Thursday, March 31, 2016

Steel companies divesting power assets to lighten debt burden

In 2006, erstwhile Monnet Ispat Ltd took up a new name Monnet Ispat and Energy Ltd to reflect the true nature of the activities in which the company was engaged in, which was to include steel making and power generation.
Fast forward 10 years and Monnet Ispat and Energy is said to be in discussions with Sajjan Jindal-promoted JSW Energy Ltd to sell its power subsidiary Monnet Power Co. Ltd.
Monnet Ispat is not an exception. More steel makers are now divesting power assets to stay afloat in a weak steel market. Jindal Steel and Power Ltd and Adhunik Metalliks Ltd are two such steel companies looking to partially or fully exit their power portfolios.
According to people directly involved in the discussions, Jindal Steel and Power is likely to soon close a deal with JSW Energy Ltd for about 1,000 megawatts (MW) of its 3,400 MW power capacity.
Bankers to Adhunik Metalliks Ltd, according to several news reports, has started the process to find a buyer for its subsidiary Adhunik Power and Natural Resources Ltd’s power assets.
To be sure, the three steel manufacturers are under tremendous pressure to meet debt obligations. As on 31 December 2015, standalone debt for Adhunik Metaliks wasRs.2,051.10 crore and that for Monnet Ispat was Rs.6,627.07 crore. For Jindal Steel and Power, consolidated debt as of December 2015 was Rs.42,534.04 crore.
Adhunik Power has an operational power capacity of 540 megawatt (MW) and Jindal Steel and Power 3,400 MW, while Monnet Power’s capacity of 1,050 MW is still under execution. Calculated at Rs.6 crore per MW as cost, Adhunik could get up to Rs.3,240 crore for the plant. The valuations for Jindal Steel’s 1,000 MW power capacity up for sale to JSW is being valued upwards of Rs.5,000 crore.
Salil Garg, director, corporates, Indian Ratings, said given these power assets are not captive in nature, it is easier to divest. “Most of these power plants were set up for non-captive purposes so are easier to dispose off,” he said. These power assets were set up as independent power units which sell power to a third party and not for use of the company’s own industrial units. Thus, sale of these power units will not impact the overall steelmaking operations.
Most of these steel companies entered the power generation sector as independent power producers a decade back. Jindal Power Ltd, JSPL’s power subsidiary, commissioned its first non-captive power unit in 2007. Monnet announced its power generation ambitions in 2006 and two years later Adhunik announced its entry into power generation. Garg credits these ambitions to the expertise steel companies already had in running a captive power plant. Power generation back then was a lucrative business with spot prices for power also touching new highs.
These power ambitions are now helping steel companies find a quick and temporary fix to address debt woes. The challenge, however, would be to conclude these deals as the power sector isn’t flush with buyers.
For instance, Monnet’s discussions with JSW Energy have been underway for several months now, is still awaiting a final agreement. Naveen Jindal-promoted Jindal Steel and Power may strike luck faster with JSW Energy as people directly involved in these discussions indicate an agreement may be in place before the end of this month.
Will steel companies drop the ‘power’ off their names? Maybe. Maybe not.

Indian Hotels reboots by going asset-light

Last month, Tata Sons-promoted  Company, or IHCL, announced its exit from a property in Jaisalmer, the Gateway, which it had managed for the last several years. This was the hotel chain's third exit in four months after it ended management contracts for properties in Ahmedabad and Jodhpur. The company, which operates hotels under the Taj, by and Gateway brands, has also checked out of three Taj properties in the last two years.

While has been adding new properties every year, this attrition has not escaped the attention of analysts and rivals. IHCL did not provide reasons for moving out of the Jaisalmer, Ahmedabad and Jodhpur properties, but speculation is rife that it could be an effort to shore up the company's bottom-line.

With stuck investments, churn in senior management, no profits since 2011-12 (annual and consolidated), and a huge debt burden of over Rs 5,000 crore on its books, the 114-year-old IHCL needs to do all it can to bounce back at a time when competition is increasing by the day - the combine is set to add over 70 new hotels across segments in the next five years in the country.

Indian Hotels reboots by going asset-light

Hotel chains like IHCL make real money at the top end of the market with their luxury properties. However, Taj, the country's oldest and amongst the most popular luxury hospitality brands, seems to have slackened its pace of expansion. Only one new property under the Taj banner (Taj Santacruz, Mumbai, which opened last year) was added in nearly five years (the Falaknuma Palace, which opened in 2010, was the previous opening).

While IHCL has said it will add seven new properties (excluding which runs Ginger) in 2016-17, these will all be under the Vivanta by Taj and Gateway brands only - no new Taj hotel is expected to open during the year.

