Tuesday, April 30, 2013

Gold Rush From Dubai to Turkey Saps Supply as Premiums Jump

Surging demand for gold from Dubai to Istanbul has pushed physical premiums in the region to levels not seen in years as the biggest price slump in three decades lures consumers, according to MKS (Switzerland) SA.
Premiums paid by wholesalers and bulk buyers in Dubai to secure a 1 kilogram bar of bullion are being quoted between $6 an ounce and $9 an ounce over the London cash price, said Frederic Panizzutti, global head of marketing and sales at the Swiss-based bullion refiner. That compares with about 50 cents before the rout, Panizzutti, also chief executive officer of MKS Precious Metals DMCC, said in an interview from Dubai.
Gold fell to the lowest in more than two years this month on speculation that the global economy is recovering, unleashing a purchasing frenzy among coin and jewelry buyers from China to the U.S. Consumer demand for jewelry, bars and coins in Turkey and the Middle East represented about 9.4 percent of the global total last year, according to the World Gold Council. Bars have been cleared from display in the souks, according to Gerry Schubert, head of precious metals at Emirates NBD PJSC.
“Physical demand has been tremendous in a way I haven’t seen for a number of years,” said Jeffrey Rhodes, global head of precious metals at INTL FCStone Inc., who’s worked in the industry for more than three decades. “The price collapse prompted a physical gold rush and the evidence of the extent of that is the prolonged period of high premiums that we’ve seen. Reports from the gold souks are that business is good,” Rhodes said from Dubai.

Bear Market

Prices plunged 14 percent in the two sessions to April 15, the most since 1983, and reached a low of $1,321.95 an ounce on April 16. Since then, spot bullion has rebounded 11 percent, to trade at $1,471.13 at 1:11 p.m. in Dubai, as the surge in physical demand offsets record outflows from exchange-traded products. Gold is still lower in April, heading for the worst monthly loss since December 2011 amid a bear market.
In Turkey, the fourth-biggest gold consumer last year, bullion on the Istanbul Gold Exchange traded at premiums of as much as $25 an ounce over the London spot price, something that hasn’t happened in “a very long time, we’re talking years,” said MKS’s Panizzutti.
“In the gold souk, you see some coins left over, but the investment bars are all gone from the windows,” said Schubert at Dubai-based Emirates NBD, the United Arab Emirates’ second- biggest bank by assets. Domestic retail prices moved to a premium of about $5 an ounce from a small discount before the rout, said Schubert, who has traded the metal since 1979.

Largest Center

Dubai is the largest gold-trading center in the Middle East, according to the Dubai Gold & Jewellery Group, an industry body that includes manufacturers and retailers. Trade was worth about $56 billion in 2011, up from $6 billion in 2003, according to data on the Dubai Multi Commodities Centre website.
Gold jumped 4.2 percent last week, the most in 15 months, as coin demand from mints in the U.S. and Australia to the U.K. soared. The volume for the benchmark contract on the Shanghai Gold Exchange surged to a record last week, while premiums to secure supplies in India jumped to five times the level before the slump. China and India are the world’s largest buyers.
Consumers in Singapore and Hong Kong are paying premiums of about $3 an ounce, compared with about $2 just after the rout, according to Ng Cheng Thye, head of precious metals at Standard Merchant Bank (Asia) Ltd.

‘More Patient’

“Physical metal is still not available,” Ng said by phone from Singapore. “The Chinese are on holiday these few days and at this level, the market might slow down a bit on the demand side. People are a little bit more patient now compared with two weeks ago, where everybody was rushing for physical metal.”
Chow Sang Sang Holdings International Ltd. said that jewelry sales at its 44 shops in Hong Kong more than doubled in the two weeks ended April 27 from a year ago. In China, financial markets are closed through May 1.
“It’s not just a Middle East story, it’s all across the globe,” said Panizzutti. “The fact that premiums are so high, it means that no one is making enough. We are producing 24 hours a day.”

On “Safe Havens” and the Great Rotation

Like food and fashion trends, investments can go in and out of favor with the masses. Traditional fixed income investments like government bonds have started to lose their appeal of late, particularly in the developed markets where returns may feel a bit unpalatable. There’s even been talk we could be in the midst of a “great rotation” out of fixed income and into equities. However, investors might want take a look at where they are headed—and why—before joining any sort of mass migration, says John Beck, Co-Director of Franklin Templeton’s International Bond Group. He believes fixed income investments still hold merit, particularly in light of ongoing uncertainties in Europe and elsewhere, and is also looking off the beaten path in spots where many aren’t looking such as emerging markets or high-quality corporate debt.
Amid much discussion of a “great rotation” out of bonds into equities, investors could be forgiven for thinking that the prospects for fixed income asset classes in 2013 look gloomy across the board. It is true that in recent months, returns from many sovereign bonds perceived as “safe havens,” particularly those from the U.S., Germany and the UK, had turned negative as their yields have moved up from the historic lows seen in 2012 in the midst of the eurozone debt crisis. In January, holders of 10-year U.S. Treasuries lost their entire 2013 coupon as a result of a negative capital return. In February and March, yields on 10-year Treasuries traded above 2%, up from the record low of 1.39% reached in July 2012, raising the possibility of a negative return over 2013 as a whole for Treasury investors. 
However, an adverse outcome for U.S. Treasuries and other perceived safe havens might not necessarily be replicated in other areas of fixed income. We believe investors can still earn a reasonable return this year by diversifying away from perceived safe-haven bonds into other areas, such as emerging market sovereign debt or high-quality corporate issues. Among the emerging-market government bonds that we find attractive are those from Lithuania, Chile and Mexico as well as from select Asian countries. In the case of Lithuania, the yield on its 10-year sovereign bond has declined from 8.5% a few years ago to about 4.5% more recently. Despite this steep fall, we consider that the country’s relatively healthy economic and fiscal fundamentals make Lithuanian bonds still worth holding. For example, Lithuania’s debt-to-GDP (gross domestic product) ratio of 25% compares favorably with an equivalent 85% figure in the U.S. While significant foreign funds have certainly flowed into emerging-market government bonds issued by countries such as Lithuania, this does not in itself provide a reason to sell out of the underlying credit in favor of perceived safe-haven bonds such as U.S. Treasuries, in our opinion.
Similar arguments can be put forward for our other favored emerging markets. Yields on Chilean sovereign bonds have seen falls comparable to those of Lithuanian bonds, but equally, these declines have been supported by Chile’s healthy fiscal and current accounts as well as its low debt-to-GDP ratio. On top of these structural positives, the country is rich in resources and has a pension system that is fully funded, in stark contrast to the U.S. In Mexico’s case, its economy enjoys the additional advantage of being geared to U.S. growth, which we believe should benefit the country as the U.S. recovery slowly builds momentum. We have also favored allocations to the local currency-denominated bonds of Asian countries such as Malaysia and South Korea. The yields on many of these issues remain potentially attractive, in our view, while the currencies of both countries may benefit from further appreciation against the U.S. dollar over the long term.
Though periodic episodes of market volatility are likely to occur, as a result of, for example, elections in the eurozone, we still think 2013 is going to be a tough year for holders of perceived safe-haven bonds.”
While we may tactically trim our exposure to these emerging-market bonds if we feel their valuations have moved far ahead of fundamentals, we have a hard time envisaging a scenario over the short to medium term in which we would eliminate exposure completely, given the environment and limited alternatives. That is not to say we believe no opportunities exist among developed-market sovereign credits, despite our aversion to perceived safe-haven bonds of the U.S., Germany, Japan and the UK. French and Italian government bonds trade, in our opinion, at reasonable values compared with German Bunds. Countries including Canada, Australia and much of Scandinavia share the distinction (along with our preferred emerging markets) of having superior growth prospects, as well as favorable debt‐to‐GDP ratios, increasing the attraction of their debt compared with that issued by relatively slow‐growth, indebted G‐3 countries (i.e., the U.S., the eurozone and Japan).

