Thursday, May 28, 2015

Power reforms gain ground in states

Crumbling under decades of accumulated losses, outdated technology and waking up to the fact that power supply decides who stays "in power ", several are reviving their power transmission and distribution infrastructure.

With demand falling way short of supply, it is clear that this is a problem that needs to be fixed urgently. The country's power generation capacity has reached 295,000 Mw, but 4 million households are still un-electrified. To meet the challenge, states are earmarking substantial amount of money for strengthening supply and availability of power.

Jammu & Kashmir, for instance, has become the first state to come out with a separate budget for the power sector. The state, which faces a power deficit of more than 5.5 billion units annually, plans to tap its natural resources to generate 9,344 Mw of hydro power and has allocated Rs 2,500 crore for its evacuation in 2015-16. "The requirement of the transmission sector for the entire state from the '24x7 Power-for-All' perspective works out to approximately Rs 4,054 crore. The total plan for transmission sector thus would be Rs 6,554 crore," the state's power budget said.

Uttar Pradesh Chief Minister in his budget for 2015-16 has promised 22 hours of power supply in rural areas and 24 hours in urban areas by 2016. He has also promised to ramp up supply to 21,000 Mw from the current 10,000 Mw. With the state polls bound for 2017, this could be political gimmickry but industry is taking it seriously.

Odisha has proposed to build 4,300 transformers, 860 km high-tension and 1, 260 km low-tension transmission lines during this financial year and has allocated Rs 310 crore for the construction of 550 sub-stations and to upgrade its distribution system.

Following suit
Along the same lines, Madhya Pradesh has increased its provision to the power sector by Rs 1,718 crore over last year, taking the total budgetary allocation for generation, transmission and distribution to Rs 9,704 crore. It is also planning to strengthen its grid system to support the huge step up in renewable power generation: from the current 1,400 Mw, it plans to scale up production to 3,733 Mw.

With around 40,000 Mw of stranded power capacity likely to go on stream soon with coal and gas supplies being sorted out, there is a crying need for a strong grid to carry the increased power supply. Steps are already being taken in this direction.

"There is a lot of business coming in for engineering, procurement and construction companies from Uttar Pradesh, especially its eastern part, Bihar, Odisha, Telangana and the North East," says Sunil Mishra, director general, Indian Electronics & Electricals Manufacturers' Association (IEEMA).

expects orders for sub-stations, transmission lines, conductors, insulators and transformers to grow in the months to come. Owing to increased demand from state utilities, the growth of cables, transformers and switchgear has been in double digits in the last quarter.

Most experts are of the view that the sector is waiting to be opened up. "With the advent of public-private partnership, states can now attract significant private investment into their power transmission network by adopting the tariff based competitive bids model. This can be a large business opportunity for the private sector, and a great way for states to strengthen their network and reduce the cost of power purchase," says Pratik Agarwal, vice-chairman, Sterlite Grid, the country's largest private operator of independent transmission lines.

Analysts say with companies such as Adani and Sterlite becoming aggressive in transmission business and several Chinese companies increasing their base in India, the transmission sector is in for some rapid growth.

"If the government is increasing its focus on power generation, then transmission capacity should also match it. 'Build-operate-own-transfer needs to be the functional model for power transmission. Power Grid Corporation, like NTPC , should be an asset owning/ operating company," says Rupesh Agarwal, vice-president, Ernst & Young LLP.

Piyush Goel, the minister of state for coal, power and renewable energy, in a recent interview to Business Standard said sorting out the problems of transmission and distribution companies is the government's prime focus. "Fortunately, one good thing that has happened is that in the last five years, states have understood that when they go back to people to be elected again, they would be judged on their performance," he said.

In line with the Centre's focus, Rajasthan has decided to bail out its financially sick through an innovative fund called the Rajasthan Electricity Distribution Management Bill. This fund will support the discoms financially and help them plan technological improvements. Going a step ahead, Tripura is planning to step up its power distribution and billing system with advanced IT systems.

But not all states are on the road to reform. Mineral-rich Jharkhand and Chhattisgarh, which are bound to witness massive growth with cancelled coal blocks starting operations again, are yet to increase their focus on evacuation of power.

