Financial Times: Growing fears credit boom may implode

Growing fears credit boom may implode
By Dan Roberts and David Wighton in New York and Peter Thal Larsen in London
Published: March 13 2005 21:42 | Last updated: March 13 2005 21:42
Financial Times

Bankruptcy advisers are hiring extra staff amid fears that an end to the global credit boom could spark a surge in business failures in the US and Europe.

Unusually loose lending conditions have encouraged record borrowing by speculative-grade companies, with leveraged buy-outs and debt refinancing on both sides of the Atlantic generating more than $100bn of deals in the past eight months.

But last week's fall in the price of US Treasury bonds, coinciding with signs that bankers are struggling to complete riskier corporate bond issues, has added to a sense of nervousness in some quarters.

Although corporate default rates remain low, some fear the legacy of recent private equity buy-outs and hedge fund investments in distressed debt will be a swath of over-leveraged companies ill-equipped to survive in less benign conditions.

PwC, the largest corporate recovery adviser, said it was hiring insolvency specialists in sectors such as retailing, utilities and telecommunications in preparation for the expected fall-out.

Scott Bok, president of Greenhill & Co, an investment bank specialising in merger advice and restructuring, also predicts the cycle will end with a lot of companies in trouble. “In many of the deals being done today you can foresee the debt restructurings to come in a year or two,” he said.

Last week, the Financial Stability Forum, a group of national and international central banks and regulators, pointed to the levels of liquidity as one of the main risks to the stability of the global financial system.

Following a meeting in Tokyo, the FSF said that, according to some of its members, tight credit spreads and low long-term interest rates suggested some in the market might be underpricing risks. It urged banks and investors to monitor their exposures by stress-testing what would happen in the event of a market shock. Chuck Prince, chief executive of Citigroup, said: “The possibility of a liquidity bubble around the world concerns me. A very cautionary thing is that it feels like the world is changing and traditional indices may not give a complete picture.” Some say markets are becoming more nervous. Paul Hsi, a senior analyst at Moody's, said: “There is a little bit more caution in the market right now as some of the weaker credits come up with ‘me-too' offerings and investors take a harder look.”

Ian Powell, head of European business recovery for PWC, added: “You only need one of these really big financing deals to go sour and confidence will evaporate very quickly.”

However, investors say the market is more aware of the risks than in previous credit cycles and that funds are managing their exposure accordingly.

“People are on ‘bubblewatch' since almost every market got burnt in the last five years,” said Stephen Peacher, head of high-yield investment at Putnam, the fund manager.

“We know that bond prices are certainly not cheap but, given that default rates are so very low, we feel comfortable that spreads are in a fair value range.”

Additional reporting by Jennifer Hughes in New York

NIALL FERGUSON: "Our Currency, Your Problem" published by the New York Times

Our Currency, Your Problem
By NIALL FERGUSON
New York Times
March 13, 2005

Every congressman knows that the United States currently runs large ''twin deficits'' on its budget and current accounts. Deficit 1, as we well know, is just the difference between federal tax revenues and expenditures. Deficit 2 is generally less well understood: it's the difference between all that Americans earn from foreigners (mainly from exports, services and investments abroad) and all that they pay out to foreigners (for imports, services and loans). When a government runs a deficit, it can tap public savings by selling bonds. But when the economy as a whole is running a deficit -- when American households are saving next to nothing of their disposable income -- there is no option but to borrow abroad.

There was a time when foreign investors were ready and willing to finance the U.S. current account deficit by buying large pieces of corporate America. But that's not the case today. Perhaps the most amazing economic fact of our time is that between 70 and 80 percent of the American economy's vast and continuing borrowing requirement is being met by foreign (mainly Asian) central banks.

Let's translate that into political terms. In effect, the Bush administration's combination of tax cuts for the Republican ''base'' and a Global War on Terror is being financed with a multibillion dollar overdraft facility at the People's Bank of China. Without East Asia, your mortgage might well be costing you more. The toys you buy for your kids certainly would.

Why are the Chinese monetary authorities so willing to underwrite American profligacy? Not out of altruism. The principal reason is that if they don't keep on buying dollars and dollar-based securities as fast as the Federal Reserve and the U.S. Treasury can print them, the dollar could slide substantially against the Chinese renminbi, much as it has declined against the euro over the past three years. Knowing the importance of the U.S. market to their export industries, the Chinese authorities dread such a dollar slide. The effect would be to raise the price, and hence reduce the appeal, of Chinese goods to American consumers -- and that includes everything from my snowproof hiking boots to the modem on my desk. A fall in exports would almost certainly translate into job losses in China at a time when millions of migrants from the countryside are pouring into the country's manufacturing sector.

So when Treasury Secretary John Snow insists that the United States has a ''strong dollar'' policy, what he really means is that the People's Republic of China has a ''weak renminbi'' policy. Sure, this is bad news if you happen to be an American toy manufacturer. But there are three good reasons that the administration is tacitly delighted by the Asian central banks' support. Not only is it keeping the lid on the price of American imports from Asia (a potential source of inflationary pressure). It is also propping up the price of U.S. Treasury bonds; this in turns depresses the yield on those bonds, allowing the federal government to borrow at historically very low rates of interest. Reason No. 3 is that low long-term interest rates keep the Bush recovery jogging along.

