Myrtle Beach online: China's steel peril may be oversupply

China's steel peril may be oversupply
Rising exports, lower prices could have global effect
By Patrick Barta and Paul Glader
The Wall Street Journal
January 3, 2005

For much of the past two years, China has threatened to foster a world steel shortage with its prodigious appetite for imports of the metal. Now the country has become a net exporter, its domestic demand is slowing and steelmaking capacity is up around the world, sparking concern over global oversupply and tougher times for the industry in the years ahead.

Behind China's shift is a sharp slowdown in the growth of steel consumption at home combined with continued increases in production. As Beijing has worked to cool an overheated economy, the growth in domestic demand for steel recently has been rising only about 5 percent a month compared with year-earlier periods, after average monthly increases of 26 percent in 2002, 2003 and early 2004, according to UBS AG.

Meanwhile, UBS estimates that Chinese steel production will climb 22 percent this year to 268 million tons and grow a further 14 percent next year to 305 million tons. In November, China reported net exports of more than one million metric tons of steel, more than double October's level and a reversal from November 2003, when it was a net importer of nearly three million tons.

China's emergence as a net steel exporter and rising capacity elsewhere highlights how quickly global commodity flows can shift directions. It also raises the question of whether China could as quickly reverse the trend and again squeeze global steel supplies. China in recent years has added so much new production of some raw materials, such as coal and aluminum, that even minor shifts in its economy could force it to dump unneeded supply on to the global marketplace, potentially sending prices down as quickly as they have gone up.

Lower steel prices could be a boon to manufacturers, builders and consumers worldwide, helping to reduce costs in the plant and prices at the cash register. The effect on steelmakers is less rosy, especially in the United States. Although the American steel industry is in better shape, after a wave of bankruptcies and consolidation, to cope with oversupply, the United States would be at a big disadvantage against steelmakers in lower-cost countries. In addition to China, production in lower-cost regions such as India and Eastern Europe has been surging in recent years. And when the dollar's weakness reverses, imports will look more attractive to U.S. customers.

For now, analysts and executives see a clear movement toward rising capacity in China and worldwide, though they disagree on how soon large amounts of new steel will reach the market and how much of a price squeeze global producers face.

Just a few years ago, the steel industry was slogging through a decades-long downturn, caused in part by overcapacity. That changed in 2003 and 2004, as manufacturing picked up worldwide, but especially in China, where construction projects far exceeded expectations. A global squeeze on steel supplies this year led to panic buying that caused steel prices to double and triggered shortages of steel-making raw materials such as iron ore, coking coal and scrap steel.

Now, many governments are using subsidies, loan guarantees and other tools to promote more steel production to capitalize on the increased demand in China and elsewhere. The North American Steel Trade Committee is worried that some 250 million metric tons of new steel capacity are on track to be added in the next five years in a global market that produces about one billion tons annually.

China now exports large amounts of lower-quality steel, of the type used in construction. Supplies of higher-quality steel, of the kind used to make cars and trucks, remain tight - Nissan Motor Co. and Suzuki Motor Corp. both had to temporarily halt production when they couldn't find enough steel in recent weeks. But China has been ramping up its capacity to make more high-quality steel as well.

Excess Chinese steel might not dent world prices right away. But rising Chinese exports would almost certainly affect other markets eventually, stoking competition as steel producers that had sold to China vie for sales elsewhere.

Some steel users say they are already seeing the impact of greater production and slowing demand in Asia. Among them is Pan Australian Resources Ltd., a mining concern based in Brisbane, Australia, that is building a $15 million gold-processing facility in northern Laos. Steel products account for as much as 10 percent of the facility's cost.

When Pan Australian priced the project this summer, suppliers appeared to be padding their estimates in the expectation that steel costs would continue to rise. But now that it is taking delivery of the steel, the company is finding prices are more than 10 percent below estimates.

"It looks like their order books have thinned out, so they need to be more competitive," says Joe Walsh, a Pan Australian spokesman.

And more capacity is on the way. Despite its announced intention to rein in excess steel investment earlier this year, the Chinese government recently approved a $2.5 billion plant expansion for Maanshan Iron & Steel Co., the country's fifth-largest steel producer, to make more steel for cars and home appliances. It also approved a $2 billion expansion for stainless-steel maker Taiyuan Iron & Steel.

State-run media have reported that China's largest steelmaker, Baosteel Group, is considering a $10 billion expansion to build a 10-million-ton-a-year plant in Guangdong province, pending government approval. Baosteel officials declined to comment on the plan. Baosteel has started construction on a stainless-steel plant in Guangdong that would be the biggest stainless-steel processing and distribution center in China when finished.

"It doesn't take too much imagination to look at what's happening in China and say that this is a really serious issue," says Peter Hickson, a steel analyst at UBS in London, who thinks steel prices could fall nearly $200 a ton in 2005. The U.S. industry expects prices for cold-rolled steel, a type commonly used in everything from dishwashers to automobiles, to be about $800 a ton in early 2005. Hickson's bank recently downgraded the global steel sector to "neutral" from "buy," in large part because of worries over China.

Still, some analysts contend that concerns about a steel overhang are premature. Many of the new expansions won't be completed for a long time, and some might not happen at all if steel prices drop and supplies of raw materials remain tight.

"I think there is a little too much concern about announced new capacity," says Dan DiMicco, chief executive officer of Charlotte, N.C.-based Nucor Corp. "You can build steel mills, but you can only run them if you have raw materials."