Uttar Pradesh
  • 22 hours power supply to rural areas and 24 hours in urban areas by 2016
  • Power supply to increase to 21,000 Mw from the current 10,000 Mw
  • 1 lakh villages will get electricity supply in 2015-16
Jammu & Kashmir
  • Rs 1 lakh crore to be invested to install 9,344 Mw of hydel capacity
  • Rs 1,187.20 crore has been earmarked for the state's energy department
  • Rs 28.15 crore will be spent on strengthening power infrastructure in the Elephant Corridor
  • Rs 11 crore to be spent on energy conservation and on boosting energy efficiency
Madhya Pradesh
  • Rs 9,704 crore will be spent on generation, transmission and distribution projects
Andhra Pradesh
  • To provide 24x7 power supply to domestic and industrial consumers
  • 14.85 lakh agriculture consumers will get 7-9 hours of electricity supply daily
  • Rs 4,360 crore has been provided for the power sector
  • Rs 12,878 crore has been provided to the energy department in 2015-16
  • Government to bail out discoms whose combined annual loss is about Rs 77,000 crore

Wednesday, May 27, 2015

Mark Gilbert: Auto industry looks beyond ownership

Adam Jonas, a New York-based analyst who scrutinises car companies for investment bank Morgan Stanley, has a chart that he says will "occupy the remainder of my professional life." The shift toward renting rather than owning expensive assets, combined with the advent of self-driving cars, will transform the auto industry, Jonas says.

The bottom left corner describes the state of play ever since Henry Ford's began rolling off the production line: you buy your own ride from a carmaker, head for the open road whenever you choose, and park it in the driveway the rest of the time. The top right shows where Jonas reckons the industry is eventually headed: you'll order a self-driving vehicle that will pick you up and drop you off while charging you only for the distance you traversed (and without your ever having to worry about when the oil needs changing).

That reality probably still seems somewhat far off, as might the future depicted in the upper left quadrant, in which people own their own self-driving vehicles. But another intermediate stage, Jonas's bottom right quadrant, just got a small but significant boost. Industry behemoth said today it's inviting 2,000 Londoners to sign up for its car-sharing service, which will offer pay-per-minute one-way car rental in the capital, with guaranteed parking at the chosen destination. Ford reckons car-borrowing will grow by as much as 23 per cent in London by 2025, while the global auto-sharing industry will be worth more than $6 billion by the end of this decade. Half of the fleet of 50 cars will be the company's Ford Focus Electric model.

Bill Ford, heir to the family business and executive chairman of the automaker, told a TED conference in June 2011 that mobility, freedom and progress were the objectives of his great grandfather, not selling cars per se. The prospect of the global car fleet growing fivefold to 4 billion autos by the middle of the century risks creating "global gridlock," he said: When you factor in population growth, it's clear that the mobility model that we have today simply will not work tomorrow. Frankly, 4 billion clean cars on the road are still 4 billion cars, and a traffic jam with no emissions is still a traffic jam. The solution is not going to be more cars, more roads or a new rail system; it can only be found, I believe, in a global network of interconnected solutions.

Last week, Ford's investment firm took a stake in US ride-hailing firm Lyft. Lyft's business model - using technology to match drivers with riders for individual trips - is almost the antithesis of how Ford has made money for a century.

Ford's GoDrive scheme isn't the only game in London. Trundle into any London recycling centre - as I have done far too frequently in recent weeks (don't ask how the house renovation is going) - and you'll see eager spring-cleaning urbanites unloading Zipcars they've rented for a single day from the company's fleet of 1,500 vehicles. Other such ventures include City Car Club, DriveNow and E-Car. Ford, though, is the first major manufacturer to get into the game.

It seems pretty clear that auto ownership, at least in our crowded cities, is going the same way as music or software. Why own racks of compact discs or even MP3s when you can stream tunes into your ears? Why burden your computer hard drive with programmes and data that you can access and run off the cloud?

And if you live in a city centre, why have an expensive depreciating asset sitting in its parking place for most of the time if Ford will let you pay just for the road time you need and nothing more? Jonas at says it's "sad that my life can be boiled down to one chart." I disagree. I find his analysis of the future exciting and liberating, and I can't wait for the first self-driving rent-by-the-mile car to get approval to start navigating London.

Is Netflix killing cable television?