Though periodic episodes of market volatility are likely to occur, as a result of, for example, elections in the eurozone, we still think 2013 is going to be a tough year for holders of perceived safe-haven bonds, and we see a possibility of negative returns for some of these issues over this period. But, in our view, the demanding environment for perceived safe-haven bonds should not distract investors from the potential rewards in other areas of fixed income, for example, U.S. dollar-denominated government bonds from countries such as Lithuania, Chile and Mexico or local-currency sovereign bonds from issuers like Malaysia and South Korea.
(Source: Franklin Templeton website)

Monday, April 29, 2013

Pimco Sees M&A as ONGC Returns to Dollar Offerings

Oil & Natural Gas Corp. (ONGC) sold $800 million of debt in its first dollar bond sale since 1986 as India’s largest energy explorer starts its biggest push to boost the nation’s energy security.
The state-owned company’s overseas unit, ONGC Videsh Ltd., issued $500 million of 10-year notes yesterday at 210 basis points over U.S. Treasuries and $300 million of five-year debt at a premium of 190 basis points, according to data compiled by Bloomberg. China National Petroleum Corp. and China Petroleum & Chemical Corp. (386) sold 2023 notes this month at around 160.
“The region’s energy appetite can only expand over the secular horizon as these economies continue to develop and standards of living rise,” Raja Mukherji, Hong Kong-based head of Asian credit research at Pacific Investment Management Co., said in an e-mail interview yesterday. “To meet increasing demand, many Indian oil and gas companies have not only become frequent buyers of foreign assets, they have also regularly tapped the international capital markets.”
Indian companies including Reliance Industries Ltd. (RIL) have more than tripled overseas debt sales this year to $8.8 billion as borrowing costs fell to record lows, providing ONGC a platform as it mounts bids for assets from Azerbaijan to Kazakhstan and Mozambique to fuel Asia’s third-largest economy. Pimco, manager of the world’s biggest bond fund, expects most of the new fundraising will be primarily used for overseas mergers and acquisitions, according to Mukherji.

‘Makes Sense’

The latest bond sale will help ONGC Videsh, which invests in and operates the parent’s assets abroad, refinance an $870 million bridge loan that it took to fund the purchase of a stake in an oil field and related pipeline in Azerbaijan in March. The acquisition will increase the New Delhi-based company’s overseas reserves by 9 percent and production by about 11 percent.
“Our revenue from this field will be in dollars, so for us borrowing in that currency makes sense,” D.K. Sarraf, managing director at ONGC Videsh, said by telephone yesterday. “We are coming to the dollar-bond market after many years and may return if we need money for other acquisitions.”
China National Petroleum sold $2 billion of notes April 9 in three tranches that each had record-low coupons, according to data compiled by Bloomberg. China’s largest oil company’s offering included $750 million in 10-year (GIND10YR) securities with a 3.4 percent coupon. China Petroleum & Chemical, Asia’s biggest oil refiner, raised $3.5 billion April 18 in the second-largest sale of dollar bonds in Asia outside of Japan. This included $1.25 billion of 10-year debt at 3.125 percent, the data show.

‘Cheaper Rates’

Average dollar yields for Indian issuers touched an all- time low of 3.805 percent March 18 and are at 3.92 percent, HSBC Holdings Plc indexes show. A similar gauge for all Asian debt is at 3.46 percent.
“Chinese companies are able to borrow at cheaper rates because China has a lower risk than India and a better credit rating,” Hemant Dharnidharka, the head of credit research at SJS Markets Ltd. in Bangalore, said in in a phone interview yesterday. “ONGC Videsh’s yield is still attractive.”
China’s bond risk is lower than India’s. The cost to insure government notes from Asia’s largest economy using five-year credit-default swaps was at 72 basis points last week in New York, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A similar gauge for State Bank of India, considered a proxy for the sovereign, was 200.

Junk Outlook

China is rated Aa3, by Moody’s Investors Service and AA-, the fourth highest investment grade, by Standard and Poor’s. India is ranked Baa3 by Moody’s and BBB- by S&P, the lowest investment grades. ONGC is rated Baa2 by Moody’s and BBB- by S&P. CNPC and China Petroleum & Chemical are assessed at Aa3 by Moody’s, the fourth-highest non-speculative rank.
S&P and Fitch Ratings last year said that India’s credit ratings may be downgraded to junk, citing slowing growth and current-account and budget deficits. The nation’s gross domestic product rose 5 percent in the fiscal year ended March 31, the weakest pace since 2003, the statistics agency estimates.
Prime Minister Manmohan Singh’s government cut fuel subsidies in September, opened up industries including aviation and retailing to foreigners and reduced taxes on companies’ overseas debt to boost investment and economic growth. Singh’s biggest policy push in a decade was complemented by monetary easing by the Reserve Bank of India, with two interest-rate cuts this year.

Lower Rates

Central bank Governor Duvvuri Subbarao will lower the RBI’s 7.5 percent repurchase rate by 25 basis points, or 0.25 percentage point, at a May 3 review, according to 25 of 31 economists surveyed by Bloomberg. Singh and Subbarao’s policies have helped India’s sovereign bonds rally the most among the four-largest emerging markets, including Brazil, Russia and China.
Indian debt returned 5.2 percent in 2013, the second highest in Asia, compared with 13.5 percent for the Philippines, according to HSBC indexes. The yield on 10-year government notes in India dropped 29 points this year to 7.76 percent, offering an extra yield of 610 basis points over similar-maturity U.S. Treasuries. The rate touched a 33-month low of 7.738 percent April 23. The rupee rose 0.1 percent today to 54.191 against the dollar.
“Last year, the sentiment had been bad for a while for India, so spreads were wide and companies held back,” Philipp Good, who helps manage $2 billion of global bonds in Zurich at Fisch Asset Management Ltd., said in an interview yesterday. “It seems like the downgrade pressure is less imminent at the moment, but we remain cautious on the sovereign and therefore on the corporates too.”