Sadly, according to a growing number of eminent economists, this arrangement simply cannot last. The dollar pessimists argue that the Asian central banks are already dangerously overexposed both to the dollar and the U.S. bond market. Sooner or later, they have to get out -- at which point the dollar could plunge relative to Asian currencies by as much as a third or two-fifths, and U.S. interest rates could leap upward. (When the South Korean central bank recently appeared to indicate that it was shifting out of dollars, there was indeed a brief run on the U.S. currency -- until the Koreans hastily issued a denial.)

Are the pessimists right? The U.S. current account deficit is now within sight of 6 percent of G.D.P., and net external debt stands at around 30 percent. The precipitous economic history of Latin America shows that an external-debt burden in excess of 20 percent of G.D.P. is potentially dangerous.

Yet there is one key difference between the United States and the countries south of the Rio Grande. Latin American economies have trouble with their foreign debts because those debts are denominated in foreign currency. The United States' external liabilities, by contrast, are almost entirely denominated in its own currency.

It therefore makes more sense to compare the United States with other members of that exclusive club of countries that have produced -- and hence been able to borrow -- in international currencies. The most obvious analogy that springs to mind is the United Kingdom 60 years ago.

During the Second World War, Britain financed its wartime deficits partly by borrowing substantial amounts of sterling from the colonies and dominions within her empire. And yet by the mid-1950's, these very substantial debts had largely disappeared. Unfortunately, this was partly because the value of sterling itself fell significantly. Moreover, sterling's decline and fall did not reduce the U.K.'s chronic trade deficit, least of all with respect to manufacturing. On the contrary, British industry declined in tandem with the pound's status as a global currency. And, needless to say, the decline of sterling coincided with Britain's decline as an empire.

From an American perspective, all this might seem to suggest worrying parallels. Could our own obligations to foreigners presage not just devaluation but also industrial and imperial decline?

Possibly. Yet there are some pretty important differences between 2005 and 1945. The United States is not in nearly as bad an economic mess as postwar Britain, which also owed large sums in dollars to the United States. The American empire is also in much better shape than the British empire was back in 1945.

Even the gloomiest pessimists accept that a steep dollar depreciation would inflict more suffering on China and other Asian economies than on the United States. John Snow's counterpart in the Nixon administration once told his European counterparts that ''the dollar is our currency, but your problem.'' Snow could say the same to Asians today. If the dollar fell by a third against the renminbi, according to Nouriel Roubini, an economist at New York University, the People's Bank of China could suffer a capital loss equivalent to 10 percent of China's gross domestic product. For that reason alone, the P.B.O.C. has every reason to carry on printing renminbi in order to buy dollars.

Though neither side wants to admit it, today's Sino-American economic relationship has an imperial character. Empires, remember, traditionally collect ''tributes'' from subject peoples. That is how their costs -- in terms of blood and treasure -- can best be justified to the populace back in the imperial capital. Today's ''tribute'' is effectively paid to the American empire by China and other East Asian economies in the form of underpriced exports and low-interest, high-risk loans.

How long can the Chinese go on financing America's twin deficits? The answer may be a lot longer than the dollar pessimists expect. After all, this form of tribute is much less humiliating than those exacted by the last Anglophone empire, which occupied China's best ports and took over the country's customs system (partly in order to flood the country with Indian opium). There was no obvious upside to that arrangement for the Chinese; the growth rate of per capita G.D.P. was probably negative in that era, compared with 8 or 9 percent a year since 1990.

Meanwhile, the United States may be discovering what the British found in their imperial heyday. If you are a truly powerful empire, you can borrow a lot of money at surprisingly reasonable rates. Today's deficits are in fact dwarfed in relative terms by the amounts the British borrowed to finance their Global War on (French) Terror between 1793 and 1815. Yet British long-term rates in that era averaged just 4.77 percent, and the pound's exchange rate was restored to its prewar level within a few years of peace.

It is only when your power wanes -- as the British learned after 1945 -- that owing a fortune in your own currency becomes a real problem. As opposed, that is, to someone else's problem.

Niall Ferguson is professor of history at Harvard and author of ''Colossus: The Price of America's Empire.''

World Bank Press: Water Worries Start to Gain Attention

World Bank Press: Water Worries Start to Gain Attention

Expect to hear a lot more talk about water, The Wall Street Journal writes. As the world population has tripled during the past century, the use of water has increased sevenfold.

The World Commission on Water predicts water use will increase 50 percent during the next 30 years and bemoans "the gloomy arithmetic of water." Others project that a decade from now 40 percent of the world's population -- three billion people -- will live in countries that hydrologists classify as "water stressed."

Even though more than 2.4 billion people got access to safe drinking water for the first time during the past 20 years, an estimated 1.7 billion people still lack it, and perhaps 2.6 billion people lack basic sanitation. Two million tons of human waste is released into rivers and streams around the world annually. About 1.8 million people, mostly young children, die from diarrhea and related diseases each year; many of those deaths could be prevented with clean water and sanitation.