NEXT MONTH the Emmys, the American television awards, could label a show that never appeared on a television channel as the year’s best drama. “House of Cards”, a series about political maneuvering starring the actor Kevin Spacey (pictured), is available only onNetflix, an online-video service. The show’s success highlights the maturation of video-streaming firms, and the threat they pose to traditional television. People can now watch television-quality shows, including “House of Cards”, only through Netflix, seemingly diminishing the need to pay for a cable subscription. Is Netflix killing cable television?
Online video services have long been touted as destroyers of pay-television. Fewer people become willing to pay for cable, the thinking goes, when they can stream their favourite shows through Netflix and other online-video services, including Amazon and Hulu. Netflix and its peers are convenient: subscribers can watch programmes when they want, and can do so outside of the home on their mobile devices and tablets (so long as they have an internet connection), freeing them from their television set. These services are also cheaper: American cable subscribers pay around $80 for a subscription a month (not including broadband); Netflix costs around $10. Netflix now has around 30m members in America, and 38m globally.
Many predicted that Netflix would kill pay-television much like murders occur in popular cable dramas—suddenly, painfully and quickly. So far, however, pay television’s death has not occurred so speedily or dramatically. The main reason for this is that content-producers and pay-TV operators have been adept at making sure consumers cannot watch current episodes of their popular shows unless they pay for cable. In other words, they have not made the same mistake that newspapers did a decade ago, offering the same content online for free that they expect subscribers to pay for. Content-owners have restricted Netflix’s ability to buy rights to shows until after they have aired on television. And anyone wanting to watch live sports still needs a subscription, since Netflix has not bought expensive rights to sports. Netflix may have had success with “House of Cards”, but most hit dramas are still on traditional television. 
In the short-term then Netflix has not come close to killing cable. Those who predicted a dramatic death are more likely to witness a prolonged decline. Craig Moffett, an analyst who covers the sector, reckons that around 900,000 households in America have cut the cord in the last year or started a new household without signing up for pay-TV. That is only around 1% of households that subscribe for cable television. But it is meaningful, because it will probably accelerate over time. “Cord nevers”, youngsters who start their own households without a subscription, and who may never get one, will continue to add to the number of cable defectors. So will ownership trends of “smart televisions” which are internet-connected: people may be more likely to opt out of paying for cable when they can easily stream Netflix in their living rooms. 

Tuesday, May 26, 2015

MNCs bet big on their India IT centres

Multinational firms continue to prefer setting up global captives, or global in-house centres (GIC), in India. According to a report, in the past two years, 70 companies set up GICs in India, taking the number to more than 1,448, with a headcount of 74,500.

GICs are an integral part of the Indian IT-BPO (information technology-business process outsourcing) sector. GICs have been viewed as cost-saving centres for parent organisations. But, with the growth of the global sourcing sector, GICs in India are evolving into centers of excellence, profit centres, and program management offices.

Over five years, around 220 GICs have been set up, with firms from Europe and Japan showing higher inclination, said the study by Zinnov. These GICs will hit a revenue of $20 billion a year in 2015, a growth of 11 per cent over FY10. Of this, almost 52 per cent will come from software product development and embedded engineering services; 25 per cent from BPM (business process management) and 23 per cent from IT.

"Year-on-year, we have seen an increase in the setting up of GICs in India. Barring a year or two, the growth has been positive. In the past two years, 70 companies set up their GICs in India and this year, about 20 companies are in different stages of evaluation for setting up of GIC in India," said Karthik Ananth, director, Zinnov.

Ananth cites growing instances of multinational firms from Europe and Japan wanting to set up centres in India. The total number of GICs from Germany has gone up from 28 to 39 from FY10 to FY15. In the case of Japan, the number of centres has gone up to 40 from 24 over the period. "While North America will continue to be the largest in terms of centres in India, firms from Continental Europe and Japan have also shown interest. Several firms from China are looking at India," said Ananth.

He added that new players do have an idea of working with Indian IT players, but setting up a GIC in India is new for them.

"Earlier, an IT budget would have 70 per cent for maintenance work, which was outsourced; 20 per cent for growing IT; and 10 per cent for transforming the IT infrastructure. This break-up has changed: 50 per cent for maintenance; 30 per cent for growing IT; and 20-25 per cent for transforming the IT infrastructure. It is in this last segment that firms are looking at what stays inside in GICs and what gets outsourced," added Ananth.

The report also points out that many GICs in India are enabling digitisation efforts of enterprises. India is emerging as the world's leading centre for digitisation, with the world's second-largest pool of digital talent and practitioners. Tesco, Honeywell, Schneider Electric, and Wells Fargo India's centres are leading efforts on mobility. Microsoft, Amazon, Google, and IBM's centre in India are leading efforts on machine learning.

MasterCard set up its GIC in 2013. The GIC will be an extension of the MasterCard Advisors' analytics group in New York, which leverages big data and analytics to solve business challenges.

Singapore-based Redmart, with a revenue of $2 million in 2014, set up its GIC in 2014 to act as an analytics hub for making business decisions.

"India is no more just a outsourcing base. It is a huge market. So, for firms that are tech-enabled such as Uber and LinkedIn, India is a huge market. Twitter acquired Zipdial. With that they got a vibrant engineering ecosystem. It is natural that they will want to leverage this for growth," said Ananth.

Ananth says only because the number of GICs are going up does not mean the role of third-party IT vendors will get affected. "Though firms are transforming, it does not mean everything changes. A lot of things will continue and for that you need partners. Also, there is a preference for a hybrid model," he says.

But skill sets will be a challenge. The IT sector has created a skill ecosystem that is outside university education. Ananth believes it will be crucial for this ecosystem to grow and nurture relevant skills.