Reliance, GAIL

Reliance Industries and state-owned GAIL India Ltd. (GAIL) are among Indian energy companies that have acquired at least $10.3 billion of overseas oil and gas asset in the past five years compared with $90.7 billion by Chinese firms, according to data compiled by Bloomberg.
ONGC, which is mandated by the government to help meet the nation’s fuel needs, plans to spend 11 trillion rupees ($203 billion) by 2030 to increase production at home and abroad. Demand in Asia’s second-biggest energy consumer is forecast to more than double by 2035, according to the U.S. Energy Information Administration. India imports 80 percent of its oil requirements.
“In general, among Asian national oil companies, we prefer the ones with large upstream assets, limited exposure to downstream assets, and flexibility to access funding,” said Pimco’s Mukherji.

ONGC Targets

Efforts to buy global assets are gathering momentum after a lull following ONGC’s completion of the $2.2 billion purchase in 2009 of Imperial Energy Corp., a U.K. company with fields in Siberia where production declined quickly.
The explorer announced in November a $5 billion acquisition of a 8.4 percent stake in Kazakhstan’s Kashagan project, touted as the biggest oil find since the 1960s when it was discovered beneath the Caspian Sea in 2000. Kazakhstan’s government is considering preempting that deal, and selling the stake to a Chinese company instead, people with direct knowledge of the matter said this month.
ONGC and partner Oil India Ltd. (OINL) are also among bidders proceeding to a second round in the sale of a stake in a Mozambique gas field that could be worth at least $5 billion, according to people with knowledge of the matter.

‘Becoming Attractive’

Companies may benefit from Finance Minister Palaniappan Chidambaram’s efforts to woo capital to fund the nation’s record current-account deficit.
Chidambaram, who estimates that the nation needs more than $75 billion by March 2014 to bridge the gap in the broadest measure of trade, met investors in the U.S. and Canada this month. He completed a tour of the world’s biggest financial centers that included similar visits to Hong Kong, Singapore and Europe earlier this year.
“Indian corporate debt is becoming attractive,” said Dharnidharka of SJS Markets. “The finance minister himself has been pitching the nation to foreign investors.”
(Source: Bloomberg)

Tata Eyes Coal Assets Freed By Global Fracking Boom

Tata Power Co. (TPWR), India’s second- largest generator, is seeking coal assets in the U.S., Canada and Colombia as prices of the fuel drop amid surging shale gas supplies in North America.
Initial purchase talks are on for several mines, Managing Director Anil Sardana said in an interview, declining to identify the assets. Acquisition prospects in South Africa, where Tata Power has scouted for more than a year, have dimmed because of infrastructure concerns, he said.
“We just want cheap coal and there are several assets that are languishing after the shale gas boom in North America,” said Anil Sardana, managing director of Tata Power Co. “A lot of assets got abandoned because of the boom as existing buyers moved on to shale gas.” Photographer: Pankaj Nangia/Bloomberg
“We just want cheap coal and there are several assets that are languishing after the shale gas boom in North America,” Sardana said. “A lot of assets got abandoned because of the boom as existing buyers moved on to shale gas.”
Cheap coal may help Tata Power, led by Cyrus Mistry, to turn its biggest power plant profitable after a purchase of mines in Indonesia turned sour as the Southeast Asian nation pegged its coal to global benchmark prices. U.S. power generators have turned to gas extracted from shale rocks as hydraulic fracturing, or fracking, has made the country the world’s biggest producer of the less polluting fuel, while freeing up coal reserves.
Lack of railroad facilities and inadequate port handling capacities that can transport coal from the mines to the nearest shore are veering Tata Power away from assets in South Africa, Sardana said. The acquisition costs for such mines increase because miners have to spend time and money to build the infrastructure, he said.
Tata Power gained as much as 0.5 percent to 95.75 rupees and traded at 95.60 rupees as of 10:22 a.m. in Mumbai. The shares have dropped 13 percent this year, compared with a 0.5 percent gain in the benchmark S&P BSE Sensex.

Coal Shortage

A shortage of local coal supplies and Indonesia’s move have driven up costs for Indian utilities including Adani Power Ltd. (ADANI) and Tata Power, which have little choice but to bring in Indonesian supplies because buying coal from other nations would boost shipping charges.
Trouble for Tata Power began when Indonesian prices increased following the change in regulation. Tata Power, which owns stakes in PT Kaltim Prima Coal and PT Arutmin Indonesia, both controlled by PT Bumi Resources, and a 26 percent stake in PT Baramulti Suksessarana, had won the contract to build a 4,000-megawatt plant at Mundra in Gujarat state in December 2006 after bidding the lowest tariff of 2.26367 rupees a kilowatt- hour.
The coal from Indonesia, which was $42.13 a ton at the time, has since jumped 79 percent.

Mundra Tariff

Tata Power needs 0.54 rupees more per kilowatt hour for electricity from Mundra to erase losses, Sardana told Bloomberg TV India in an interview April 15. The company has written off 26.5 billion rupees ($488 million) on its Mundra unit, he said.
The unit may suffer a loss of 475 billion rupees over 25 years, considered the lifetime of a plant, should the current tariff be maintained, Tata has told the industry regulator, which has recommended the producer must be compensated for the increase in coal costs.
Tata Power reported its first annual loss of 10.88 billion rupees for the year ended March 2012, dragged down by Mundra and currency fluctuations.
It’s unlikely the Indian states buying power from Mundra will accept the regulator’s order, said Sachin Mehta, an analyst at Mumbai-based IFCI Financial Services Ltd. who maintains a sell rating on the stock. Five Indian states that have contracted to buy 3,800 megawatts of electricity from the Tata Power plant have resisted tweaking the contract norms.
“Tata Power is not very bullish on India and is seeking to grow through overseas operations,” Mehta said. “Yet, raising funds for an acquisition or a new project will not be easy, considering the losses it is suffering at Mundra.”

Shale Boom

The boom in fracking, which shatters shale rocks using pressurized water to pump out gas and oil, in the U.S. and Canada has absorbed bulk of the energy demand, freeing up large quantities of coal reserves. The assets can help Tata Power revive the unprofitable 4,000 megawatt Mundra power plant and aid Asia’s third-largest economy prevent outages such as the world’s worst blackout that left 640 million people without electricity last year.
“The current price points of shale gas have fundamentally changed the cost economics in the U.S.,” said Arvind Mahajan, partner and head of energy, infrastructure and government practices at KPMG LLP. “There’s a clear shift in feedstock preference towards gas whose supply has increased in a step function. This is rendering a lot of coal reserves surplus and ready for exports.”