Kim Soo Jung, a spokeswoman for Posco, the large South Korean steelmaker, says: "We can't say we're not concerned about the increased production volume in China. If they don't stop producing [so much], that will cause overcapacity."

Even so, Posco is considering its own expansions, including a possible $8.4 billion joint venture with Australia's BHP Billiton to build a steel-slab plant in India with capacity for 10 million tons a year. As recently as 2001, Kim says, Posco was the world's biggest producer of steel in terms of volume, but it has lost that status after other steelmakers expanded through a series of mergers. "If we want to continue to be a leader in the industry, we need to expand our capacity," she says.

Chinese officials emphasize that their latest expansions will be aimed at serving the high-grade steel market rather than users of lower-grade construction steel. Wang Xiaoguang, head of the economic operation and development research department at China's State Development and Reform Commission, predicts China's steel output will only increase 10 percent to 15 percent next year, compared with more than 20 percent in recent years.

The United States, for its part, remains a net importer of steel, taking in about 30 million of the 130 million tons of steel it consumes each year. A few companies, such as Nucor and Fort Wayne, Ind.-based Steel Dynamics Inc., have expanded existing capacity this year for certain types of steel. But that additional production roughly offsets steel-making capacity that disappeared from the United States between 2000 and 2003, when almost 40 companies declared bankruptcy.

Bloomberg: Eastern European Currency Gains Spur Shopping Trips

Eastern European Currency Gains Spur Shopping Trips (Update1)

Dec. 31 (Bloomberg) -- Record gains by currencies in the four biggest nations that joined the European Union in May have boosted consumers' spending power and spurred trips to Austria, Germany and beyond for clothes, ski trips and even groceries.

The Polish zloty is the world's best-performing currency this year, gaining 15 percent against the euro and 25 percent against the dollar. The Hungarian forint has risen 7 percent versus the euro and 16 percent against the dollar, while the Czech and Slovak koruna are up 6 percent against the euro and 15 percent against the dollar.

``The purchasing power of the people from those new EU countries increased quite markedly and their presence will be felt more on the markets'' of Western Europe, said Radek Maly, who follows Eastern European currencies as head of research and treasury at Citibank in Prague. ``They will be able to afford to spend more, either through tourism or by individual spending.''

The former communist countries' EU membership has reduced the risk for foreign investors, boosting benchmark stock indexes and generating demand for the currencies. Budapest's BUX index is the world's third-best performer this year, adding 78 percent in dollar terms, while Prague's PX50 is up 72 percent, ranking fourth. Warsaw's WIG20 index gained 49 percent and ranks eighth.

Shares of Budapest-based OTP Bank Rt., the biggest bank by market value in the 10 new EU members, rose 109 percent, and PKN Orlen SA, Poland's largest oil company, has advanced 56 percent.

EU Dynamics

Polish bonds with a maturity of at least 10 years are the world's best performers this year, returning 28 percent in euro terms. Hungarian five-year debt has returned 23 percent, according to Bloomberg data.

``It's a reflection of the dynamics flowing from EU entry, foreign direct investment and convergence towards the euro,'' said Elizabeth Gruie, an emerging markets economist at BNP Paribas in London. ``It's also because of investors' appetite for yield. Central banks have been aggressive in keeping monetary policy tight'' as currency strength fights inflation.

A strong forint encourages shoppers such as Otto Szabo, a 30- year-old swimming-pool builder from Gyor in northwest Hungary, to make a weekly, hour-long drive to neighboring Austria for clothes, food and drink.

Austria Cheaper

``Everything is cheaper here, even food,'' said Szabo, heading into Vienna's Shopping City Sued mall, one of Europe's largest malls. ``When I want to buy a good suit, I go to Vienna, not to Budapest.''

Companies including Ford Motor Co. are building or expanding plants in the new EU states, where economic growth is twice the pace of the older members. The European Commission on Oct. 26 said it expects Poland and the Czech Republic, the two largest economies among the new entrants, to grow 4.9 percent and 3.8 percent next year, compared with 2 percent in the 12 euro-sharing nations.

Dearborn, Michigan-based Ford, the second-largest U.S. carmaker, said on Dec. 2 it plans to invest 300 million euros ($409 million) to build a transmission plant in Slovakia.

Central banks in Eastern Europe are keeping interest rates high to support their currencies and hold down inflation to meet terms for adopting the euro later this decade. Poland's benchmark borrowing cost is 6.5 percent and Hungary's is 9.5 percent, compared with the European Central Bank's main refinancing rate of 2 percent.

Growing Appetite

Currency appreciation lowers inflation by cutting import costs and euro aspirants must bring their inflation rates to within 1.5 percentage points above the average of the three EU members with the lowest rates.

Poland's annual inflation rate was 4.5 percent in November while in Hungary it was 5.8 percent.

While gross average wages in the new EU states are around $800 a month, compared with more than $4,000 in Germany, a growing and better-paid middle class is getting an appetite for travel and higher-quality goods from abroad.

Marek Svoboda, a 54-year-old ski buff from the Czech Republic, sat on a ski lift in Bad Hofgastein, Austria, last week, enjoying the mountain view.

A year ago, a double room at the Norica Hotel in the Austrian resort, at 679 euros for the week, cost him 22,510 koruna. This year, the same room cost 2,000 koruna less. The ski pass, at 171 euros per person for the week, is now almost 1,000 koruna cheaper for a couple.