  • $20bn: GIC revenue in FY2015, a CAGR of 11 per cent over FY10
  • 745k: Number of employees; 5x growth since FY03
  • 1,000: MNCs have GICs in India; 220 new MNCs set up GICs since FY10

Global in-house centres (GICs) deliver IT-BPO services. These are set up by multinationals in countries where costs would be low. But GICs in India are evolving into centres of excellence, profit centres, and program management offices.

Thursday, May 21, 2015

Tata Steel disappoints with $615m annual net loss

Tata Steel underscored a troubled year for India’s largest private steelmaker, punctuated by huge write-offs and the looming threat of industrial action in the UK, as it unveiled fourth-quarter results in Mumbai on Wednesday evening.
Weak demand, sharp increases in steel imports and higher costs in India, along with slumping steel prices internationally due to a Chinese supply glut, led the steelmaker to report a below expectations $615m net loss for the full year and a $890m loss in the fourth quarter.

Tata last week wrote off about $785m, largely from its European business, bringing its total provision for the full year to near $1bn. It was the second writedown in two years for Tata’s European steel assets, after a $1.6bn charge in 2013.In what JPMorgan analysts described as another “kitchen-sinked quarter” for India metals, Tata Steel joined Vedanta Resources, which recently took a $3.1bn charge, in writing off huge value from its business.
Since acquiring Anglo-Dutch steelmaker Corus in 2007 for $13.1bn, Tata’s European business has been forced to slash costs and cut jobs as it struggled amid dramatically falling demand.

The recent writedown was concentrated in the UK section of its European long products division, which has now been written down to zero, according to the company.
Speculation that Tata could soon sell the European long products division, which makes steel for building and to make rails for train lines, has been rife since the company entered into talks with Geneva-based industrial group Klesch in 2014.

However, Karl Koehler, chief executive of Tata Steel Europe, said that “the triggers for a sale are different” and the writedown “does not really impact negotiations”.

Any buyer would have to deal with threat of industrial action at Tata Steel UK after the company announced plans to close the British Steel final-salary pension scheme in March. Tata had estimated that the closure of the scheme would result in savings of £1bn.

Without clarity around the strike, “even the Klesch group may not be able to complete its purchase of EU long products business,” said Credit Suisse’s India equity team earlier in the month. Tata told reporters it expected talks to conclude in a “couple of months”.

On Wednesday, UK-based Unite became the latest union to announce plans to ballot its 6,000 members for strike action over the pension closure. Steel unions Community, GMB and Ucatt have already begun balloting for industrial action, which is expected to conclude at the end of May.

Depending on the vote, this could result in the first strike in the UK steel industry in more than 30 years.

Ghana cocoa delays spark fears over country’s reliability

Chocolate lovers beware. Delays of shipments from Ghana, the world’s second-largest cocoa grower, have stoked concerns among traders and chocolate manufacturers that a disappointing crop is even worse than first feared.
Bad weather, pests and smuggling prompted Ghana’s industry authority, the Cocoa Board (Cocobod), to revise down crop estimates by 15 per cent last month. But traders and analysts say that the shortfall could now be closer to a third of the 1m tonnes it said that it would produce in 2014-15, as large pre-paid deliveries of the aromatic, dark bean have not showed up.
With Ghana’s output normally accounting for about 20 per cent of global production, prices for cocoa — the essential ingredient for making chocolate — will be volatile until there is more clarity, traders say. The lack of information from Cocobod and its sales arm, the Cocoa Marketing Company (CMC), has frustrated some industry executives.
“We are at a time when [Cocobod] have to talk to people,” says Derek Chambers, head of cocoa at commodity traders Sucres et DenrĂ©es (Sucden) in Paris.
“The risk is that the market loses confidence,” he said, noting that Sucden and its US cocoa arm, General Cocoa, are both owed small volumes of cocoa from the CMC.