Worrying about water isn't new. But there is a new intensity. "Water has come to the top of things that we can do something measurable about," says Steven Radelet, an economist at the Center for Global Development, a Washington think tank that focuses on global poverty. Among foreign-aid thinkers, there is a growing consensus that improving health isn't just a byproduct of wealth, it is a vital factor in fostering economic growth, and that water is key to health. "Water," the World Bank's Claudia Sadoff said, "was an early and large priority in the development of this country's economy, yet we seem to place very little emphasis on water in our foreign aid relative to what it deserves."

Much of the conversation is -- encouragingly -- focused on perfecting technologies to increase the supply of water, making its use more efficient (drip irrigation, for instance), strengthening the institutions that manage water resources and relying more on market mechanisms to encourage wise use. Water is, in short, best viewed as a challenge – but a manageable one. It won't be easy, though. Yemen, [for example,] is a poor country with near 20 million people, close to half of whom live in poverty. Its population is growing rapidly; by 2045, projections show it will have nearly as many people as Germany will. Most of its populace lives too far from the coast to make transport of desalinated water practical; most of its water is drawn from an underground aquifer that is likely to be depleted within a couple of decades.

International Herald Tribune: For canny gold buyers, it's time to mine

For canny gold buyers, it's time to mine
By Barbara Wall International Herald Tribune
Tuesday, March 8, 2005

You do not have to be a gold bug to realize that gold and precious metals should do well this year. But you might also want to reserve some space in your portfolio for industrial mining companies because, according to fund managers, their star is also rising.

Gold bulls had a great run in February, with the price hitting a high of just over $440 an ounce in the past week. Fund managers predict that the upward trend in metals will continue as central banks, particularly in Asia, diversify away from the dollar and buy gold and platinum to bolster confidence in their currencies.

The recent appearance of gold-linked exchange traded funds has opened up the sector to institutional and retail investors. StreetTracks Gold was introduced at the end of 2004, while Barclays iShares Comex Gold Trust made its debut in January. The investment concept is simple enough: The funds buy physical gold and the shares reflect the changing price of the metal, minus expenses.

For a minimum investment of $10,000, investors could get direct exposure to gold and other precious metals through an open-ended investment fund like the Aliquot Gold Bullion Fund, managed by Castlestone Management. An additional advantage is that Castlestone leases out its gold holdings during the month and uses the leasing income to offset fund costs.

Daris Delins, a director at Castlestone Management, said that a gold bullion fund was similar to hedging against a paper currency investment.

Most investors think of gold equities when they think of gold as an asset class," Delin said. "However, gold-related equities funds are two to three times more volatile than a pure bullion fund. When you buy mining company stock, you add an extra layer of complexity to the portfolio. As well as getting exposure to the metal, you are also exposed to foreign currency risks and management issues."

Aliquot Gold Bullion rose 4 percent in the three months to the end of February, while the average offshore gold equity fund lost 8 percent over the same period, according to Standard & Poor's.

Gold equities tend to follow, though not mirror, the direction of the gold price. Last year, the relationship decoupled. Evy Hambro, manager of a mining equities fund for Merrill Lynch, in London, explained: "Gold equities went through the roof in December 2003, as analysts were predicting the collapse of the U.S. dollar. When this failed to materialize, valuations came under the spotlight, and share prices suffered. "

Managers generally like gold companies because many pay dividends. In good times, shares can also do better than bullion because companies are leveraged. The main problem at the moment is that valuations are still considered to be on the high side. Eberhard Weinberger, manager of a gold and resources fund for DJE Investments in Germany, said a catalyst was needed to push gold shares higher.

"A significant rise in the gold price or a further weakening of the dollar could help matters, but investors need to be selective," Weinberger said.

"I would go for defensive blue-chip names, such as Anglo Gold, as they tend to do better in periods of high volatility."

It is not just the gold price that is replete with possibilities. Hambro said that he expected it to be a "fantastic" year for industrial mining companies on the strength of their improved earnings.

"Mining companies that focus on base metals and industrial materials are making money faster than they count it," he said.

"Earnings at Anglo American and Rio Tinto were up 59 percent and 61 percent respectively on last year."

This is not just a one-time thing, Hambro added. Assuming that commodity prices remain fairly stable, he predicted that earnings growth over the next few years would be huge. But will this lead to higher share prices?

"We believe higher than long term average commodity prices should be around for a while," Hambro said. "This means that mining company share prices could be due for a significant rerating. At one point the sector was trading on 16 times future earnings. It is now trading on just 10 times."

And if Hambro is proved wrong, shareholders are unlikely to be too disappointed.

Analysts expect mining companies to return significant cash to shareholders over the coming years, given high commodity prices. Teck Cominco increased its dividend by 100 percent last year and Rio Tinto has just announced plans to return $1.5 billion of capital to shareholders over two years through a share repurchase program. Now that is food for thought.

Prudent Investor comments...Oh no! Mainstream media is now into it...a bad sign.

Earth Policy's Lester R. Brown: LEARNING FROM CHINA

LEARNING FROM CHINA
Why the Western Economic Model Will not Work for the World
Lester R. Brown

Could the American dream in China become a nightmare for the world? For China's 1.3 billion people, the American dream is fast becoming the Chinese dream. Already millions of Chinese are living like Americans--eating more meat, driving cars, traveling abroad, and otherwise spending their fast-rising incomes much as Americans do. Although these U.S.-style consumers are only a small fraction of the population, China's claims on the earth's resources are already becoming highly visible.