KPMG is working on feasibility studies for several companies on transporting coal cheaply from these countries and exploring options such as swap agreements, Mahajan said, without disclosing if Tata Power is a client.
Global coal demand has grown at a compounded annual rate of 4.8 percent since 2003, seven times the pace between 1990 and 2002, according to data compiled by Bloomberg. Much of the rapid pickup has been driven by emerging market demand, principally China and India, which together have accounted for almost 95 percent of the growth in the past decade.
Growth for Tata Power would depend on how challenges around its Mundra project are overcome, which Chairman Mistry “fully understands,” Sardana said. The Mundra unit “is the albatross around the neck.”
(Source: Bloomberg)

Sunday, April 28, 2013

IMF flags risks of asset bubbles, middle income trap in Asia

Asia needs to guard against asset bubbles and its emerging economies must improve government institutions and liberalize rigid labor and product markets if they wish to reach the level of developed countries, the International Monetary Fund said on Monday.
"Emerging Asia is potentially susceptible to the 'middle-income trap,' a phenomenon whereby economies risk stagnation at middle-income levels and fail to graduate into the ranks of advanced economies," the IMF said in its latest Regional Economic Outlook for Asia and the Pacific.
"MIEs (middle-income economies) in Asia are less exposed to the risk of a sustained growth slowdown than MIEs in other regions. However, their relative performance is weaker on institutions," the international funding agency said.
IMF's warning about the emerging risks faced by Asian countries come at time when the region looks set to lead a global economic recovery as risks from a meltdown in Europe recede.
"While the external risk of severe economic fallout from an acute euro area crisis has diminished, regional risks are coming into clearer focus. These include some ongoing buildup of financial imbalances and rising asset prices," the IMF said.
IMF was monitoring credit ratios and output levels in Asia closely as conditions can worsen very quickly, the fund's director for Asia and Pacific region, Anoop Singh, told reporters at a briefing in Singapore.
He said regional authorities needed to respond early and decisively to potential overheating.
IMF, which recently cut its 2013 and 2014 growth forecasts for Greater China, India, South Korea and Singapore but raised its outlook for Malaysia and the Philippines, nevertheless sounded generally positive about near-term prospects.
"Growth in Asia is likely pick up gradually in the course of 2013, to about 5.75 percent, on strengthening external demand and continued robust domestic demand," it said.
The IMF said India, the Philippines, China and Indonesia needed to improve their economic institutions while India, the Philippines and Thailand were also exposed to a larger risk of growth slowdown stemming from sub-par infrastructure.
Malaysia and China were the highest-ranked developing Asian countries in an IMF chart measuring institutional strength while Indonesia, India and the Philippines were at the bottom.
IMF defined institutional strength as demonstrating higher political stability, better bureaucratic capability, fewer conflicts and less corruption.
For many developing Asian economies, there remains ample room for easing stringent regulations in product and, in some cases, labor markets, the fund added.
The IMF also said various statistical approaches indicate that trend growth rates have slowed in both China and India
For China, trend growth appears to have peaked at around 11 percent in 2006-07, while India's trend growth is now around 6-7 percent compared with about 8 percent prior to the financial crisis.
"By contrast, trend growth for most ASEAN countries seems to have remained stable or to have increased somewhat, with the notable exception of Vietnam," the fund said.
ASEAN is the acronym for the 10-member Association of Southeast Asian Nations whose members include Indonesia, Thailand, Malaysia, the Philippines, Vietnam and Myanmar.
Turning to Japan, Singh said the IMF "welcomed" Japanese efforts to stimulate its economy, and said quantitative easing was just part of a package of measures that included cutting debt and embarking of structural reforms such as increasing female participation in the workforce.
"In Japan, we have welcomed the measures taken. It's because they are focused on addressing the deflation that has affected Japan for the last 10-15 years."
"As Japan moves back to sustainable positive growth, it's going to help the region and the global economy and that is the most important," he said.
(Source: Reuters)

Thursday, April 25, 2013

Unilever Reports Slowest Quarterly Sales Growth in Two Years

Unilever (UNA), the world’s second- biggest consumer-goods company, reported the slowest quarterly growth in two years as demand in Europe was held back by weaker consumer confidence and sales of ice cream and spreads faltered.
So-called underlying sales, which exclude acquisitions, disposals and currency fluctuations, rose 4.9 percent from a year earlier, the London- and Rotterdam-based maker of Dove soap said today. The average estimate of 12 analysts surveyed by Bloomberg was for a 5.5 percent gain. Units sold increased 2.2 percent, less than the 3 percent gain estimated by analysts.
Sales fell 3.1 percent in Europe, the steepest rate of decline in more than three years, as “difficult markets” and cold spring weather sent ice cream sales plunging by more than 10 percent, Chief Financial Officer Jean-Marc Huet said in an interview. Europe makes up about 25 percent of revenue.
“This is a disappointing start to the year, with weaker than expected progress in particular in Europe and in the spreads category globally,” Graham Jones, an analyst at Panmure Gordon, said today in a note to clients.
Unilever shares dropped as much as 3.5 percent in Amsterdam trading, the steepest intraday decline in more than a year. They were down 1.9 percent at 31.91 euros as of 10:09 a.m.

Spreads Drop

Unilever’s sales growth still topped that reported this month by Nestle SA, (NESN) the world’s largest food maker, and Procter & Gamble Co., (PG) the world’s biggest consumer-product company. Nestle’s so-called organic sales growth was 4.3 percent in the first quarter, while P&G’s revenue on that basis rose 3 percent. All three trailed Danone (BN), which posted a 5.6 percent gain.
Unilever’s food revenue fell 0.5 percent, hurt by a decline in its margarine business, which includes brands like Flora and Becel. Huet said the business “is taking longer than we would like” to turn around, as consumers opt for lower-priced butter.
“We can do a better job,” he said. “This is self- inflicted and we need to rectify it. It’s no quick-fix.”
Unilever has been pruning its food business to focus on faster-growing beauty products. The company sold its Skippy peanut butter brand earlier this year.
“Spreads was the real area of weakness, and we question whether it is getting to the stage when Unilever needs to start considering disposals in this persistently disappointing category,” Panmure Gordon’s Jones said.

North America

First-quarter sales in North America rose 0.3 percent, Unilever said, a deceleration from previous quarters, with gains in personal-care offset by lower growth from food.
Sales in developing markets such as China and Indonesia rose 10 percent. The company has said they will account for more than 90 percent of its annual sales growth this decade.
“We remain focused on achieving another year of profitable volume growth ahead of our markets, steady and sustainable core operating margin improvement and strong cash flow,” Chief Executive Officer Paul Polman said in the statement.
Unilever is also seeking acquisitions, mainly of companies worth 1 billion euros to 2 billion euros.
Underlying sales rose 8.3 percent in the personal-care segment, the company’s largest business, fueled by deodorants, shampoos, and skin care products. Revenue rose 9.4 percent in the home-care unit during the quarter, helped by laundry detergents in emerging markets like Brazil and the Philippines.
Sales in the quarter advanced 0.2 percent to 12.2 billion euros. Analysts had estimated revenue of 12.5 billion euros.
(Source: Bloomberg)