“[Ghana] had oversold by 200,000 tonnes. That is a lot of cocoa,” says one leading international trader. “Nobody knows who will be getting the cocoa,” he adds. Analysts forecast that the crop could be the lowest since 2009.Ghana pledges its crops ahead of the harvest in the form of “forward selling” to traders and cocoa merchants. But the surprise shortfall has meant that cocoa has not been delivered to the buyers expecting shipments since the start of the year.
Cocobod did not respond to phone calls and emails from the Financial Times requesting comment.
Ghanaian output was the most discussed topic at “Cocoa Week” the international industry gathering held in London last week. Some industry executives managed to hold meetings with visiting Cocobod officials. “We’ll have to see how [the Ghanaians] respond,” said one large trading house.
The fall in production will be a blow to Ghana, whose government faces tough fiscal demands as revenues fall owing to lower oil prices, rising inflation and high civil servant wage payments.
Last October, Standard & Poor’s downgraded the country’s debt rating to B minus, on par with the Democratic Republic of Congo and Burkina Faso. The International Monetary Fund last month agreed an aid programme to help restore economic stability.
Some analysts and traders say that Ghana’s financial situation may have exacerbated the cocoa farmers’ problems. Last year growers received their fertiliser and fungicide supplies from Cocobod late, and much of the chemical application proved to be ineffective as it was washed away by the rains, says Edward George, analyst at pan-African bank Ecobank.
Cocobod also finances Ghanaian buying companies, which act as middlemen, to purchase the cocoa from the farmers. This year, the funding distribution was delayed, leading to more farmers smuggling their cocoa to neighbouring Ivory Coast, says one cocoa trader.
The sharp fall in the cedi, Ghana’s currency, also meant that it is more lucrative for farmers to smuggle their cocoa rather than sell to Cocobod.
Reports of crop declines and delayed deliveries, are also making commodity bankers nervous.
Every year, a group of international banks provides a syndicated loan of about $1.5bn-$2bn to finance partly Cocobod’s operations. In 2014, banks including Deutsche Bank, Natixis, and Barclays provided a loan of $1.7bn.
“Banks are watching the situation very carefully,” one commodity financier says.
While it is too soon to say how much of an impact chocolate consumers will feel from Ghana’s output problems, the uncertainty surrounding its supplies has already pushed the cocoa price up 10 per cent since late April to a seven-month high of almost £2,090 a tonne.
Traders are also paying higher premiums for immediate delivery of Ghanaian cocoa in the physical market as they scramble to source the beans. That is adding as much as another $300 per tonne over the futures market price, compared with $80-$180 a tonne normally, say traders.
Chocolate cocoa 2
Ghana’s cocoa beans are considered to be of the highest quality, with little waste produced when processed compared with beans from other countries. About half of Ghana’s cocoa is sold to chocolate makers in Japan, who use it in up to 90 per cent of all bars the country produces. Cadbury in the UK relies on Ghanaian beans for some of its chocolate production, as does Swiss chocolatier Lindt.
“Ghana’s position as a reliable supplier of quality cocoa beans to the market is being questioned,” says Mr George.
But analysts say that those who blend in Ghanaian beans to their chocolate production could eventually turn away from the country if the current situation is not addressed soon. Once chocolate manufacturers change their blends, they rarely go back, they say.
Mr Chambers warns: “If people become wary of buying forward from Ghana, then the premium for the country’s cocoa may disappear.”

HP revenues hit by falling printer sales

Falling sales of corporate technology services and printers as well as the strong dollar pushed revenue down at Hewlett-Packard, as it presses ahead with plans to split in two.
Revenue of $25.5bn in the second quarter was down 7 per cent, or 2 per cent on a constant currency basis, and slightly lower than the consensus forecast for $25.6bn. Sales were down in every segment but enterprise services fell the furthest, down 16 per cent year-on-year, and printer revenue decreased 7 per cent.
Meg Whitman, HP chairman and chief executive, said the company was becoming stronger as it headed towards a separation in November.But HP’s shares, which closed 2.3 per cent higher, were up a further 1 per cent in after-hours trading after it reported earnings that were slightly higher than expected. Earnings per share on a non-GAAP basis were 87 cents, compared with the average analyst estimate for 86 cents. Net income on a GAAP basis was $1bn.
“Despite some tough challenges, we executed well across many parts of our portfolio, sustained our commitment to innovation, and delivered the results we said we would,” she said.
The company forecast full-year non-GAAP earnings per share in the range of $3.53 to $3.73, in line with analyst expectations, and GAAP earnings per share of between $2.03 and $2.23. Revenue will be flat to slightly down on a constant currency basis.
HP is splitting its global business into two Fortune 50-sized companies — HP Inc, focused on PCs and printers, and Hewlett-Packard Enterprise, centred around corporate hardware, software and services. The division should free up the enterprise unit to make its own deals.
Ms Whitman said she had “confidence” the separation would complete by the end of the fiscal year, as she announced new appointments to the future companies. The leadership structure is now finalised and the workforce has largely been allocated between the new companies.
Cathie Lesjak, HP chief financial officer, will join HP Inc in the same position, supporting Dion Weisler who is due to become chief executive.

HP slashed its full-year earnings guidance by more than a third when it announced earnings last quarter, blaming the strong dollar as well as restructuring and separation costs. The strong dollar is causing particularly tough competition with Japanese manufacturers, who are benefiting from a weak yen.Tim Stonesifer, chief financial officer of HP’s Enterprise Group, will become CFO at Hewlett-Packard Enterprise, under Ms Whitman’s leadership. The company also announced that Chris Hsu would be chief operating officer at Hewlett-Packard Enterprise. He had been managing the transition to two companies.

