financial markets throughout the 1970s, 1980s and 1990s. The introduction of the euro appears to have indeed played a major role in insulating financial markets from such adverse shocks."

(I am obliged for both of these pieces to Eurointelligence.)

4. NETHERLANDS THREATENING TO BLOCK ICELAND ACCESSION TO THE EU IF IT DOES NOT COMPENSATE DUTCH SAVERS ON LOSSES

NRC Handelsblad reports that Dutch Foreign Minister Maxime Verhagen is threatening to block Iceland's bid to join the European Union, unless Reykjavik meets its obligations to compensate Dutch savers.

"According to the agreement Iceland has to repay €1.3 billion to the Netherlands and €2.3 billion to the UK. The British and Dutch governments spent that money to compensate savers for the €20,000 the Icelandic government had guaranteed for those saving with Icelandic banks. The Icelandic government agreed to repay those damages in the form of a loan, but parliament could block that deal, as some members of the Althing have threatened to do.

'A solution to the problems surrounding Icesave could speed up the handling of the Icelandic application for EU membership," Verhagen said. He added it is "absolutely necessary' that Iceland approves the agreement to 'show that Iceland takes EU guidelines seriously.'"

5. GEORGIA SEEKING AMERICAN ARMS

Philip P Pan at the Washington Post reports that Georgian President Mikheil Saakashvili yesterday indicated in an interview that Tblisi is seeking a weapons deal with the United States.

"In a wide-ranging interview, Saakashvili said that discussions about a weapons deal remained at 'very early stages' but that he planned to press Biden to speed up delivery of antiaircraft and antitank systems, saying such weaponry was 'purely defensive' and 'would make any hotheads think twice about further military adventures.'

'I think the decision to help us is there,' he added, noting recent meetings between Georgian and US defense officials. 'It's a matter of speeding up the process. . . . We want the country to still be around when those things start to arrive here. That's ultimately what's right now at stake.'

The United States has been working to train and modernize the Georgian military for more than a decade, but Russia has warned strongly against new arms shipments to the former Soviet republic, which it routed in a brief war last year."

6. PAKISTANI SUPREME COURT ASKS FOR MUSHARRAF REPRESENTATION ON CASE CONSIDERING WHETHER EMERGENCY MEASURES IN 2007 WERE CONSTITUTIONAL, ISLAMABAD OBJECTS TO CAMPAIGN IN AFGHANISTAN, GERMAN INVOLVEMENT HEATS UP, PAKISTAN ASKS FOR ADDITIONAL INTEL SUPPORT FROM US AND WARNS THAT DEAL WITH INDIA COULD START ARMS RACE

BBC News reports that Pakistan's Supreme Court has decided that former President Musharraf should be represented in a case before it over whether or not the emergency rule imposed in November 2007 was constitutional.

"'This is the first time in Pakistani history that the court has taken cognizance of such action. In the past, the courts have tended to condone military takeovers,' a former chief justice of Pakistan, Saeeduzzaman Siddiqui, told Dawn News TV.

The BBC's Ilyas Khan in Islamabad says that the court apparently issued the notice to Mr Musharraf following the refusal on Tuesday by the attorney-general, who represents the government, to defend the former president's position in the case."

Meanwhile, Eric Schmitt and Jane Perlez at the New York Times report that Pakistan is objecting to expanded combat plans in Afghanistan.

"Pakistani officials have told the Obama administration that the Marines fighting the Taliban in southern Afghanistan will force militants across the border into Pakistan, with the potential to further inflame the troubled province of Baluchistan, according to Pakistani intelligence officials.

Pakistan does not have enough troops to deploy to Baluchistan to take on the Taliban without denuding its border with its archenemy, India, the officials said. Dialogue with the Taliban, not more fighting, is in Pakistan’s national interest, they said."