``It's really worth the five-hour drive,'' Svoboda said. ``I might have come anyway, but this makes it better.''

Paying Off

Milena Valdova, the owner of Matylda s.r.o., a Prague-based travel agency, said interest in one-day Christmas shopping trips to Vienna, Nuremberg, Passau and Dresden has increased.

``These trips are selling much better this year than last,'' Valdova, 41, said in a phone interview. ``It pays off to buy a whole range of goods in Germany and Austria.''

Still, the strength of Eastern European currencies is hurting exporters, including Polish copper producer KGHM Polska Miedz SA, who get less revenue after exchanging dollars and euros earned abroad.

``We've got a strong zloty and its effects are not good for us,'' said Tomasz Szelag, director of currency risk at Lubin- based KGHM, Poland's biggest exporter. ``We do hedging and high copper prices also provide a natural hedge so we're OK, but we're not happy with the current exchange rate.''

Raba Rt., a Gyor, Hungary-based axle and truckmaker, reported on Nov. 9 that its nine-month operating loss widened to 8.2 billion forint because of the currency's appreciation.

Hungarian Law

Hungary's government has repeatedly called on the central bank to cut interest rates faster to stem the forint's gains, on concern it will lead to job cuts.

A new law to increase Prime Minister Ferenc Gyurcsany's influence over who will sit on an expanded rate-setting council was signed by the president on Dec. 20 and will take effect as of the central bank's January meeting.

``Exporters are being killed by the strong forint,'' said Bela Balog, Raba's chief financial officer. ``Our company is very badly affected by the persistently strong exchange rate. If this is sustained in the long term, it will damage the whole economy. We're pleased to see any initiative aimed at weakening the forint.''

San Jose Mercury News: With `Socks City,' China puts toe in textile market

With `Socks City,' China puts toe in textile market

SPECIALIZED MANUFACTURING AIMS FOR GLOBAL DOMINANCE

By David Barboza
New York Times
San Jose Mercury News

DATANG, China - You probably have never heard of this factory town in coastal China, and there's no reason you should have. But it fills your sock drawer.

Datang produces an astounding 9 billion pairs of socks each year -- more than one set for every person on the planet. People here fondly call it ``Socks City,'' and its annual Sock Festival attracts 100,000 buyers from around the world.

Southeast of Datang is Shenzhou, which is the world's ``Necktie Capital.'' To the west is ``Sweater City'' and ``Kid's Clothing City.'' To the south, in the low-rent district, is ``Underwear City.''

This remarkable specialization, one city for each drawer in your bureau, reflects the economies of scale and intense concentration that have helped turn China into a garment behemoth. On Jan. 1, a new trade regime will end the decades-old system of country-by-country quotas that split up the world's exports among roughly 150 countries. Now, China is banking on its immense size and efficient operators to grab an even larger share of the world's clothing orders.

Neither Adam Smith nor Karl Marx could possibly have imagined that this kind of capitalism would evolve from a communist system in quite this way, with an obscure town in the middle of nowhere becoming the world's sock capital. But these days, buyers from New York to Tokyo want to be able to buy 500,000 pairs of socks all at once, or 300,000 neckties, 100,000 children's jackets, or 50,000 size 36B bras. And increasingly, the places that best accommodate those kinds of orders are China's giant new specialty cities.

The abolition of quotas is expected to accelerate this trend over the next decade or so, particularly under the guidance of China's visible hand. The niche cities reflect China's ability to form ``lump'' economies, where clusters or networks of businesses feed off each other, building technologies and enjoying the benefits of concentrated support centers -- like the ``Button Capital'' nearby, which furnishes most of the buttons on the world's shirts, pants and jackets.

Glimpse at the future

The new era, thus, offers a glimpse into how China's incredibly fast-paced economy is developing into more than just a beehive of individual private enterprises scattered hither and yon. Beyond the entrepreneurial vigor so palpable, the textile business is a prime example of how the Chinese government's attempt to guide development more indirectly through local planning instead of outright state-ownership is starting to pay off in a big way.

China is not just becoming the leader of the pack. In many ways, it hopes to run away with as much of the market as possible.

New import limits by the United States, along with other external and internal forces, are expected to hamper China's progress in apparel and textiles for several years, if not longer. That should allow several other countries to maintain vigorous garment industries as well. But there is little question that China will be the dominant force in the business, and the growth of its industrial conclaves highlights just how powerful a force China's industries are becoming in almost every sector they have entered.

In the late 1970s, Datang was little more than a rice farming village with 1,000 people, who gathered in small groups and stitched socks together at home and then sold them in baskets along the highway.

Back then, government officials branded Datang's sock makers as ``capitalists'' and ordered them to stop selling socks. Now, they produce more than a third of the world's output, and the government has nothing but praise for such entrepreneurs and their domination of the sock business.

Signs of Datang's rise as a sock capital are everywhere. The center of town is filled with a massive government-financed marketplace for socks. The rice paddies have given way to rows of neatly paved streets lined with cookie-cutter factories. Banners promoting socks appear along streets and draped across buildings. And each year, Datang is decorated with balloons and flags for the annual sock fair.

And rags-to-riches tales abound in Datang. Just ask Dong Ying Hong, who in the 1970s gave up a $9-a-month job as an elementary school teacher to make socks at home. Now, Hong is the owner of Zhejiang Socks -- and a sock millionaire.