In an Eco-Economy Update released in February, we pointed out that China has replaced the United States as the world's leading consumer of most basic commodities, like grain, coal, and steel. Now the question is, What if consumption per person of these resources in China one day reaches the current U.S. level? And, closely related, how long will it take for China's annual income per person of $5,300 to reach the 2004 U.S. figure of $38,000?

During the 26 years since the far-reaching economic reforms of 1978, China's economy has been growing at a breakneck pace of 9.5 percent a year. If it were now to grow at 8 percent per year, doubling every nine years, income per person in 2031 for China's projected population of 1.45 billion would reach $38,000. (At a more conservative 6 percent annual growth rate, the economy would double every 12 years, overtaking the current U.S. income per person in 2040.)

For this exercise we will assume an 8 percent annual economic growth rate. If the Chinese consume resources in 2031 as voraciously as Americans do now, grain consumption per person there would climb from 291 kilograms today to the 935 kilograms needed to sustain a U.S.-style diet rich in meat, milk, and eggs. In 2031 China would consume 1,352 million tons of grain, far above the 382 million tons used in 2004. This is equal to two thirds of the entire 2004 world grain harvest of just over 2 billion tons. Given the limited potential for further raising the productivity of the world's existing cropland, producing an additional 1 billion tons of grain for consumption in China would require converting a large part of Brazil's remaining rainforests to grain production. This assumes, of course, that once they are cleared these soils could sustain crop production.

To reach the U.S. 2004 meat intake of 125 kilograms per person, China's meat consumption would rise from the current 64 million tons to 181 million tons in 2031, or roughly four fifths of current world meat production of 239 million tons.

With energy, the numbers are even more startling. If the Chinese use oil at the same rate as Americans now do, by 2031 China would need 99 million barrels of oil a day. The world currently produces 79 million barrels per day and may never produce much more than that.

Similarly with coal. If China's coal burning were to reach the current U.S. level of nearly 2 tons per person, the country would use 2.8 billion tons annually--more than the current world production of 2.5 billion tons.

Apart from the unbreathable air that such coal burning would create, carbon emissions from fossil fuel burning in China alone would rival those of the entire world today. Climate change could spiral out of control, undermining food security and inundating coastal cities.

If steel consumption per person in China were to climb to the U.S. level, it would mean that China's aggregate steel use would jump from 258 million tons today to 511 million tons, more than the current consumption of the entire Western industrialized world.

Or consider the use of paper, another hallmark of modernization. If China's meager annual consumption of 27 kilograms of paper per person were to rise in 2031 to the current U.S. level of 210 kilograms, China would need 303 million tons of paper, roughly double the current world production of 157 million tons. There go the world's forests.

And what about cars? If automobile ownership in China were to reach the U.S. level of 0.77 cars per person (three cars for every four people), China would have a fleet of 1.1 billion cars in 2031--well beyond the current world fleet of 795 million. The paving of land for roads, highways, and parking lots for such a fleet would approach the area now planted to rice in China. The competition between automobile owners and farmers for productive cropland would be intense.

The point of this exercise of projections is not to blame China for consuming so much, but rather to learn what happens when a large segment of humanity moves quickly up the global economic ladder. What we learn is that the economic model that evolved in the West--the fossil-fuel-based, auto-centered, throwaway economy--will not work for China simply because there are not enough resources.

If it does not work for China, it will not work for India, which has an economy growing at 7 percent per year and a population projected to surpass China's in 2030. Nor will it work for the other 3 billion people in the developing world who also want to consume like Americans. Perhaps most important, in an increasingly integrated global economy where all countries are competing for the same dwindling resources it will not continue to work for the 1.2 billion who currently live in the affluent industrial societies either.

The sooner we recognize that our existing economic model cannot sustain economic progress, the better it will be for the entire world. The claims on the earth by the existing model at current consumption levels are such that we are fast depleting the energy and mineral resources on which our modern industrial economy depends. We are also consuming beyond the sustainable yield of the earth's natural systems. As we overcut, overplow, overpump, overgraze, and overfish, we are consuming not only the interest from our natural endowment, we are devouring the endowment itself. In ecology, as in economics, this leads to bankruptcy.

China is teaching us that we need a new economic model, one that is based not on fossil fuels but that instead harnesses renewable sources of energy, including wind power, hydropower, geothermal energy, solar cells, solar thermal power plants, and biofuels. In the search for new energy, wind meteorologists will replace petroleum geologists. Energy architects will be centrally involved in the design of buildings.

In the new economy, the transport system will be designed to maximize mobility rather than automobile use. This new economy comprehensively reuses and recycles materials of all kinds. The goal in designing industrial processes and products is zero emissions and zero waste.

Plan A, business as usual, is no longer a viable option. We need to turn quickly to Plan B before the geopolitics of oil, grain, and raw material scarcity lead to political conflict and disruption of the social order on which economic progress depends.

Prudent Investor comments,

I don't think that the estimated pace of growth will be maintained at 8% and that China will reach the American level of consumption in such a short period. Although the vital lesson here is that with a large segment of global population climbing up the economic ladder, this could represent an economic and political source of instability given the strains to the world's finite natural resources. Hence the emerging political trend is now tilted towards the securitization of natural resources as seen in China's and India's recent venture across to globe.