Earlier in the day, HP announced plans to spin off its Chinese server unit into a joint venture with China’s Tsinghua University. It will own 49 per cent of the newly formed HC3 company after selling the majority stake for about $2.3bn. HC3 will be a market leader in networking and storage in China, valued at $4.5bn net of cash and debt.
Ms Whitman said HP had found a “terrific partner” in Tsinghua and she was “optimistic” that the joint venture would protect HP’s intellectual property.
She denied the spin-off was a direct response to draft legislation in China which could put pressure on US technology companies.
“China is evolving fast, regardless of legislation, any other thing, the right thing to do in China is to become even more Chinese,” she told the Financial Times. “Tsinghua is a very prestigious partner that is very well respected, with full access to the Chinese market and very close connections to the government.”

Oil tankers: tanked up

The world is sloshing with oil. Opec’s output is near a two-year high and non-Opec production is hitting records. Storage around the world is filling up. Asian buyers, at least, are sopping up some of the flow, upping their purchases this year. 

Rates for very large crude carriers (VLCCs) have jumped this spring — usually a season of low demand. The cost to charter a VLCC from the Middle East to Asia has risen to six times last year’s level. Rates also rallied this past winter, but back then hopes had increased that the tankers might serve as storage. The price curve had made it profitable to buy oil, lock it away in a VLCC and book a profit by selling futures contracts. That arbitrage has disappeared.

What has made a difference is Asian demand, especially from India and China. India’s in particular has swelled markedly this year. Gasoline demand for April hit a record, and now accounts for the bulk of oil demand, as opposed to diesel before. India’s improving economy has led to a surge in passenger car sales, which has had annual gains for six consecutive months. China’s refineries, too, have been busy, processing 7 per cent more in April than the year before. While some of China’s crude imports simply flow into storage, for national security purposes, that accounts for no more than a 10th of the total, says Energy Associates.

All this activity may have kept ship brokers busy but, surprisingly, not equity traders. The listed VLCC owner/operators, such as Norway’s Frontline, have not rallied much in response to the higher tanker rates. The market may have concerns about Frontline’s highly levered balance sheet. Yet the shares of US listed DHT Holdings, with a third of the leverage, have not responded either. Only Belgium’s Euronav has shown much life — up a fifth this year. All three trade at about the same valuation.

The equity market has little faith in the sustainability of the surge in crude tanker rates. But if US production does not abate, and Asian demand defies the prevalent economic pessimism, the tanker companies are going to thrive.

Kingdom built on oil foresees fossil fuel phase-out this century

Saudi Arabia, he world’s largest crude exporter, could phase out the use of fossil fuels by the middle of this century, Ali al-Naimi, the kingdom’s oil minister, said on Thursday.
The statement represents a stunning admission by a nation whose wealth, power and outsize influence in the world are predicated on its vast reserves of crude oil.

For that reason, he said, the kingdom planned to become a “global power in solar and wind energy” and could start exporting electricity instead of fossil fuels in coming years.Mr Naimi, whose comments on oil supply routinely move markets, told a conference in Paris on business and climate change: “In Saudi Arabia, we recognise that eventually, one of these days, we are not going to need fossil fuels. I don’t know when, in 2040, 2050 or thereafter.”
Many in the energy industry would find his target of a 2040 phase-out too ambitious. Saudi Arabia is the largest consumer of petroleum in the Middle East, and more than 25 per cent of its total crude production — more than 10m barrels a day — is used domestically.
A 2012 Citigroup report said that if Saudi oil demand continued to grow at current rates, the country could be a net oil importer by 2030.
But while acknowledging that Saudi Arabia would one day stop using oil, gas and coal, Mr Naimi said calls to leave the bulk of the world’s known fossil fuels in the ground to avoid risky levels of climate change needed to be put “in the back of our heads for a while”.
“Can you afford that today?” he asked other conference speakers, including British economist, Nick Stern, author of a 2006 UK government report on the economics of climate change. “It may be a great objective but it is going to take a long time.”
Chart: Middle Eastern countries' CO2 emissions
With more than 1bn people globally still lacking access to electricity, there would be strong demand for fossil fuels for years to come, he said, adding that more work was needed to find ways to burn oil, coal and gas without releasing warming carbon dioxide.
Saudi Arabia, like other Gulf states that burn a lot of oil domestically, has long said it plans to use more renewable power.
Chart: Middle Eastern countries' oil production
Officials in the kingdom declared three years ago they had plans to build so many solar plants they would be able to export solar electricity. But the recent fall in oil prices has increased doubts about the fate of such schemes.
Mr Naimi said he did not think lower crude prices would make solar power uneconomic. “I believe solar will be even more economic than fossil fuels,” he said.
The minister’s comments come as Paris prepares to host UN talks in December where nearly 200 countries are due to agree a global climate pact.
Ahead of that meeting, the leaders of Germany and France have called for an end to carbon emissions this century.
World leaders have already agreed in previous UN talks to curb emissions enough to avoid global temperatures warming more than two degrees Celsius compared with pre-industrial times.
But Mr Stern said the action countries had pledged in the lead-up to the Paris meeting so far would not be enough to put the world on a path to meeting the two degree target. It was therefore crucial for any agreement signed in Paris to include measures that required countries to ramp up their climate actions in future, he said.
Chairs and chief executives from nearly 60 large companies represented at the Paris business meeting this week backed a statement urging governments to produce a robust, predictable climate agreement at the end of the year.
The companies, including Airbus, NestlĂ© and Siemens, said carbon pricing was “essential” to guide business decisions and should be accompanied by an end to fossil fuel subsidies.
Christiana Figueres, the UN’s top climate official, said the number and size of the companies attending the Paris meeting represented a “turning point” in the global warming debate.
However, some of the energy company executives at the event, including Glencore chairman Tony Hayward, echoed Mr Naimi’s caution about the long-term need for fossil fuels in many countries.