Matthias Gebauer and Shoib Najafizada at Der Spiegel report on German forces increasing involvement in the fighting in Afghanistan:

"The Bundeswehr is supporting the Afghans with around 300 members of the Quick Reaction Force (QRF). Their primary role is to help secure the area around the fighting and provide reconnaissance.
...
[T]he Bundeswehr has also become considerably more assertive. For the first time, Marder tanks--which have heavy firepower and were only recently relocated from Mazar-e-Sharif to Kunduz--have been deployed.
...
According to SPIEGEL ONLINE sources, missiles are also being fired by German fighter jets in northern Afghanistan for the first time. Following a first deployment of fighter jets on June 15 in northern Afghanistan by the ISAF international security force, most supplied by the United States, Afghan forces requested so-called 'air support' for a second time on Sunday.

Such air support had long been considered taboo in northern Afghanistan."

Meanwhile, Joshua Partlow at the Washington Post reports that Pakistani Prime Minister Yusuf Raza Gilani today has called on the US to provide real-time intelligence and other military support for the Pakistani effort against the Taliban, without relying on attacks from US drones. Both American national papers mention that Islamabad is concerned about the recent end use monitoring deal made with India, suggesting that it could spark an arms race.

7. KURDISTAN COMMISSIONS NEW REFINERY

Eric Watkins at the Oil & Gas Journal reports that Kurdistan has commissioned a new refinery near Arbil which will originally process 20 kb/d, ramping up to 40 kb/d by the end of the year. The refinery is one of several planned for the area, with plans to have total throughput capacity of about 200 kb/d. "Refinery director Baz Karim said the new facility is operated by private Kurdish investors Kar Group, and will process crude from the Khurmala Dome oil field ... ."

8. IRANIAN CONSERVATIVES RESPOND TO RAFSANJANI LETTER, LOTR TELLS AHMADINEJAD THAT HE NEEDS TO WITHDRAW SON IN LAW AS VP PICK

The best round up on recent maneuvering between elites in the aftermath of the Iranian elections is at Juan Cole's Informed Comment. The Leader of the Revolution has warned against further civil disobedience on Monday and includes an excerpt of his speech as translated by the Open Source Center. A representative of the LOTR at the Revolutionary Guards has indicated that support for the LOTR has foiled the plots of outsiders--Cole includes an excerpt from his speech as translated by the OSC. He also includes an excerpt of conservative cleric Ayatollah Mohammad Yazdi's recent charges that Rafsanjani has undermined the revolution as translated by the OSC. Press TV--an English-language state media organ of Iran--on Tuesday reported that the LOTR has told Ahmadinejad that he must undo the selection of his son-in-law as Vice President.

9. HAGUE RULES ON NORTH-SOUTH SUDAN BORDER

Stephanie McCrummen at the Washington Post reports that the Hague has issued a ruling on the disputed south-north border in the Sudan, striking a compromise.

"The ruling by the Permanent Court of Arbitration awards control of a lucrative Chinese-run oil field in the region of Abyei to the Sudanese government but defines the region's boundaries in a way that is politically beneficial to the south.

Officials from the south and President Omar Hassan al-Bashir's ruling party quickly promised to respect the ruling, which analysts called a major test of the fragile 2005 peace deal that ended the bloody north-south civil war, one of Africa's longest-running conflicts.

'Both parties have agreed to accept the boundaries,' said Majok Guandong, Sudan's ambassador in Nairobi. 'We think there will be no maneuvering by either side.'"

The ruling leaves a smaller working oil field in the territory of the south and defines the territory as being mostly populated with the Ngok Dinka, a nomadic tribe which identifies itself with the south and will likely vote to join it in the referendum on independence from Khartoum in 2011.

10. NIGERIA SAYS NIGER DELTA UNREST CUTTING OFF 1 MB/D IN SUPPLY

Platts reports that Nigeria's Oil Minister Rilwanu Lukman yesterday told the media that the country is losing approximately 1 mb/d in production due to continuing strife in the Niger Delta.

"Lukman told leaders of the ruling People's Democratic Party in Abuja that Nigeria's oil production had dropped to between 1.4 million and 1.5 mb/d, well below its assigned OPEC quota and far off from the 2009 budget benchmark of 2.29 mb/d, according to a Thisday newspaper report Wednesday.