Bloomberg: Commodity Prices Climb to 24-Year High on Global Demand Growth

Commodity Prices Climb to 24-Year High on Global Demand Growth

March 8 (Bloomberg) -- Commodity prices surged to a 24-year high, led by gains in copper and crude oil, on concern that global economic growth is eroding inventories of raw materials faster than supplies can be replenished.

Copper reached a 16-year high, and oil rose near a record in New York, extending the rally in the Reuters-CRB Index of 17 commodities to the highest since January 1981. The index gained 7.1 percent in February, the most in any month since August 1983.

``Everybody wants to be long of commodities,'' said Stephen Briggs, an analyst at Societe Generale in London. Hedge fund managers ``think that the potential returns in commodities are still very high,'' Briggs said.

The Reuters-CRB Index rose 3.28 to 312.65, the eighth straight gain. Commodity prices are up 15 percent in the past year, in part because of rising demand and a decline in the dollar, which makes commodities priced in the U.S. currency cheaper for buyers using the euro or yen.

Copper futures for May delivery rose 0.3 cent, or 0.2 percent, to $1.4995 a pound on the Comex division of the New York Mercantile Exchange, the highest close since March 1989. Prices are up 16 percent in the past year and reached a record today in London.

Crude oil for April delivery rose 70 cents, or 1.3 percent, to $54.59 a barrel on the Nymex. Prices reached a four-month high of $55.20 a barrel on March 3 and a record $55.67 on Oct. 25. Futures are up 49 percent from a year ago.

Commodity Producers

The commodity rally spurred gains in the currencies of countries that produce raw materials such as oil, metals and grain. The Australian and South African currencies surged against the U.S. dollar, and New Zealand's dollar climbed to a record.

Canada's dollar rose the most in eight weeks and its Australian counterpart approached 80 cents for the first time in more than a year. Commodities comprise 35 percent of Canada's exports and about 60 percent of Australia's overseas sales.

``It's one of those days when commodity prices are flying and currencies like the Canadian dollar and the Australian dollar are benefiting,'' said Adam Cole, a currency strategist in London at RBC Capital Markets Ltd., a unit of Canada's largest lender.

Hedge funds and other large speculators have increased their net holdings of 20 physical commodities in the U.S. to their highest in nine months, government figures show.

So-called net-long positions rose to 430,153 futures contracts as of March 1, the highest since June 4, the U.S. Commodity Futures Trading Commission said. A futures contract is an obligation to buy or sell a commodity at a set price by a specific date.

Rising Consumption

Energy and metals prices ``are moving higher today on the continued concerns regarding the pace of global consumption and the ability of supply to keep up,'' said Michael Guido, director of hedge-fund marketing and commodity strategy in New York at Paris-based Societe Generale SA.

Oil rose on speculation that the Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world's oil, will do little to rein in prices when members meet in Iran on March 16. The International Energy Agency, OPEC and the U.S. Energy Department cited economic growth in the U.S. and China when they boosted their oil-demand forecasts last month.

``The only thing that will get us to move decisively lower is a global recession that would reduce demand,'' said Kyle Cooper, an analyst with Citigroup Inc. in Houston. ``OPEC is pretty powerless to lower prices. If OPEC boosts output the bulls will say that there will be less spare capacity.''

Boosting Forecast

Oil prices will rise through 2008 and stay high thereafter as demand increases and concern mounts that global production is nearing its peak, according to analysts at Lehman Brothers Holdings Inc.

Lehman said New York crude oil will average $43.25 a barrel this year before climbing to $46 in 2008. Lehman is the fourth investment bank this week to boost its forecast. Banc of America Securities and UBS Securities increased their projections for 2005 to more than $40 a barrel, while JPMorgan Chase & Co. raised its average oil price in 2005 to $45.25.

Copper prices rose on concern supplies aren't rising fast enough to keep pace with demand, after global inventories monitored by the London Metal Exchange plunged 80 percent in the past year.

Copper smelters aren't boosting output of refined copper because some are shut for maintenance, Merrill Lynch & Co. said today in a report. World supply is equal to three weeks of demand, down from more than six weeks in early 2003, said Jon Bergtheil, an analyst at J.P. Morgan Securities Ltd. in London.

`Danger Zone'

``Anything below four weeks is still a danger zone,'' Bergtheil said. ``There is no doubt that copper is extremely tight in the first half of the year.''

Melbourne-based BHP Billiton, which owns the world's biggest copper mine, Escondida in Chile, today offered to buy WMC Resources Ltd. for A$9.2 billion ($7.3 billion) in part to help supply more copper and nickel to China. China surpassed the U.S. in 2002 as the world's largest copper consumer.

``We feel quite optimistic about China,'' BHP Chief Executive Officer Charles W. ``Chip'' Goodyear said in a conference call. BHP would displace Phelps Dodge as the world's second-biggest copper producer. Santiago-based Codelco, owned by Chile's government, is the world's largest producer.

Copper prices have almost doubled in the past two years as demand surged in China, the U.S. and Japan, the top three users of the metal.