China Does an About-Face on GMOs

The Chinese have long been wary of genetically modified organisms, grown from seeds designed to yield plants more resistant to drought, bugs, and other hazards. While imports of GMO-derived soybeans and corn are used as livestock feed, human consumption of GMO-based food is banned except for cooking oil and papayas.
China’s top officials are gearing up to turn their country into a GMO power. In a speech released last fall, President Xi Jinping said China must “boldly research and innovate, [and] dominate the high points of GMO techniques.” An agricultural policy paper issued early this year calls for more GMO research. A pro-GMO ad campaign from the agriculture ministry began in September 2014. Beijing-based Origin Agritech has already developed GMO corn seeds, while other Chinese companies are working on new rice varieties. “Biotechnology is our investment for the future,” says Origin Chairman Han Gengchen. He expects the government to allow planting of GMO corn within three years.
China needs a sharp boost in farm productivity, which has been hurt by damaged soil, contaminated water, and overuse of fertilizer and pesticides. The official Xinhua News Agency on Feb. 4, wrote, “GMO technology has long been considered an effective way to increase yields on marginal lands.”
China is the destination of more than 60 percent of global soybean exports, almost all genetically engineered. This dependence on foreigners concerns China’s leaders, who have seen self-sufficiency in grain as a strategic imperative.
The production and development of GMO seeds by foreign multinationals remain banned inside China. Companies such as DuPont Pioneer have joint ventures in China that develop and sell non-GMO seeds there. DuPont hopes someday to win Beijing’s permission to do GMO work in China, says Firoz Amijee, DuPont Pioneer’s director of global registration and regulatory affairs for Asia, China, Europe, and Africa.
China subjects new GMO varieties from abroad to an approval process that can take up to seven years, much longer than in countries such as Brazil, which synchronizes its approval of new seeds with the U.S. Approvals from China have become even more difficult of late, says Matt O’Mara, acting executive vice president at the Biotechnology Industry Organization, whose members include Monsanto, DuPont Pioneer, and Dow AgroSciences. For a smooth global rollout of new seeds “you need a process that runs on time and is predictable. China hasn’t been either of those,” he says, adding that 24 GMO products are waiting for China’s authorization.
China’s enormous clout as a food importer makes the global seed companies increasingly hesitant to release new products in other markets until the Chinese approve them. The consequences of accidentally sending Chinese customers grains grown from nonapproved seeds can be dire. In November 2013, Chinese inspectors discovered corn grown from a nonapproved GMO seed in a shipment, bringing to a halt all U.S. corn imports for more than a year. This risk of crossing China now even slows the sale of new seeds to U.S. farmers, Amijee says. Monsanto and Dow declined comment. The agricultural ministry did not respond to faxed questions.
The Chinese government has disbursed at least $3 billion to institutes and local companies to develop bioengineered seeds. “[We] cannot let foreign companies dominate the GMO market,” Xi said in his speech released last year.The bottom line China’s leaders want to build a domestic GMO industry because they need to boost productivity in agriculture.
The bottom line: China’s leaders want to build a domestic GMO industry because they need to boost productivity in agriculture. 