The reason is not hard to find: a luxury hotel can cost upwards of Rs 1 crore a room, which can strain IHCL's balance sheet further. Abroad too, the luxury plans of IHCL seem to be on hold.

Stuck in China
A strong footprint in China, the world's largest luxury market, was one of IHCL's ambitious projects. In 2008, it became the first Indian hospitality company to forge a partnership in China for setting up luxury properties there.

A management contract was signed by an IHCL subsidiary, Taj International Hong Kong, to run the Temple of Heaven Park property in Beijing. In close proximity to the Temple of Heaven, constructed in 1420 and used by Emperors of the Ming dynasty, it was to be a 46-room luxury hotel.

Indian Hotels reboots by going asset-light

A further three hotels were also planned in China including a 500-key luxury resort with 40 villas on the Hunan Island. However, for unspecified reasons, none of these properties has been inaugurated till date. An IHCL spokesperson did not answer questions on the China projects.

Meanwhile, having waited for several years, IHCL was forced to abort its plans to take over Bermuda-based Orient Express Hotels (now Belmond), thanks to the lack of interest from the target company. Last month, it started liquidating six- to eight-year-old shares in Belmond at a price which is bound to raise eyebrows.

At an average selling price of $9.4 a share, IHCL took a massive haircut compared to the average purchase price of $35 a share. The sale price was also lower than the $12.63 a share offered by it to buy Belmond in 2012. IHCL had collectively paid around Rs 1,200 crore for the Belmond shares.

The share sale was to release money locked in an unproductive investment. IHCL needs money urgently to cut its debt which jumped to Rs 5,337 crore by the end of December from Rs 4,075 crore on March 31, 2015, at the gross consolidated level. The company did not disclose details of debt repayment coming up in 2016-17 when contacted through email.

Another such investment is the Rs 680 crore IHCL paid to acquire Sea Rock Hotel in Bandra, Mumbai, in 2009: redevelopment plans have been stalled for six years following some public interest litigation. IHCL had planned to combine the existing Land's End Hotel with Sea Rock to form the largest hotel in the city. 

In an interview in April, IHCL Managing Director & Chief Executive Rakesh Sarna had said that investments such as Sea Rock cannot be allowed to remain non-performing and a decision will be taken on it. "We are committed to take that piece of land and either have a performing asset or not. We are really hopeful of bringing this to some sort of a conclusion," he said.

Losses abound
IHCL has been under financial duress for the past three years. High finance cost has eroded its margins, even as the company stares at possibly its fourth consecutive yearly loss at the consolidated level when it closes its books on March 31. Sarna had indicated that profits would be two years away.

Then there are the external factors. The mega merger of Starwood and Marriott announced in November will hurt Indian hotel companies, especially IHCL, believe market experts. With a combined inventory of 18,000 rooms in India, Starwood-Marriot is way ahead of IHCL which has just under 14,500 rooms.

"Starwood and Marriott have properties in important cities like Delhi, Mumbai and Bengaluru, which are the main revenue drivers. With their huge base of loyalty memberships, these will become benchmark properties in the coming period," says a Mumbai-based analyst. Marriott and Starwood have a combined membership of 75 million, which will help them market their inventory aggressively.

In a recent interview to Business Standard, Starwood Hotels and Resorts President (Asia Pacific) Stephen Ho said: "India has some great local brands like Taj, Leela and Oberoi, but their presence is largely in India. Outside the country their presence is not significant. Our global loyalty programmes and marketing strength will help us drive our India business."

Meanwhile, the IHCL stock has been range-bound over the past year, trading between Rs 115 and Rs 90. The appointment of Sarna, who is rated highly in the industry, as managing director in 2014 and the shake up in the organisational structure in order to give more powers to general managers have added stability to the stock.

An added silver lining is that the business environment is picking up. Foreign tourist arrivals are hitting new highs every quarter. In the October-December quarter, arrivals stood at more than 2.4 million, the highest for any quarter, according to the Union ministry of tourism. With the global economy on the mend, arrivals are expected to continue their upward march in the coming quarters.

To seize the opportunity, IHCL will look to add new resorts and hotels at popular tourist spots. "The group will expand its portfolio to include four new hotels in four new destinations with over 300 rooms by December 2016. These will be Meghauli Serai, a Taj Safaris lodge in Chitwan, Nepal; Vivanta by Taj Amritsar; The Gateway Resort Ajmer and The Gateway Resort Corbett," said a recent statement from IHCL.

New properties will be opened through management contracts rather than through ownerships, which has been the traditional route for the company. IHCL is going asset-light to expand without increasing its debt burden.