Wednesday, April 24, 2013

Markets Insight: Bank of Japan action threatens emerging Asia

The Bank of Japan just threw another log on the fire. Over the coming two years, it plans to inject the equivalent of $1.4tn into the system. And more could come as officials struggle to hit their newly imposed inflation goal.
Whether all this cash will cure Japan’s ills is doubtful. The country’s problems are not monetary but structural. Much of this liquidity will thus leak abroad to where it is least needed: emerging Asia. The region, including China, is already drowning in liquidity and the BoJ’s action means another powerful wave will crash on to its shores. This will raise inflation pressure and, possibly, stoke asset bubbles. 
Until recently, emerging Asia had looked with equal measures of hope and trepidation at improving data in the US. On the one hand, recovering American demand promises relief for the region’s long-suffering exporters. On the other, stronger US growth means the end of the Federal Reserve’s quantitative easing is moving closer. Though welcomed by Asian officials, who have had to battle ballooning capital inflows and their unwelcome effects of soaring debt and exchange rates, investors were rightly left to wonder whether higher dollar rates could spell an abrupt halt to their cushy ride of recent years.
They need not fret. The BoJ’s new policy of aggressive easing will ultimately offset the gradual tightening to be delivered by the Fed. Look at history. Asia’s previous debt splurge of the 1990s owed much to the BoJ’s generosity. Back then, after Japan’s own property bubble had burst, the country’s central bank sought to cushion the blow by cutting rates. The Fed, grappling with a deep recession and the aftermath of the Savings and Loan Crisis, did the same. Inevitably, capital poured into emerging Asia.
In 1994 the Fed shocked bond markets by raising rates unexpectedly. But higher dollar rates did little to derail Asia’s leverage train. Japanese banks, deprived of profitable opportunities in the moribund local economy, continued to invest in neighbouring countries. It was only when Japan began to tumble into recession in early 1997, and questionable loans accumulated on their balance sheets, that Japanese banks started to pull out of the region, exacerbating a liquidity squeeze that would evolve into a much larger crisis.
Again in the 2000s, the BoJ’s easing cycle gave the region a lift despite higher dollar rates. In 2001, with deflation having taken hold, Japan’s central bank resorted to quantitative easing. Its balance sheet, as a result, ballooned from around 20 per cent of GDP to roughly 31 per cent over the next five years. Although this helped stabilise the economy, so much cash was injected that much of it found its way abroad in the form of the so-called yen carry trade. Emerging Asia, still reeling from the crisis, was thereby helped back on its feet. Even as the Fed began to raise rates in 2004 – by a cumulative 425 basis points over the next couple of years – liquidity remained ample enough across the region to boost bank lending once again.
Today, it is almost like watching a tired rerun. Even if the Fed were to gradually taper off asset purchases later this year or next, which is by no means assured, the BoJ’s actions will blunt the effect of higher dollar rates. Japan’s central bank is projected to raise its balance sheet from nearly 35 per cent of GDP currently to some 60 per cent by the end of 2014. Yet, before deflation is truly beaten, the number may well turn out higher than this.
And so more liquidity washes into emerging Asia. Among the markets likely to feel the most immediate and biggest impact are Thailand, Malaysia and Indonesia, which have historically had close links to Japan’s financial system. Vietnam and the Philippines, as well as India, could also feel a major lift. Even China, though hidden behind a wall of capital controls, is not immune: money, after all, is fungible, and the Fed’s easing has shown it will relentlessly head where returns are highest.
A little patience is needed, however. Monetary cycles take time to unfold. So far, it is only expectations that have driven yields lower and currencies higher across Asia. Japanese investors have not yet budged, preferring, for now, to ride out the rapid ascent of local asset prices.
But as in previous such easing episodes, these gains will eventually exhaust themselves, luring investors to more promising opportunities elsewhere. Wait another quarter or so before the true torrent starts.
Investors, in short, may rest assured that Asia’s easy money splurge is not coming to an end any time soon. Officials, however, have more reason to worry, for all this cash will ultimately drive up inflation, and asset prices, to dizzying heights.

Monday, April 22, 2013

Acute scarcity of water can stunt growth, in India

India, the world’s second-most populous nation, is doubling spending on water management to a record as conglomerates from the Tatas to Adani face shortages that the United Nations calls an impending crisis.
The federal and state governments have set aside 1.1 trillion rupees ($20 billion) for sewage treatment, irrigation and recycling for the five-year period ending March 2017, G. Mohan Kumar, special secretary in the Ministry of Water Resources, said in an interview. The nation with 1.2 billion people, which treats only 20 percent of its sewage, is pouring more money as inadequate clean water is threatening to stunt growth in industrial and farm output.
Disputes with farmers demanding rights to their irrigated land have stalled about $80 billion of investment by companies including Posco (005490) and ArcelorMittal (MT) as Prime Minister Manmohan Singh seeks to revive an economy growing at the slowest pace in a decade. Tata Steel Ltd. (TATA), India’s biggest maker of the alloy, is setting annual targets to cut water usage as two-thirds of the country faces a scarcity, H.M. Nerurkar, managing director said in an April 11 interview.
“Water availability is a very big issue and in the coming days this will be a far bigger issue,” A.P. Choudhary, chairman of Rashtriya Ispat Nigam Ltd. (RINL), India’s second-biggest state-run steelmaker, said in an interview. “Water is critical for the steel industry’s growth and no company is comfortably placed.”

Industrial Demand

India has 18 percent of the world’s population and four percent of the globe’s water resources, President Pranab Mukherjee said at an April 8 conference in New Delhi. About 80 percent of the water available is used for farming and less than 10 percent by factories, water ministry’s Kumar said.
Industrial water demand in India may surge 57 percent by 2025, with the Asian country being the most water-stressed among the Group of 20 nations, which also includes China, according to estimates by HSBC Holdings Plc. Water availability in India per person dropped by 15 percent to 1,545 cubic liters in a decade, according to a 2011 census.
India’s demand for clean water by 2030 may exceed supply by 50 percent while pollution is making what’s available unfit for human consumption, industrial or farm use, according to McKinsey & Co. forecasts and a government report.
“This five-year plan devotes far more space to water and it is clear that there is more political agreement on India’s water crisis,” said Srinivasan Iyer, assistant country director at the United Nations Development Program.

‘Extremely Rich’

Still, the planned spending on water projects accounts for just 2 percent of the $1 trillion Prime Minister Singh says is needed to build infrastructure in the five years ending March 2017 to revive economic growth that slowed to an estimated 5 percent in the year ended March 31, the least since 2003.
Jim Rogers, the investor who foresaw the start of a commodity rally in 1999, said he is “extremely optimistic” about investing in water amid scarce supply in countries from India to the U.S.
“If you can find ways to invest in water, you will be extremely rich because we do have a serious water problem in many parts of the world like India, China, the southwestern part of the U.S., and west of the Red Sea,” Rogers, chairman of Rogers Holdings, told reporters in Singapore on April 15.