U.S. left behind

These kinds of gains have sharply eroded America's old sock-making might. American textile companies filed a petition earlier this year asking Washington to place limits on Chinese sock imports.

Hoping to ease trade tensions, the Chinese government said earlier this month that it would voluntarily add tariffs on some of its own textile and apparel exports to lessen their competitive thrust. That is one reason, among others, why many experts believe China's wallop will not come all at once.

Still, China already accounts for about 16 percent of all apparel imports into the United States. And several studies project that in the next few years, once all the limits are lifted, that figure could soar to between 50 and 70 percent.

``There's no question, at the end of the day, China ends up a much bigger player in the global apparel business,'' said David Weil, an associate professor of economics at Boston University.

Businessweeek: Alternative Energy Gets Real

Alternative Energy Gets Real
Businessweek
December 27, 2004

Pricey oil and gas are heating up industrial interest in renewable sources

Renewable energy is booming. The use of solar power has been growing by more than 30% a year and, except for a hiccup in 2004 -- when Congress delayed renewing a tax credit -- so has wind power. Ethanol is heading for record production levels. And there's no end in sight, given high oil and gas prices, an increasing number of government mandates and incentives, and the first real steps toward tackling global warming. Clean Edge Inc., a research and strategy consultant, predicts that the total clean-energy market will grow to $92 billion by 2013, about seven times its current size of $13 billion. "The investment community is starting to see real opportunities," says Ron Pernick, co-founder of Clean Edge.

But buyer beware: Many of the leading companies supplying the technology to produce renewable energy still aren't profitable. Often the pros are divided on just which are the leading companies. In fact, today's renewable business is reminiscent of the computer industry in the early 1980s, "when no one knew who the winners would be," says Carsten Henningsen, chairman of Portfolio 21, a mutual fund that invests in environmentally conscious companies. That's why many analysts and fund managers recommend investing in a basket of companies. "People should try to pick companies positioned to be winners and get enough of them," says Henningsen.

Wind might produce the biggest winners. A U.S. tax credit of 1.8 cents per kilowatt-hour is in place until 2006, and 19 states now require electricity producers to generate part of their power from green sources. Energy information and services company Platts, like BusinessWeek part of The McGraw-Hill Companies (MHP ), expects that most of the new sources will be wind. One beneficiary could be Denmark's Vestas Wind Systems, the world's biggest turbine manufacturer, which is listed in Copenhagen and trades over the counter in the U.S. "It is profitable, and there is more certainty and a more favorable political climate surrounding wind than solar or hydrogen," says Henningsen.

Fuel-cell companies are also catching the eye of investors. Their stocks are way down from the speculative peaks of a few years ago, but their products are finally becoming a compelling alternative to diesel-powered backup generators, says Walter Nasdeo, managing director of New York-based Ardour Capital Investments LLC. And they hold the promise of clean, efficient, hydrogen-powered cars, provided costs come down. Nasdeo is bullish on FuelCell Energy Inc., which he expects to reach $17.50 in a year, from $8.45 now.

A buy-and-hold strategy combined with some selective trading may be the best strategy for cashing in on the alternative-energy boom. "If [FuelCell Energy] goes to $14 or $15, you should take a little profit, then wait until [it] pulls back and buy some more," says Nasdeo. Eventually, he expects one of the renewable energy stocks to hit it big. In addition to FuelCell Energy, Nasdeo sees potential in Evergreen Solar (ESLR ), which makes solar cells; American Superconductor (AMSC ), which makes highly efficient superconducting wire and power-regulation devices; and two other fuel-cell makers, Hydrogenics (HYGS ) and Plug Power (PLUG ).

Portfolio 21's Henningsen also sees opportunities now to buy companies with beaten-down stocks. His own holdings: Vestas; fuel-cell makers Ballard Power Systems and Plug Power; and IMPCO Technologies (IMCO ), which focuses on devices for car engines that use alternative fuels. After a fall for these stocks in 2004, "now may be the time to buy," he says.

If investors don't have the time or stomach to juggle a portfolio of individual stocks, they could buy into a fund that specializes in renewable-energy stocks. An interesting choice is the WilderHill Clean Energy Index, set to debut in early 2005. It's the brainchild of Robert J. Wilder, who put together an index of clean energy stocks five years ago as a hobby. It now includes everything from fuel-cell companies to suppliers of carbon fiber for turbine blades and makers of hydrogen. The index soared during the tech boom, plunged, and is now up 26% since August. "There are about 40 representative stocks -- and any one of them might do well," says Wilder. In other words, with a big enough basket, renewable energy could charge up any portfolio.

By John Carey

Busineweek: Four Countries You Must Own

Four Countries You Must Own
Busineweek
December 27, 2004

Every investor needs a stake in Brazil, Russia, India, and China

Once in a great while a trend takes hold that's so powerful, it transforms the entire global economy: the Industrial Revolution of the 18th century, the modern industrial nation in the 19th century, and the emergence of cheap computing and communications in the 20th century.

The newest megatrend? It's the rise of the BRICs. That's shorthand for four dynamic developing nations with large populations -- Brazil, Russia, India, and China. The four now account for less than 15% of the economies of the G6 nations. But collectively they could be larger than the G6 in just four decades, say economists at Goldman, Sachs & Co. (GS ). That depends, of course, on whether they get the fundamentals right: sound fiscal and monetary policies, free trade with the outside world, and massive investment in education. "It's a story for the future," says Robert Hall, portfolio manager for global emerging markets at Russell Investment Group.