'We have production capacity of 2.3 mb/d but because of problems in the Niger Delta, we cannot meet our target. This year's budget is based on having 2.2 mb/d. So, we are short of a million barrels,' the minister was quoted as saying.

'Our target is 4 million barrels in 2010, presently we have 37 billion barrels in our reserve. The target for next year's production is 4 mb/d,' Lukman said."

11. BRAZIL TO SELL DOLLAR DENOMINATED BONDS, SIGNS NUCLEAR ENERGY MOU WITH MOSCOW

After all the hoopla about the replacement of the dollar as the reserve currency, Andre Soliani and Carla Simoes at Bloomberg report that Brazilian Treasury Secretary Arno Augustin has said that Brasilia plans to sell dollar denominated bonds on the overseas credit markets shortly.

"The country will tap the market more than once before yearend and look to sell securities maturing in more than 10 years, Augustin ... said in an interview with Bloomberg Television in Brasilia today.

'We will certainly issue foreign bonds more than once in the second half, seeking to lengthen the debt’s profile and create conditions' for companies to sell bonds, Augustin said. There is investor demand for bonds maturing in 30 years, he said.

Brazil plans to tap international credit markets as speculation the global recession is easing fuels demand for higher-yielding assets."

As a counterpoint, today the Latin American Herald Tribune notes that Russian media yesterday reported that Russia and Brazil have signed a MOU on nuclear energy cooperation.

"The pact calls for the development of uranium prospecting technology and the design of new reactors, as well as the design and construction of nuclear research reactors.

The agreement opens the way for the production of radioisotopes for use in agriculture and the pharmaceutical industry, as well as the training of nuclear energy experts.

Russia and Brazil agreed to create a working group for atomic research and development projects."

12. US PLANS TO INCREASE PRESENCE IN COLOMBIAN MILITARY BASES ROILING NEIGHBORS

Simon Romero at the New York Times reports that a plan to increase the American presence at three military bases in Colombia is drawing the ire Bogota's neighbors.

"Venezuela, Ecuador and Nicaragua, which are members of a leftist political alliance that is led by President Hugo Chávez of Venezuela and backed by his nation’s oil revenues, have all criticized the plan, saying it would broaden the military reach of the United States in the Andes and the Caribbean at a time when they are still wary of American influence in the region.

Despite a slight improvement in Venezuela’s relations with the United States in recent months, Mr. Chávez has been especially vocal in lashing out at the plan. Speaking on state television here Monday night, he put Venezuela’s diplomatic ties with Colombia under review, calling the plan a platform for 'new aggression against us.'

Colombia’s foreign minister, Jaime Bermúdez, on Tuesday defended the negotiations, which are expected to produce an agreement in August, asking neighboring countries not to interfere in Colombia’s affairs. 'We never expressed our opinion in what our neighbors do,' he said, pointing to Mr. Chávez’s attempts to strengthen ties with non-Western nations. 'Not even when the Russian presence became known in Venezuelan waters, or with relations with China,' he added."

13. EIA SAYS COMMERCIAL CRUDE STOCKS DOWN, GASOLINE AND DISTILLATE UP--REGULAR GASOLINE PRICES DOWN, REFINERY UTILIZATION DOWN

The EIA reports that commercial crude oil stocks were drawn down by 1.8 million barrels in the week ended July 17 to 342.7 million barrels. Inventories are still above the five year historical range for this time of year. The draw down was smaller than the 2.1 million barrel fall expected as per the median expectation of analysts in a Bloomberg survey. Bloomberg also notes:

"In contrast to the Energy Department supply report, the American Petroleum Institute said late yesterday that stockpiles rose 3.1 million barrels last week, the first gain since April."

Gasoline stocks grew by 800,000 barrels and are now at the top of the five year historical range for this time of year. Distillate stocks grew by 1.2 million barrels and there are 32.4 million barrels more distillate in storage than there was this time last year, about 25.3% more. Refining utilization fell to 85.84% from 87.87% in the week previous. The national average price of regular gasoline fell to $2.463/gallon in the week ended July 20, just below the range where driving demand begins to fall in response to the price.