Beating Gold

Shares of water-treatment companies are beating those of gold and oil explorers as governments from China to India boost spending on basic infrastructure to avert shortages threatening economic growth and political stability.
The S&P Global Water Index (SPGTAQD) of 50 companies has surged 162 percent since Nov. 30, 2001, when Bloomberg began compiling the measure. In comparison, the S&P Global Oil Index (SPGOGUP) has risen 137 percent in the same period and the S&P/TSX Global Gold Sector Index (SPTSGD) has climbed about 40 percent.
Suez Environment, Europe’s third-largest water company by market value, won 41 million euros ($54 million) of contracts to build and operate water-treatment units in New Delhi, a city of 17 million people, and Bangalore, according to a March 13 statement. Thermax Ltd. (TMX), a Pune-based company that produces water-recycling equipment, has climbed 31 percent in the past year, compared with the benchmark S&P BSE Sensex’s 10 percent advance. VA Tech Wabag Ltd. (VATW), the nation’s biggest builder of water-treatment plants, has risen 12 percent in the same period.
Work including sewage treatment and waste water management will help boost revenue as much as four-fold for VA Tech and double it for Thermax in five years, according to the companies’ chief executive officers.

Acquisition Plan

“We will participate in projects where there’s need for technology to treat water,” M.S. Unnikrishnan, CEO of Thermax, said in an April 9 interview. “Sewage treatment is getting increasing importance from the government.”
VA Tech plans to spend as much as 50 million euros to buy two companies in Europe to help it gain access to new markets and technology, Managing Director Rajiv Mittal said in an interview on April 17.
Thermax’s revenue from its environment business, which includes water, rose to a record 11.7 billion rupees in the year ended March 31, 2012. VA Tech Wabag’s net income climbed 36 percent to 751.2 million rupees in the 12 months and sales rose to 10 billion rupees, both an all-time high. Pretax profit margin in the quarter ended Dec. 31 was 11.18 percent compared with 10.24 percent a year earlier.

Farmer Suicides

Parts of Maharashtra and Karnataka, states that together account for 45 percent of India’s sugar production, have faced drought in the past two years. Output in India, the world’s top producer after Brazil, is set to decline for a second year, according to a survey compiled by Bloomberg.
Nearly a 1,000 farmers, unable to repay their debt after dry weather cut their incomes, committed suicide in one region of Maharashtra in 2012, India Today said in an article dated Jan. 21, a number the local administration disputes.
Plans by Posco (005490), the world’s biggest steelmaker by value, to build a $12 billion mill in the eastern state of Odisha have stalled for eight years as the South Korean company failed to persuade farmers to move. ArcelorMittal (MT), the world’s largest steelmaker by output, faces delays for a $10 billion plant in Odisha and in Jharkhand state.
“We don’t have the luxury to use water the way we want,” said Devendra Amin, vice-president and spokesman for Adani Group, which is controlled by billionaire Gautam Adani. “Water cannot be taken for granted the way industries set up in the decades gone by used to.” Adani has businesses in mining, power and ports.
(Source: Bloomberg)

Wednesday, April 17, 2013

The agony and ecstasy of broken markets: Mohd. El-Erian

The Japanese bond purchase programme has already had a material effect on financial prices around the world. It will now alter the global investment landscape by changing the nature and size of capital flows. Yet once the initial excitement passes, the real question will become whether it adds to, or subtracts from, the longer-term stability of the global monetary system.
The Japanese programme is massive: in absolute terms (some $75bn per month); relative to where bond prices stood (the 10-year Japanese government bond interest rate was already very low); and even compared to the Federal Reserve’s QE3 (which involves monthly purchases of $85bn for an economy with a GDP three times larger than Japan’s). Anchored by a 2 per cent inflation objective, the Japanese programme is also slotted to persist for a long time. 
Realising this, market participants have already adjusted financial prices. The most dramatic move is in the yen, and justifiably so: unlike the US, where domestic components of aggregate demand would be expected to do the heavy lifting, the Japanese programme’s success depends on its ability to capture market share from other countries.
The currency moves have also been turbocharged by the green light given to Japan by other advanced countries. For now, G7 countries are making a distinction between explicit foreign exchange intervention (still frowned on) and this type of approach to weakening a currency.
Meanwhile, recognising that the economy is in no position to absorb the liquidity injected by the Bank of Japan, markets are also anticipating capital flows out of Japan. The result is a cascading valuation waterfall. It started by benefiting any and all higher-income producing fixed income securities, then pushed higher global equities and other more risk-oriented investment opportunities.
All this happened irrespective of the underlying fundamentals. This is what excites global investors in the short run, but makes them more anxious about the longer term.
It excites them because yet another central bank is now actively involved in creating a significant wedge between sluggish fundamentals and higher financial prices. And so investors continue to ride wonderful liquidity waves that divorce valuations from top line revenue growth and profitability.
Yet it makes investors more anxious because they recognise it may all end in tears if real economies do not respond adequately to central bank policies. Here, the risk is that artificially high asset prices would eventually collapse to levels warranted by fundamentals.
The resolution of this anxiety is not in the hands of central banks alone. It also depends on proper responses by other policy makers, on less obstructive politicians, and on the proper engagement of strong corporate balance sheets. In the meantime, we should expect at least two developments that will add to the twin emotions of excitement and anxiety.
First, Japan’s programme increases the probability that other central banks will be pushed into adopting more expansionary monetary policies. This is particularly the case for economies directly affected by the sharp depreciation of the yen, such as Korea and members of the eurozone. It is also true of those (such as Brazil and Mexico) that experience surges in capital inflows due to Japan’s actions.
Second, the programme will add to worries about market malfunction. This speaks to more than increasing episodes of illiquidity and price gapping already evident in the market for Japanese government bonds. It includes growing concerns about the poor information content of prices in today’s global markets, and how the artificial price signalling distorts the allocation of resources and misaligns incentives (across time, and among different market participants).
Such concerns would be tempered if real economies were to respond quickly and properly to central bank actions. But they are not, and for understandable reasons.
While officials recognise the importance of supporting policies that improve economic responsiveness and longer-term financial viability, these are yet to be put in place. Witness how Congressional dysfunction is paralysing movement on virtually any policy front in the US. And even Japan’s recently announced programme lacks proper specification when it comes to the structural reforms that are essential to increasing nominal GDP in a sustainable fashion.
Global investors are right to be excited by Japan’s bond purchase programme. It has already had a material impact. Yet where it can be a real game changer is in how it alters the dynamic of the longer-term switchover from artificial growth to genuine growth. Here, investors are right to be anxious.