That means you might want to start making investments now. You can choose individual equities or take a basket-of-stocks approach with exchange-traded indexed funds or actively managed mutual and closed-end funds. Don't invest a huge lump sum at once. Instead, put your money in over time. The markets are volatile, and there will be pullbacks offering cheaper entry points.

These economies have weaknesses, too. For instance, foreign capital is pouring into China so quickly that some economists fear the combination of a speculative frenzy and a backward banking system will eventually burst the bubble. Watchdog group Transparency International ranks India among the rampantly corrupt nations in its latest Corruption Perception Index. And investors are questioning Russian President Vladimir Putin's commitment to capitalism after the recent crackdown on oil giant Yukos. Any one of those could derail the markets or the economy for a bit.

Still, there is precedent for making a long-term bet on an emerging frontier. In the years after the Civil War, America's industrial output lagged far behind that of Germany, France, and Britain. Yet from 1870 to 1914, America's economy expanded fivefold, and the U.S. became the world's leading industrial power. Along the way there were about a dozen sharp downturns and a handful of financial panics, yet stocks returned an average of 6.5% a year after inflation. "If you can close your eyes for years, you'll probably do well," says Stuart Schweitzer, global markets strategist at JPMorgan Fleming Asset Management in New York.

In part driven by the economic performance of the BRICs, the entire emerging-market sector put on a stellar show this year. The Morgan Stanley Capital International Emerging Market Index is up some 14% through Dec. 10, vs. 6.8% for the Standard & Poor's 500-stock index.

And 2005 looks good, too. Emerging-market stocks are cheap, with valuations about 40% lower than in the U.S. The sinking dollar is prompting investors to send more money abroad, says Brad Durham, a managing director at Emerging Portfolio Fund Research in Boston. Currently, global mutual funds and pension funds are underweighted in the BRICs. As investors become more familiar with the BRICs, says Durham, more money will flow to them.

One strong global theme that benefits the BRICs in particular is demand for industrial commodities. Brazil's Bovespa stock index is up some 15% this year, powered by companies such as Companhia Vale do Rio Doce, a major exporter of iron ore, and CSN, a major steelmaker. Rio Doce, CSN, and other basic industry companies should continue to do well considering the world's voracious appetite for raw materials, especially in China. Russia's Gazprom, for instance, will account for a quarter of world gas production, and it will be one of the international oil giants after buying a chunk of rival Yukos. "It's Russia's Aramco," says James Fenkner, chief strategist for Troika Dialog, a Moscow investment bank, referring to the Saudi Arabian oil company. "You don't need to be born into the House of Saud to benefit from Gazprom."

While commodities are expected to remain strong, many global investors believe rising incomes and growing employment in the BRICs will make consumer companies golden. In a decade, say the Goldman economists, the BRICs' middle class will total more than 800 million, greater than the populations of the U.S., Western Europe, and Japan combined today. The BRICs' middle class now number more than 250 million, says Goldman, and those consumers are already spurring demand for cars, cell phones, and better food, furnishings, and clothes.

Investing in the consumer sectors of these countries has been hard because of a scarcity of good, publicly traded companies. But that's changing. New opportunities are opening in Brazil, for example, after a rash of initial public offerings there. Among the IPOs were Natura, a cosmetics company, and Grendene, a footwear maker. In Russia, mobile-phone companies such as Mobile Telesystems are benefiting from growing usage. When Putin came into office in 2000 there were some 1.5 million cell-phone subscribers in Russia. Now there are more than 50 million. India's Pantaloon Retail is building both food hypermarkets and clothing stores that appeal to young buyers. Same-store sales are expanding at a 12% to 15% annual pace.

FOOLHARDY -- OR FARSIGHTED?

In China, consumers are also inveterate savers, salting away some 40% of their incomes. That's good for financial-services firms such as China Life Insurance (LFC ), a favorite of Agnes Dang, an investment manager for Standard Life Investments in Hong Kong. China Life is the country's biggest insurer, and its premium income is growing at 15% a year. Phillip Ehrmann of Gartmore China Opportunities Fund, a U.S. mutual fund, expects a number of state-run Chinese banks to go public in 2005, and they may make attractive investments. You heard that right. China's banks have a reputation for bad loans and poor management, yet Ehrmann thinks some of them will clean up their acts because the government wants them to go public.

For sure, those who invest in those Chinese banks -- or in the BRICs -- will be called foolhardy by some doubters. But much the same was said in the 19th century about those who invested in a wild and raucous nation called America.

By Christopher Farrell with Frederik Balfour in Hong Kong, Jason Bush in Moscow, and Jonathan Wheatley in São Paulo

Chicago Tribune: World economic growth is seen slowing in 2005

World economic growth is seen slowing in 2005
Asia is predicted to be top region
By Viorel Urma
Associated Press
Published December 27, 2004

Buffeted by the soaring cost of oil, the world economy is expected to moderate in 2005, led by a slowing of the expansion in industrialized countries.

Spurred by China and India, developing countries should enjoy solid growth. Predictions are that Asia will lead the global economic race--though Japan is facing a slowdown--and that the United States will still outrun Europe.