Price gains now are ``consistent with seasonal tendencies for copper, which often posts significant highs in late March or early April,'' said Tim Evans, an analyst at IFR Markets in New York. ``With low inventory levels this time around, that seasonal peak should run somewhat later than normal rather than earlier.''

U.S. refined metal stockpiles at refineries, wire-rod and brass mills and exchanges fell in November to 137,000 tons, down from 656,000 tons at the end of 2003, the Interior Department's Geological Survey said in a report today.

Taipei Times: China's growth threatens coal reserves

China's growth threatens coal reserves

DANGEROUS SHORTAGE: Beijing officials are voicing their concern that a severe coal shortage, caused by China's economic explosion, could cause social unrest
AFP , BEIJING
Monday, Feb 28, 2005,Page 12

China's breakneck economic growth is causing a dangerous shortage of its most important energy source, coal, with potential consequences for the entire world, state media warned yesterday.

Scarcity is so severe officials even worry aloud that it could cause social instability among the 1.3 billion Chinese, the China Business Weekly reported.

"The imbalance between coal demand and supply will become more acute this year," the National Development and Reform Commission said, according to the paper.

"Easing the tightened coal supply will be the first priority for us," said the commission, the nation's top planning agency.

China is the world's largest consumer and producer of coal, which accounts for about two thirds of its energy needs.

The impact of the coal shortage could be global since soaring domestic demand could force the government to cut off export quotas and push up global prices, the paper said.

Last year, when China's economy expanded by 9.5 percent, its voracious demand was a key factor in causing international prices of coal to double.

One of the first sectors to be affected when coal supplies are under pressure is the power industry, which consumes about half of China's coal output.

The paper said the government was concerned a disruption in the power supply during the Lunar New Year earlier this month could have sparked social instability.

To prevent this from happening, it ordered state-owned coal mines to operate throughout the week-long festival, while railroads were told to use the extra holiday runs to transport more coal.

The nation's coal consumption this year is expected to rise by 120 million tonnes, or six percent, to 2.1 billion tonnes, according to estimates by the China Coal Industry Association.

The problem is that the opening of new mines is likely to result in no more than an additional 100 million tonnes of coal in the course of this year, the paper said.

"New coal mines cannot meet the faster demand. There is little room for additional production," the National Development and Reform Commission said.

"All kinds of coal mines are almost operating at full capacity, or beyond capacity, and the pressure on safety is huge," it said.

The safety issue was highlighted most recently in the Sunjiawan coal mine in northeastern Liaoning province, which was among the operations that carried on extraction throughout the Lunar New Year festival.

The mine's workers only had one day off and towards the end of the festival it was struck by tragedy when a gas explosion erupted, killing up to 215 in China's worst recorded coal-industry disaster for over 60 years.

Even if overtaxed mines can produce the amount of coal needed to keep fueling the economy, there is no guarantee that it will reach power plants and factories.

Rail is the preferred method of transporting it from the mines in the north to the industrial centers in the east and south.

But the railway system is also overburdened by the hyperactive economy and last year more than 65 percent of all transportation requests had to be turned down.

Prudent investor says...

Profit from folly...buy the Philippines' largest coal producer.

Washington Post's Paul Blustein: Many View Argentina's Comeback With Skepticism

Many View Argentina's Comeback With Skepticism

Some Financiers and Bondholders Say Offer to Settle Huge Debt Is Far Too Little
By Paul Blustein
Washington Post Staff Writer

Friday, March 4, 2005

BUENOS AIRES -- Tainted for the past three years as a deadbeat debtor and international financial pariah, Argentina is proclaiming itself cleansed.

In late 2001, during bloody riots, the Argentine government defaulted on about $100 billion in debt. The default was the biggest by any nation in history, and it plunged the economy into chaos, with millions falling into poverty and unemployment reaching nearly one-quarter of the workforce. Many Argentines are still struggling to recover from the fallout.

Now, however, Argentine is recovering, and it is seeking to reenter the global financial system after having cast itself out. The implications go well beyond Argentina's borders to the international system's basic workings.

The government is completing a restructuring of its debt in which it offered new securities to hundreds of thousands of bondholders, ranging from Italian widows to New York hedge funds. Officials announced yesterday that bondholders owning 76 percent of the defaulted debt had accepted the deal, worth about 32 cents on each dollar of claims that they held.

"The country is leaving the default behind," a triumphant President Nestor Kirchner told the nation's Congress.

That assertion is subject to challenge by international financiers and investors. Many of them are angry with the take-it-or-leave-it terms of this week's deal, which leaves bondholders with losses about twice as deep as the average settlement reached in previous sovereign defaults such as Russia's and Ecuador's.

Thrown into question in the process are some hoary financial principles. Countries that treat foreign creditors so shabbily are supposed to be doomed to stagnation for years, because investors and lenders presumably will shun nations that show little respect for property rights. But the boom that Argentina is enjoying stands in mocking counterpoint to that tenet.

It is not just that Argentina recorded annual growth of 8.8 percent for the past two years. More significant, companies are investing. According to government figures, business spending on structures, plant and equipment is close to all-time highs as a percentage of national output.

The investors include foreign-based multinational companies such as Volkswagen. Eight months ago, the German automaker decided to spend $200 million on producing a new vehicle model and expanding capacity at its transmission plant in the industrial city of Cordoba.