Europe Car Sales Heading for 20-Year Low on German Slide

European car sales are sliding to a 20-year low after German concerns over the debt crisis sent demand plunging last month in the region’s biggest economy and removed the main buffer protecting automakers.
Registrations in March fell 10 percent to 1.35 million vehicles, the 18th consecutive decline, with Germany’s auto market plunging 17 percent, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today. First-quarter deliveries in the region dropped 9.7 percent to a record-low 3.1 million cars.
Volkswagen AG (VOW3), Bayerische Motoren Werke AG (BMW) and Daimler AG (DAI), which last year shrugged off Europe’s decline, are forecasting unchanged 2013 earnings as investor and consumer confidence fall in their home country. A recession stemming from the debt crisis, which reared back up last month with a rescue for Cyprus, has led to 12 percent unemployment in the 17 countries sharing the euro, the highest since records began in 1995.
“The car boom in Germany has come to an end,” said Hans- Peter Wodniok, an analyst at Fairesearch GmbH & Co. “People have stopped buying cars as consumers are much less confident of the future, especially after the latest decision on Cyprus.”
Volkswagen declined as much as 2.4 percent to 142.20 euros and was down 1.6 percent as of 12:55 p.m. in Frankfurt trading. BMW fell as much as 2.3 percent to 65.35 euros and was down 1.6 percent. Daimler was 0.9 percent lower.

IMF Forecast

The International Monetary Fund yesterday trimmed its 2013 euro-area economic forecast as a second year of contraction leaves the region’s recovery lagging behind the rest of the world. The Washington-based IMF sees the 17-country bloc shrinking 0.3 percent, compared with a 0.2 percent retreat seen in January, with France joining Spain and Italy in contracting.
European Central Bank President Mario Draghi said yesterday that while he expects a recovery in the second half, the outlook has “downside risks.”
The German car-sales drop was the steepest among Europe’s five biggest auto markets, and compared with an 11 percent fall in February. The U.K., where sales increased 5.9 percent, overtook Germany in deliveries in March, according to the ACEA. Spain, Italy and France all posted declines.

‘Disturbing’ Trend

“The western European passenger-car market is on track this year to hit levels last seen in 1993, and Germany seems to be in a free-fall,” Max Warburton, an analyst at Sanford C. Bernstein Ltd. in Singapore, wrote in a report to clients yesterday. “While unit profitability in Germany is not nearly as high as China, it’s still a critical driver of German carmakers’ earnings and the current trend is quite disturbing.”
Deliveries at Wolfsburg-based VW, the regional market leader, dropped 9.3 percent, with the namesake brand posting a 15 percent decline. BMW (BMW), the world’s biggest luxury-car producer, sold 4.7 percent fewer vehicles in Europe last month.
Daimler (DAI) posted a 1 percent European sales decline, with registrations at the two-seat Smart division dropping 16 percent and demand at Mercedes rising 0.8 percent. Daimler, which has said first-quarter profit will fall, plans to update 2013 forecasts this month once it assesses a European market that it has said shows no signs of recovery.

Recovery Chances

European sales at Paris-based PSA Peugeot Citroen (UG), the region’s second-biggest carmaker, and Dearborn, Michigan-based Ford Motor Co. (F) dropped 16 percent.
“A recovery in the second half looks a little less likely,” Stephen Odell, Ford’s European chief, said in an interview today on Bloomberg Television, adding that sales in the region after the first quarter are at the low end of the automaker’s forecast.
Ford and Peugeot are among auto manufacturers planning job cuts and factory shutdowns in Europe in coming years in response to the vehicle-market decline. Detroit-based General Motors Co. (GM) is scheduled to close one of its Opel brand’s five car plants in Germany next year.
“Ongoing difficulties have led to lower-than-expected industry sales during the first three months,” Allan Rushforth, head of Seoul-based Hyundai Motor Co. (005380)’s European business, said in an e-mail. “We anticipate this trend will continue through the second quarter, before an improvement in consumer confidence helps to push up sales in the second half.”

Full-Year Forecast

Full-year car sales across Europe may fall as much as 7 percent, according to Peter Fuss, a partner at Ernst & Young consulting company’s Global Automotive Center in Frankfurt.
Business confidence and an index of consumers’ willingness to buy fell in Germany last month following a botched bank bailout in Cyprus. The euro-area economy shrank 0.6 percent in the fourth quarter, the worst performance since 2009. The economy probably contracted again in the first three months of 2013, according to a Bloomberg News survey of economists.
“The market is getting worse day by day and, for the first time, I can’t see the bottom,” Fiat SpA (F) CEO Sergio Marchionne told reporters at the carmaker’s annual meeting on April 9. A decline in European sales “would be worse than the forecasts we indicated in January as our base for 2013 targets.”
GM’s European sales fell 13 percent in March, led by a 28 percent drop at the Chevrolet brand. Sales at GM’s Opel and Vauxhall divisions declined 10 percent. Among Asian carmakers, sales in Europe plunged 17 percent at Toyota Motor Corp. (7203), the world’s biggest auto manufacturer, and 10 percent at Hyundai (005380).

Fiat Drops

Renault SA (RNO) posted a 9.7 percent drop in European deliveries. The manufacturer, based in the Paris suburb of Boulogne-Billancourt, is introducing the Captur multipurpose vehicle this month in an effort to revive demand.
European sales by Turin, Italy-based Fiat (F) fell 1.2 percent because of declines at the Lancia, Chrysler and Alfa Romeo divisions. The namesake Fiat brand posted a 7.7 percent increase after introducing the 500L wagon. The new model helped slow the industrywide sales drop in Italy to 4.9 percent in March from a 17 percent plunge in February. Last month’s figures were also helped by a comparison with a year earlier, when a nationwide truckers’ strike halted deliveries.
European and U.K. stocks fell for a fourth day, with the Stoxx Europe 600 Index (SXXP) sinking 1 percent and the FTSE 100 Index (UKX) declining 0.6 percent.
In Britain, minutes of the Bank of England’s April policy meeting released today showed that Governor Mervyn King was defeated for a third month in a push for more stimulus. Six of the nine-member Monetary Policy Committee voted to keep the target for quantitative easing at 375 billion pounds ($575 billion) this month. King, David Miles and Paul Fisher wanted to increase it by 25 billion pounds.
A separate U.K. report today showed unemployment rose at its fastest pace in more than a year. Unemployment as measured by International Labour Organisation methods rose by 70,000 to 2.56 million in the three months through February, the most since November 2011. The unemployment rate climbed to 7.9 percent from 7.8 percent in the previous quarter.
Group of 20 finance ministers and central bankers meet for two days from tomorrow in Washington before IMF and World Bank talks. The Federal Reserve will release its Beige Book business survey later today.
(Source: Bloomberg)