The World Bank sees global economic expansion slowing in 2005 to 3.2 percent from an estimated 4 percent in 2004 because of high and volatile oil prices, a decline in investment growth due to higher interest rates, and concerns about the growing U.S. trade deficit.

"The global economy is slowing, but it will likely keep expanding on the basis of a recovery in the U.S. and Chinese economies," Bank of Japan Gov. Toshihiko Fukui said.

The Organization for Economic Cooperation and Development said in November that oil prices have already taken their toll on the major economies, prompting it to cut its growth forecasts for 2005.

Across the OECD's membership of 30 industrialized countries, it expects growth of 2.9 percent next year, down from the 3.4 percent it forecast in May.

For the 12-nation euro zone, the Paris-based global economic think tank expects the United States to lead the global recovery but cut its growth forecast for 2005 to 3.3 percent from 3.7 percent. For Japan, it now forecasts growth of 2.1 percent, down from the 2.8 percent previously forecast.

Here's a region-by-region look at predictions for the global economy in 2005:

Asia

China's economic boom is expected to continue to power fast expansion throughout the region, despite efforts by Beijing to slow 9 percent growth to a more sustainable level by cutting public spending and bank lending, and raising key interest rates.

Strong exports and domestic demand in the country of 1.3 billion are boosting trade throughout the region, a trend likely to continue as long as U.S. and European consumers continue to snap up made-in-China products.

Helped by India, East Asia is expected to remain the world's fastest growing region, with 7.1 percent growth in 2005, the World Bank projects.

By contrast, Japan's economy appears headed for another slowdown, government data indicate. After more than a decade of stagnation, the world's second largest economy has been witnessing a modest rebound, marking six straight quarters of expansion. But fears have been growing that a decline in exports will push down growth, while a rebound in consumer spending will not be enough to keep the recovery going.

United States

The U.S. economy is expected to grow about 4 percent in 2004, and economists forecast growth at or above the economy's trend rate of about 3.5 percent in 2005.

"This year it is on track to complete the third year of recovery with a strong 4 percent growth," Treasury Undersecretary John Taylor told business executives during a recent trip to India.

November's weaker employment report was a disappointment, but employment growth has averaged 185,000 monthly since the start of the year, fast enough to take in labor market slack.

While the oil price has boosted day-to-day inflation, core inflation pressures have remained under control.

Robert DiClemente, head of U.S. economic analysis at Citigroup, expressed concern about the strength of the global economic expansion and said the huge current account deficit in the United States, a key factor in the plunge of the dollar, will narrow as the Bush administration pushes policies to cut its budget gap and encourage private savings.

The OECD's chief economist, Jean-Philippe Cotis, warned that the burgeoning U.S. current account deficit--5.7 percent of the gross domestic product--was a major source of disturbance in the world economy and called on the Federal Reserve to raise interest rates gradually, encouraging greater savings to rein in the gap.

According to OECD, the U.S. current account deficit--the broadest measure of foreign trade--is estimated to widen from 5.7 percent of GDP in 2004 to 6.2 percent in 2005 and 6.4 percent in 2006, or about $825 billion.

Europe

After a relatively strong first six months in 2004, growth in the 12-country euro zone has slowed sharply. GDP rose by just 0.3 percent in the third quarter, as exports suffered from a strong euro and household spending remained flat.

The European Central Bank cut its projection for economic growth in 2005 to between 1.4 percent and 2.4 percent.

Central Bank President Jean-Claude Trichet said Europe's modest recovery remains on track but will slow next year due to high oil prices.

South America

Brazil, which has South America's largest economy, is poised for a second straight year of growth in 2005 and hopes to build on its strong exports while benefiting from rising consumer demand among its 182 million citizens. Economists predict Brazil's economy will grow 3.5 percent in 2005 following estimated growth of 4.7 percent in 2004.

Argentina's economy is expected to expand 5.4 percent following estimated growth of 8 percent in 2004. But South America's second-largest economy faces a big challenge: the country's debt default. In 2002, it was the largest ever by a sovereign country, with payments stopped on some $100 billion in public debt.

Creditors have resisted offers by President Nestor Kirchner to pay as little as 30 cents on every dollar. The negotiations are being closely watched on Wall Street and in Europe. Argentine officials say they hope to resolve the issue in 2005 with a formal debt exchange.

Copyright © 2004, Chicago Tribune

Manila Bulletin: Nation’s biggest mining conference set this February

Nation’s biggest mining conference set this February
By GENALYN D. KABILING
Manila Bulletin

President Gloria Macapagal Arroyo has promised to put premium on the environment and the people rather than accommodate business interests when she hosts the biggest mining conference in the country in February next year.

While she intends to lure foreign and local mining firms to tap the country’s profitable mineral reserves, the President said the government would also consult with non-government organizations (NGOs) to craft a comprehensive strategy for sustainable mining operations during the summit tentatively scheduled in the first week of February.

The President vowed to ensure that mining operations, which are expected to increase following the Supreme Court decision upholding the constitutionality of Mining Act of 1995, would not be "disastrous" for the environment and instead would have a "sanitary effect on the economy."

"This February, I intend to attend to the issue of mining not just on investor confidence in mining, we will have meeting and consultation with the NGOs on how best to preserve and protect the interest of the indigenous people and the environment," she said last Monday night in a press conference in Baguio City.

If necessary, Arroyo said she would ask Congress to pass a legislation that would guarantee the protection of the environment from mining activities in the country.