Yet Another Ghost Town in China Shows Extent of Regional Debt Crisis

China’s Ordos city, where towers that sprang from Inner Mongolian farmland now sit empty, is showing the hangover has just begun from a decade-long building boom.
Ordos City Huayan Investment Group Co., a developer whose chairman headed a group of livestock researchers, is at high risk of defaulting on 1.2 billion yuan ($194 million) of bonds if investors exercise an option to offload them in December, said Haitong Securities Co. and China Investment Securities Co. Also in the city, Inner Mongolia Hengda Highway Development Co. asked noteholders to defer rights to sell back private securities in April due to cash shortages, according to China International Capital Corp.
The city whose fortunes reversed as a coal boom turned to bust is grappling with China’s slumping property market that researcher SouFun Holdings Ltd. said led to more than 10 “ghost towns.” Five years after the first building was finished in the eastern city of Tianjin’s replica of Manhattan, the district remains almost deserted. Locals in the city of Handan, where a burst property bubble left half-constructed high-rises, have blocked streets to protest soured investments.
“Many small-city developers are running into financial trouble,” said Liu Yuan, a Shanghai-based research director for Centaline Group, China’s biggest property agency. “It’s the problem Ordos faces after its property bubble burst.”

High-Risk Regions

China’s slowest economic growth since 1990 and a shift toward the service sector from traditional smokestack industries are adding to stresses in less developed areas. That’s frustrating long-standing efforts to boost the regions through steps including the “Go West” campaign launched in 2000 to cover six provinces including Inner Mongolia.
Cities suffering from declines in fiscal revenue need close scrutiny for potential debt failures, according to Zhang Chao, a bond analyst at China Investment Securities in Shenzhen. The highest-risk areas rely on resource production like Inner Mongolia and Shanxi, and also include northeastern provinces such as Heilongjiang and Liaoning, he said.
President Xi Jinping must balance efforts to rein in record regional borrowings that swelled after a 4 trillion yuan stimulus package in 2008, with steps to prevent contagion in the nation’s money markets. Two landmark bond defaults in April, one at a state-owned company and another at a homebuilder based in the southern city of Shenzhen, showed that companies in larger cities have also become vulnerable.

Default Watch

Financial difficulties are even worse among developers in smaller cities, according to Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shanghai.
An official who wouldn’t disclose her name in Ordos City Huayan’s accounting department said the company will be able to meet any bond payments in December given that the notes are guaranteed by a local government financing vehicle.
The developer said in 2012 it would spend the majority of its bond proceeds building a commercial center covering 232,514 square meters, almost the size of the “Bird’s Nest” Olympic stadium in Beijing, with a shopping mall, furniture and home appliance stores and supermarket.
That year marked a turning point in the Ordos real estate market, as floor area under construction started sliding from an all-time high in 2011, according to city annual reports.

‘Big Slump’

“The city’s property market is experiencing a big slump following the over-expansion in previous years,” said China Investment Securities’ Zhang. That’s contributed to the financing crisis at Ordos City Huayan, which faces a high chance of default on its borrowings due this year, Zhang said.
Ordos City Huayan, which builds apartments as well as commercial properties, had only 21.33 million yuan of cash compared with 6.69 billion yuan of debt as of the end of 2014, according to its annual financial statement. It had a total of 170 million yuan of overdue bank loans as of Dec. 31, after suffering a loss of 726.1 million yuan last year.
Firms based in Ordos have stepped up efforts to raise capital in the debt market before they must repay a record 16.7 billion yuan of bonds next year. They issued 22.1 billion yuan of notes last year, the most on record, according to data compiled by Bloomberg.

Ordos Premium

Bond investors have demanded higher premiums to hold notes from the city. Elion Resources Group Co., which focuses on desertification prevention, sold 1 billion yuan of three-year AA rated debentures at 7.8 percent on May 7. That was 256 basis points higher than the average yield on similarly rated securities the same day.
The yield on Ordos City Huayan’s 2018 bond has climbed this year to 9.63 percent since Pengyuan Credit Rating Co. cut the issuer rating from AA- to A and changed the outlook from stable to negative on Dec. 31.
In the rating statement, Pengyuan described the Ordos property market as “extremely not optimistic” because of the slowing economy and pressure the coal industry is facing.
Even companies with government backing have stumbled. China Lianhe Credit Rating Co. on Dec. 30 lowered its outlook for Erdos City Infrastructure Construction Investment Co. to negative from stable, citing the city’s slower growth and weaker finances. The LGFV is guarantor of the Ordos City Huayan 2018 bond. Lianhe also downgraded the rating for Erdos Dongsheng City Development & Investment Group Co. to AA- from AA, citing its defaults on entrusted loans.
Fiscal income of Ordos, which sits on one sixth of China’s coal reserves, declined to 43 billion yuan in 2014, according to official data. Job growth in the city slowed to 4,169 new hirings in the first quarter, 967 less than the same period of last year due to falling demand from the mining and construction industries, municipal data show.
Premier Li Keqiang has pledged to allow market forces to play a bigger role in the economy and strip power from the government since he took office in March 2013.
“Whether the central and local governments will allow builders in smaller cities to default will depend on their determination to restructure the economy and on whether the possible defaults will cause any systemic risk,” said Liu at China Merchants Bank.