Automakers Spur $3 Billion Boom for Made-in-Mexico Steel

Mexico’s auto production has almost doubled since 2009. Now its steel industry is trying to catch up by spending almost $3 billion on new and improved factories.
“Auto exports are going to be the new oil for the Mexican economy,” Marco Oviedo, chief economist of Barclays Plc in Mexico, said in a telephone interview from Mexico City.
Mexico has become a magnet for automakers seeking low labor-cost output with access to North and South American markets and other regions through the nation’s trade agreements with more than 40 countries. Photographer: Susana Gonzalez/Bloomberg
Steelmaker Altos Hornos de Mexico SA, known as Ahmsa, has almost completed a $2.3 billion expansion designed partly to supply automakers. Ternium SA (TX) and Nippon Steel & Sumitomo Metal Corp. (5401) are teaming up on a $330 million investment to finish rust-resistant steel, and South Korea’s Posco (PKX) is spending $300 million to more than double capacity for similar products.
Further growth is likely: The Mexican Automobile Industry Association predicts output will climb almost 40 percent to 4 million vehicles in 2017 as Nissan Motor Co. (7201), Honda Motor Co. (7267), Mazda Motor Corp. (7261) and Volkswagen AG (VOW)’s Audi unit build factories that join long-standing plants for U.S. carmakers General Motors Co. and Ford Motor Co.
Mexico has become a magnet for automakers seeking low labor-cost output with access to North and South American markets and other regions through the nation’s trade agreements with more than 40 countries. In some cases, Japanese automakers were taking advantage of the yen’s strength against the dollar at the time they announced their investments.
“The automotive sector in Mexico is one of the stronger ones around the world,” Paul Robinson, senior economist at researcher IHS, said in a telephone interview from Washington. “Because the expansion on the automotive side has come so fast and so recently, the steel industry is a little behind.”

Galvanized Steel

While Mexico is the world’s 13th-largest maker of steel overall, its production of automotive-grade metal that has been galvanized, or coated in zinc to prevent rust, remains low, said Oscar Albin, president of the National Autoparts Industry in Mexico City. That has been largely imported from the U.S. and other countries, Albin said.
Mexico’s steel imports climbed 36 percent to a record 9.6 million tons last year, according to trade group National Iron and Steel Industry Chamber.
Among the larger exporters of steel to Mexico are the U.S. plants of ArcelorMittal (MT), AK Steel Holding Corp. (AKS) and U.S. Steel Corp. (X), said Kenneth Hoffman, head of metals and mining research at Bloomberg Industries. Local producers will be able to compete with those imports by offering a shorter supply line and lower transportation costs.

Nearby Suppliers

“Carmakers often demand that the suppliers be nearby with the promise of big demand,” Hoffman said. “We saw the same thing when a number of German and Japanese carmakers moved into the American South and steel producers followed.”
Ford would consider buying more Mexican-made steel for its factories in Hermosillo and Cuautitlan as long as it met the automaker’s quality standards, said Leo Torres, supply chain director for the company’s Mexico unit.
“If I have a ton of steel I can import to my plants in Hermosillo or Cuautitlan and I can buy the same ton in Mexico for the same price, my logistics costs are going to benefit and my inventory costs are going to benefit,” he said in a telephone interview from Mexico City yesterday.
The Mexican steel industry will invest $11 billion in the next four years, Alonso Ancira, president of the iron and steel chamber and chairman of Ahmsa, said last month. The industry directly employed 53,000 workers at the end of 2011, according to the trade group.

Aluminum Threat

There are potential challenges, too. A global glut of the metal may undermine investment in Mexico, Ancira warned, calling on the Mexican government to crack down on “unfair competition.”
At the same time, demand may drop as manufacturers replace some parts traditionally made of steel with aluminum to reduce vehicle weight and comply with stricter fuel-economy standards.
Mexican vehicle output has jumped 91 percent since 2009, the Mexican Automobile Industry Association said.
Japanese automakers shifted production outside their home market to maintain competitive pricing in the U.S. as the yen strengthened for two straight years before declining against both the dollar and the peso in 2012. Their new assembly lines will boost Mexico’s automotive production capacity even further.
Nissan is scheduled to open a $2 billion factory by the end of the year next to an existing plant in the central state of Aguascalientes. The Yokohama, Japan-based company is the largest automaker in Mexico with 24 percent of 2012 vehicle output, followed by Volkswagen, GM (GM), Fiat SpA (F) and Chrysler Group LLC, and Ford. (F)

Mazda Factory

About 150 miles away in the state of Guanajuato, Tokyo- based Honda plans to open an $800 million factory next year with capacity for 200,000 Fit small cars.
Mazda’s new factory in the same state, slated to open in 2014, will make Mazda2 and Mazda3 small cars. Annual capacity in the $650 million plant will be 230,000 vehicles by 2016, Mazda said in January. That’s 21 percent more than the Hiroshima, Japan-based company discussed as recently as November, when it added 50,000 small cars per year for Toyota Motor Corp. (7203) to its capacity of 140,000 vehicles.
Volkswagen’s Audi chose the state of Puebla, east of Mexico City, for a $1.3 billion plant to assemble its Q5 sport-utility vehicle starting in 2016.
Mexico accounted for 19 percent of North American car and light truck production last year, up from 11 percent in 2000 and 6 percent in 1990, the Federal Reserve Bank in Chicago said in a newsletter dated May 2013. The nation surpassed Canada in auto output in 2008 and the gap has widened every year since, they said.

Labor Costs

Labor costs in the Mexican automobile industry are about 20 percent of what they are in the U.S. and Canada, according to Luis Lozano, the lead automotive partner at PriceWaterhouseCoopers LLP in Mexico City.
“Auto exports have gone from 4 percent of the gross domestic product to close to 6 percent,” said Oviedo of Barclays. “With all the investments that have been announced, they’re going to rise to 8 to 9 percent very soon. That’s almost twice oil exports last year as a percentage of GDP.”
Steelmakers have followed. Ternium, based in Luxembourg, is completing a $1.1 billion plant near Monterrey, Mexico, with an annual capacity of 1.5 million tons to supply automakers, home- appliance manufacturers and others.
The project includes the joint venture with Nippon Steel & Sumitomo Metal, which will be able to finish 400,000 tons of rust-resistant steel a year, starting in July.

Posco Capacity

Posco (005490), based in Pohang, South Korea, said in 2011 that it would more than double the capacity of its continuous galvanizing line in Altamira, Mexico, by adding 500,000 tons. Posco’s American depositary receipts have fallen 13 percent this year to $71.86, while Ternium’s have dropped 17 percent to $19.64 as steelmakers globally struggle with excess production capacity and lower demand. Nippon Steel & Sumitomo Metal climbed 4.5 percent to $25.76.
Posco signed a letter of intent with Ahmsa last year to form a joint venture in which the Mexican company would send its Korean counterpart iron ore while tapping its expertise in producing automotive steel.
Ahmsa, an integrated steelmaker that has been in bankruptcy proceedings since 1999, is finishing a $2.3 billion investment this year in its so-called “Fenix” project to add 1.7 million tons of annual capacity. The project includes steel for automotive applications, Christopher Plummer, managing director of consulting firm Metal Strategies Inc., said in a telephone interview from West Chester, Pennsylvania.
Mexico is “significantly short of domestic capacity for the high-quality steel coils that are needed,” Plummer said. “With these lines, they’ll make major steps in becoming self- sufficient.”
(Source: Bloomberg)