Arroyo earlier hailed the Supreme Court ruling on the Mining Act of 1995 allowing foreign companies to undertake mining in the Philippines, believing it would bring in vast revenues for the government and create more economic opportunities and jobs for Filipinos.

The President said she believes the Philippines, which she considered the world’s fifth mining power, would gain considerable economic benefits from its mineral riches estimated at $840 billion or ten times the annual gross domestic product (GDP).

"This can easily wipe out our foreign debt of $56 billion while leaving much more for future generations," she said. "This can give a lot of income to our people. But let us all work together to make sure that it is going to be socially responsible mining."

Aside from the environmental and social safeguards of the Mining Act, Arroyo noted that today’s mining operations, which utilize modern technology, are "very pro-environment."

"I do not even think that the funding agencies, JBIC (Japan Bank for International Cooperation) for instance, would be funding any project that have not undergone the test of environmental consciousness," she said.

Total reserves of gold in the Philippines have been estimated at a total of 162.7 million metric tons, and its copper reserves at 4.05 million metric tons.

***
Prudent Investor Says: "I told you so!"

Forbes Interviews Warren Buffett: A Word From A Dollar Bear

A Word From A Dollar Bear
Robert Lenzner Daniel Kruger , 01.10.05
Forbes.com

Warren Buffett's vote of no confidence in U.S. fiscal policies is up to $20 billion.

The dollar has fallen savagely against the euro for the past three years, and the trade deficit is running $55 billion a month. Is the currency rout over? Can the trade deficit be fixed with a rise in interest rates or an upward revaluation of the Chinese currency? Warren Buffett, the world's most visible dollar bear, says the answer to both these questions is no. His bet against the dollar, reported at $12 billion in his last annual report (for Dec. 31, 2003), has gotten all the bigger. Now his Berkshire Hathaway has a $20 billion bet in favor of the euro, the pound and six other foreign currencies.

Buffett has for a long time been lecturing fellow Americans about their bad habit of borrowing from abroad to live well today. He made a big stink about his currency trades in his March 2004 letter to shareholders. FORBES phoned him recently for an update, hoping for the news that the Scold of Omaha had softened his views on the decline of the dollar. What we got was more doom and gloom, more than we have ever heard from the man. In other words, he is not about to cover his short position on the dollar.

Buffett said that he began buying foreign currency forward contracts when the euro was worth 86 U.S. cents, and kept buying until the price reached $1.20. It's now worth $1.33. Buffett said he is not adding new positions now but has been rolling over contracts as they mature. Berkshire lost $205 million on currency speculations in the first half of 2004, but more than made that back with a $412 million gain in the third quarter. It's likely that the December quarter report will show another huge gain.

Since January 2002 the dollar has fallen 33% against the euro. Buffett blames that on bad policy, coming from both the White House and Congress. It does appear that forex speculators are no big fans of George Bush or his Treasury secretary, John Snow. Since Nov. 2 the dollar has fallen 4.4% against the euro.

Says Buffett: "The rest of the world owns $10 trillion of us, or $3 trillion net." That is, U.S. claims on foreign assets run to only $7 trillion. "If lots of people try to leave the market, we'll have chaos because they won't get through the door." In a nutshell, the trade deficit is forcing foreign central banks to ingest U.S. currency at a rate approaching $2 billion a day. Buffett continues: "If we have the same policies, the dollar will go down."

The $20 billion bet has to be put in context. Berkshire has a huge portfolio of investments that includes $40 billion of Treasury securities. Budget and trade deficits are likely to make dollars worth less and bonds worth less. So the currency play is a partial hedge of a large position that can be read as bullish on the U.S.

Still, that Buffett is making a currency bet at all is striking given that this investor has, in his 74 years, rarely made macroeconomic bets. He built Berkshire to a $130 billion market value by acquiring parts or all of lots of businesses, primarily in the insurance sector and primarily in the U.S. Now some of those assets are antidollar assets. Example: In 2002 he bought bonds of Level 3, a telecom company, that were denominated in euros. In 2000 Berkshire picked up MidAmerican Energy, a gas pipeline company. By doing so, Berkshire indirectly acquired the assets of Northern Electric, a utility in England, at a time when the pound was worth $1.58. Now it's worth $1.94, so Berkshire has a paper gain irrespective of any appreciation in the electric company's pound-denominated earning power.

A continuing fall in the dollar "could cause major disruptions in financial markets. There could be unpredictable side effects. It could be precipitated by some exogenous event like a Long-Term Capital Management," Buffett says, referring to the 1998 collapse of a steeply leveraged hedge fund.

How about a soft landing for our deficit-addicted economy? Don't count on it. We're running $100 billion a year in the hole against China, but Buffett doesn't expect that an upward revaluation of the renminbi (stoutly resisted, in any event, by the Chinese government) would greatly reduce this number.

How about a rise in short-term interest rates? They used to say on Wall Street, "Six percent interest will draw money from the moon." Buffett is skeptical, though, that the recent tightening by Fed Chairman Alan Greenspan will do much more than "put off the day of reckoning."

Nor does Buffett support the notion that intervention in the currency markets by one or another central bank can overcome the momentum of a currency that's losing value. "Sooner or later markets win over the intervenors. The intervenors always run out of gas," says Buffett.