"You can see just by opening the paper" that foreign firms are expanding in Argentina, said Viktor Klima, the head of Volkswagen's operations here, referring to a news article reporting that General Motors was investing in its plant in the city of Rosario, and another reporting that a company was moving its manufacture of ignitions to Argentina from South Africa.

Other investors are Argentine. Aluar Aluminio Argentino SAIC, a major aluminum producer, is sinking $650 million in a two-year project to increase its capacity by about 44 percent to 400,000 tons a year. Eduardo Elsztain, the country's biggest real estate developer, has just opened a shopping center in Rosario. He has more malls in the works elsewhere in the country and his firm is planning to start construction soon on a $42 million retail-residential-hotel complex bordering a nature preserve near the capital's downtown area. In Elsztain's view, "there has never been a better time to invest in Argentina." As for foreign banks, after shunning Argentina for a while, "now the banks are coming to us," he said.

"It's been tough. We will have restrictions," he said. "But in terms of access to capital, what defines access? Greed. When opportunities look profitable, access to capital will be easy."

During the 1990s, Argentina had no worries about obtaining international capital -- and that was how it went astray. With its free-market policies, a fixed exchange rate of $1 per peso and a near-zero inflation rate, the country was the darling of the International Monetary Fund and a magnet for foreign funds. It depended on international bond markets to cover its budget deficits, and Wall Street was happy to oblige. Once foreign financiers realized the country had piled up unsustainable debts, however, they began to pull their money out. The ensuing default also led to a crash of the peso.

Today the government has no need to borrow from abroad because it has been running budget surpluses. That is attributable in part to soaring prices for soybeans, wheat and other commodities, which have fattened the country's export receipts and tax revenue. It is also partly attributable to the government's discipline in keeping a lid on the wages of public-sector employees. With the government treasury full, economic policymakers here can shrug off the threats by foreign money managers to boycott Argentine bonds.

The rules of global finance have by no means been repealed entirely. Argentina is still paying a steep price for its default. More than 40 percent of the population remains below the poverty line, and obtaining long-term credit remains very difficult, if not impossible, for many companies.

Still, many in the financial community are upset over the ease with which Argentina is breaking loose from the constraints that usually hobble bankrupt countries. The research firm CreditSights Ltd. wrote in a recent report to its investor clients: "Debt repudiation with no consequences . . . appears to be the perfect crime that Argentina is about to perpetrate with its debt exchange."

Objections Abroad

During a tour of foreign cities a few weeks ago to explain the offer, Finance Secretary Guillermo Nielsen was greeted by protests by investors. "Thievery," "coercion" and "extortion" are among the epithets that investors have used to describe the 32 cents-on-the-dollar value of the exchange.

In response, Argentine officials said that the deal was the most the country could reasonably afford, and those who rejected it faced the prospect of collecting nothing.

The Argentine stance has triggered a number of lawsuits from bondholders, some of whom have won judgments -- in U.S. courts, among others -- requiring Argentina to pay its obligations in full. But collecting such judgments has so far been impossible. The assets that the Argentine government holds abroad -- embassies, mostly -- are protected from legal attachment under international conventions.

That helps explain why such a high percentage of creditors, worn down after receiving no payment on their bonds for three years, participated in the exchange despite their disgust with the terms. By reducing the outstanding number of bonds in default, the government has cleared the way for a new loan agreement with the IMF, an important consideration because a serious confrontation with the IMF would cost the country billions of dollars in international aid and throw it back into the pariah camp.

All this could have significant ramifications for the international system, by making future crises more likely, some policymakers and economists fear. Because the Argentine restructuring is likely to set a new benchmark for investor losses on loans to governments in Latin America, Asia and other "emerging markets," the deal may make markets more prone to bolt from those areas when the global financial environment turns sour.

Some on Wall Street see an even more dangerous precedent: Won't countries with large debt loads such as Brazil, Turkey or the Philippines look at the Argentine case and wonder whether they should default too? Walter Molano, head of research at BCP Securities LLC in Connecticut, wrote in a Feb. 22 note to clients that, thanks to Argentina's example, "finance ministers across the emerging markets are having second thoughts about making fiscal sacrifices in order to continue servicing their external obligations."

Maybe so, but the idea that Argentina provides a model to follow is hard to square with some of the country's gritty realities.

Street Scavengers

The competition is fierce among the unemployed Argentines who descend on this city's streets at night, sifting through trash bags for recyclable items and castoff appliances.

"Are you working this block?" a woman with a young girl in tow asked a short middle-age man who was squashing a plastic bottle for sale to recyclers. Told that he and his children scavenge in the area every evening, the woman and the girl moved on forlornly in search of unclaimed garbage.

The ranks of these cartoneros (cardboard men) swelled into the tens of thousands after the default. To be sure, most Argentines have not been forced to join them. But the cartoneros' plight is emblematic of the fate that befell the country.

The rebound of the past couple of years has failed to improve the lot of ordinary Argentines to the point that they have recovered all of what they lost. Even for salaried workers who kept their jobs, real earnings -- that is, adjusted for inflation -- are still well below the 2001 level. Compared with the peak level of 1998, real wages are down 20 percent, according to data compiled by IDESA, a private think tank.