What is absolutely necessary to bolster the dollar is "a public policy that brings imports and exports together." Buffett has proposed a grand scheme to force imports and exports into perfect balance by demanding that each dollar of imports be accompanied by a certificate bought from an exporter who moved a dollar the other way. He concedes, using the self-deprecating humor for which he is known, that this scheme has met with deafening silence from policymakers.

Moving beyond cloudland to economic history, Buffett reflects wistfully on the writings of David Ricardo, the 19th-century trade theorist: "In those days the trade imbalances got settled in gold--and when they ran out of gold, people stopped doing business with you." A gold standard? More wishful thinking. But Buffett is no goldbug. It's more that he's an antidollar bug. In dollar terms, gold, copper and oil have all climbed in the past several years; in euros, not so sharply.

So, Warren, what are you buying now? And what's your prediction for the dollar next year? His answers, respectively: No comment, and I'm not making one.

But here's a long-term perspective. He says he may hold foreign currencies "for years and years." And he says that the electorate of the U.S. may be strongly tempted to get out of hock by inflating away the country's dollar debts.

***
Prudent Investor says: No 'gold'...but a quarter of the WORLD's SILVER Supply tacked under Berkshire's Portfolio. Hmmm. Maybe there's more to what he says.

Bloomberg's Andy Mukherjee: Asian Stocks May Ride Out Tough 2005 in Style

Asian Stocks May Ride Out Tough 2005 in Style
By Andy Mukherjee

Dec. 27 (Bloomberg) -- For investors fretting over the many risks to the world economy next year, here's a pleasant prospect: Asian stocks may ride out a turbulent 2005 in style.

For Asian equities to put up a good show in the face of a declining dollar, cooling Chinese demand and still-high oil prices, the region's central banks need only lift the lid off local money supply, giving households and companies more spending power.

Make no mistake, a declining dollar and slackening U.S. demand probably will bring no cheer to investors in Taiwan and South Korean semiconductor and electronics manufacturers, which are facing margin pressures. Taiwan's exports rose at their slowest pace in 14 months in November. At the same time, a spurt in Asia's money supply -- a weapon the region's central banks have yet to fire -- could be good news for banking, property and other stocks dependent on domestic demand.

``We like domestically focused stocks in Asia,'' says T.J. Bond, chief Asia-Pacific economist at Merrill Lynch & Co., who says he favors banks and telecommunications shares because ``the Asian consumer in Japan, in China and the rest of the region will rise to the challenge in 2005.''

The key to stoking Asia's consumption and investment demand lies with the region's central banks, which have for the past two years resisted appreciation in their currencies by lining up their reserves with dollars brought in by exporters, investors and speculators. Then, to make sure the money they released into the banking system in order to purchase the dollars wasn't inflationary, they sold bonds to ``sterilize'' the cash. The net effect was that local demand in Asia remained on a tight leash.

Credit Growth

In a recent report, Sailesh Jha, Dong Tao and other Asia economists at Credit Suisse First Boston cite the example of Singapore. Between 2000 and 2003, net foreign assets of the Monetary Authority of Singapore, as a ratio of gross domestic product, jumped by a whopping 15.4 percentage points.

Yet, thanks to aggressive sterilization, the central bank's net domestic assets, as a ratio of GDP, shrank 14 percentage points in the same period. As a result, the ratio of monetary base to GDP, a measure of new money created by the central bank, expanded a measly 1.4 percentage points.

``The anemic pickup in the monetary base has been one of the key reasons why credit growth has yet to explode in Singapore, in spite of an expected 8.4 percent GDP growth in 2004,'' the CSFB researchers say. Singapore isn't alone. In Taiwan, the entire 35 percentage point increase in the central bank's foreign assets between 2000 and 2003 was nullified by a fall in the bank's local assets, reducing base money growth as a ratio of GDP to zero.

Sterilization Costs

Why should it be any different in 2005? For one, Asian central banks will be able to sell more local-currency bonds only by paying higher yields -- much higher than what they earn on their foreign assets. Second, a weakening dollar will drive more overseas capital into Asia to gain from currency appreciation.

``Overburdened by accelerating capital flows to their economies and domestic investors' tolerance for buying domestic government securities diminishing, Asian central banks may reduce their pace of sterilization in 2005, '' says the CSFB report. More money sloshing about in the Asian banking system in 2005 will help fuel consumer spending on property, cars, consumer durables and financial assets.

From an Asian central bank perspective, it would be good to have the American consumer buying the region's exports of cars and computers. Still, it won't be the end of the world if the overspent U.S. consumer stays home. Asia's own consumers will pick up some of the slack.

Asian Consumer

``Even if Asia is set to decelerate,'' say Sebastien Barbe and Claire Dissaux, economists at Calyon, the investment banking arm of France's Credit Agricole SA, ``it should continue to do much better than Europe. We see non-Japan Asia's GDP increasing by 6.7 percent year-on-year in 2005, compared with only 1.7 percent for Europe.''

Most Asian nations can afford to expand their monetary base, except China and India, where inflation is already a headache and more liquidity in the banking system is only going to make matters worse.

Asian equities may be the dominant investment theme in 2005. ``We're big believers in Asia,'' says Emiel Van den Heiligenberg, who oversees $97 billion in assets at Fortis Investments in Amsterdam. ``The second motor of the world economy has been Asia. We see a lot of good developments in the domestic economy in Asia: domestic demand is growing, the political situation on average is improving, currencies are strengthening.''

That will surely be a pleasant prospect for investors in a volatile 2005.