The problem stems in large part from the depreciation of the peso. With the Argentine currency now trading at about three to the dollar, instead of the one-for-one exchange rate that prevailed before, many goods tied to the dollar -- real estate, cars, electrical appliances -- are out of reach for many Argentines.

On the plus side, the cheap peso is one of the major factors attracting foreign manufacturers such as Volkswagen, which pays its workers an average of less than $6 an hour, including all fringe benefits -- just about the lowest wage in Volkswagen's operations worldwide, according to Klima.

But the diminution in living standards is all too perceptible to Antonio Delgado, who has worked as a nurse in public hospitals for 20 years and supplements his modest salary by working weekends at a private clinic, earning about 2,600 pesos ($870) a month.

The father of five, Delgado remembers the roaring 1990s fondly. He and his family could afford to feast regularly on the tenderest cuts of steak. He bought a 1992 Peugeot and a 1995, two-door Fiat, and the family flew on vacations to places like Central America. Now meat in the family diet tends to be restricted to stews, the Peugeot is rented to a neighbor for use as a taxi, and for vacations the family bundles into the little Fiat for drives to places in the north and west of Argentina. "I really felt the shock of 2001," Delgado said ruefully.

Generation Disillusioned

The trauma is psychological as well, particularly for Argentines who were entering adulthood when the economy collapsed and have become profoundly unsettled about their futures. Dario Jinchuk, a government scientist, cited the example of his son, who stopped pursuing a degree in electrical engineering to study for a job as a chef because he couldn't see any engineering prospects. "A whole generation has become that way -- frustrated," said Jinchuk, who himself is seeking work abroad.

In view of such evidence, many economists scoff at claims that Argentina's default sets a worrisome precedent.

The country suffered "massive social and economic pain with poverty and unemployment rates through the roof," said Nouriel Roubini, a professor at New York University. "And all this would mean that default is costless and that other countries will rush to default like Argentina did? Utter nonsense."

To generate the growth required to reduce poverty significantly, Argentina needs a lot of investment. For that reason, some of the most militant bondholders maintain that the government must eventually offer them a better deal to clear up the uncertainty that lawsuits inevitably create.

But in a move aimed at dashing such hopes, the Argentine Congress enacted a law last month prohibiting the government from paying a penny more. "We were very happy for this law to be passed," said Roberto Lavagna, the economy minister, who clearly sees little downside to such pugnacity.

"When I hear people say, 'Argentina will be isolated,' " Lavagna said, "I have to say the evidence is different."

Special correspondents Brian Byrnes and Mariano Melamed contributed to this report.
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Prudent Investor Comments

With Argentina succesfully dodging a comeuppance from the international financial community for its humungous debt default, the possibilty is that the Argentine model could be a precedent for any debt-laden emerging countries to go on a default. A case of Moral hazard?

Financial Times:WTO appeal judges declare US cotton subsidies illegal

WTO appeal judges declare US cotton subsidies illegal
By Frances Williams in Geneva
Financial Times

World Trade Organisation appeal judges yesterday upheld a ruling declaring illegal billions of dollars in subsidies to US cotton farmers.

Trade experts and development campaigners said the decision was likely to intensify pressure on the US and the European Union to cut farm subsidies in the current round of global trade talks, a central demand of developing nations.

A WTO panel in September backed a complaint by Brazil that US cotton subsidies violated fair trade rules by depressing world prices and breaching WTO subsidy limits.

The verdict marks a moral victory for poor African cotton producing countries, which blame US subsidies for destroying the livelihoods of millions of farmers in west and central Africa.

It could also pave the way for legal challenges to subsidies on other US products, such as soyabeans, rice, oilseeds and grains. Brazilian soyabean producers are already studying a possible complaint. A panel verdict condemning EU sugar subsidies, in a case brought by Brazil, Thailand and Australia, is currently under appeal.

Washington, expressing disappointment with the judgment, made clear it had no intention of quickly withdrawing the offending subsidies. "We continue to believe that negotiation, not litigation, is the most effective way to address distortions in agriculture," Richard Mills, spokesman for the US trade representative's office, said.

"We will study the report carefully and work closely with Congress and our farm community on our next steps."

However, Oxfam, the UK-based charity, said African farmers could not wait for the conclusion and implementation of a final WTO farm trade agreement. Noting that cotton prices had again fallen after a brief recovery last year, it estimated that African producers were losing more than $400m (€305m, £210m) a year because of distorted cotton markets.

The group called for speedy action by the US to dismantle cotton subsidies, including "substantial reform" before the WTO's ministerial meeting in Hong Kong in December.

To comply with yesterday's ruling, Washington will have to slash the more than $3bn a year it pays its 25,000 cotton farmers, and act swiftly to axe its costly export credit programme for cotton and certain other commodities that the WTO has judged an illegal export subsidy. Otherwise Brazil may be authorised to retaliate with sanctions against US goods.

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Prudent Investor comments...

Government intervention has massively distorted the demand-supply equilibrium in favor of developed countries. With this WTO decision and its successful implementation to abolish subsidies, we can expect global prices of commodities to smoothen out and reflect its underlying economics. The Philippines too may be expected to benefit from these global market reforms.