Global Steel Industry Facing `Ice Age,' Top China Mill Warns

The crisis engulfing the global steel industry is so severe that one of China’s top producers has warned a new Ice Age has set in as mills confront overcapacity and rising competition that threaten their survival.
“In 2015, China experienced a slowdown in economic growth and excess steel capacity, which caused the domestic and overseas steel industry to enter into an ‘Ice Age’,” Angang Steel Co. said after posting a net loss of 4.59 billion yuan ($710 million) for last year. There are severe challenges, fierce competition and difficult survival conditions, it said.
Steel demand in China is shrinking for the first time in a generation as growth slows and policy makers seek to steer the economy toward consumption. Faced with declining sales at home, mills in the top producer -- which accounts for half of global supply -- have shipped record volumes overseas, heightening competition from Europe to the U.S. Tata Steel Ltd. in India said this week it’s planning to sell off its loss-making U.K. plants, prompting Prime Minister David Cameron to call crisis talks on Thursday.

‘Severe Winter’

The steel industry is set for a “severe winter,” Angang said, describing the market that it and others faced as complex. Output of steel by the country’s fourth-biggest producer contracted 4.4 percent last year, and the company is seeking to reduce costs and boost efficiency, it said.
Benchmark steel prices sank 31 percent in China last year, pummeling mills’ margins and spurring the government to step up efforts to force the industry to shut overcapacity and shift workers to other jobs. While reinforcement bar has rebounded since November, Daniel Hynes, senior commodities strategist at Australia & New Zealand Banking Group Ltd., forecasts the rally may not last.
“The short-term rally we’ve seen in steel prices will give way to the longer-term dynamic of weaker steel consumption in China,” Hynes said by phone on Thursday. “I suppose the positive thing is that maybe the restructuring we’re seeing in the steel industry will speed up the rationalization of the market.”
Other results from China this week showed the extent of the downturn. Baoshan Iron & Steel Co., China’s second-biggest producer, posted an 83 percent slide in net income last year, and Chongqing Iron & Steel Co. swung to a net loss of 5.99 billion yuan from a profit a year earlier.
As China’s steel demand dropped and prices sank in 2015, mills in the country churned out less for the first time since 1981. Crude-steel production fell 2.3 percent to 804 million tons last year, official data show. Output may drop to about 783 million tons this year, Li Xinchuang, deputy secretary-general of the China Iron & Steel Association, has forecast.
The nation’s leading industry group representing mills including Hebei Iron & Steel Group Co. has reported wider losses as demand contracts faster than they’re able to cut output. Medium- and large-sized mills that are members swung to a loss of 64.5 billion yuan last year, the group has said. 
“On the whole, the steel sector is still a sunset industry,” said Zhao Chaoyue, an analyst at China Merchants Futures Co. in Shenzhen, adding that it was appropriate to use the Ice Age term as the entire industry lost money last year.

Iron ore leads first-quarter commodities rebound

Iron ore is set to outpace other commodities in the first three months of 2016, finishing a volatile quarter up almost 25 per cent.
The rally in iron ore prices, reflecting strengthening Chinese steel prices and increased production ahead of the country’s key construction season, has come amid a rollercoaster ride for commodities in the first quarter.
The Bloomberg Commodity index, dragged down by crude oil’s continued spiral downward, in late January fell to its lowest level since at least 1991, but has since bounced back and is poised to finish the quarter flat, up about 0.2 per cent.
With one trading day left in the quarter, iron ore, which in December fell as low as $37, was at $53.20 a tonne. Gold was also a leading performer, set to close the quarter up almost 16 per cent at $1.227 a troy ounce on rising concerns over China and global economic growth prospects at the start of the year.
The yellow metal has continued to see support from worries about negative interest rate policies by central banks in Europe and Japan, and the prospect of fewer interest rate hikes in the US.
Commodity investors and traders continued to focus on crude oil during the first quarter, as prices rebounded after Saudi Arabia and Russia called for producers to freeze output at January levels.“The pull back in expectations in the likely number of rate hikes this year has led to a recalibration of gold prices higher, as bullion had been sold off in 2015 on expectations of more like four Fed rate hikes in 2016,” said James Steel, precious metal analyst at HSBC.
After falling to a 12-year low of $27.10 a barrel in January, Brent, the international benchmark, recovered the $40 level in March, and was set to close the quarter just under $39, up 4 per cent on the quarter. West Texas Intermediate, the US marker, also looked to finish the quarter up 4 per cent, around $38 a barrel.
The rally in oil and gold lifted investor confidence. Net flows into commodity indices, exchange traded funds and structured products totalled over $20bn in January and February, the strongest start to a year since 2011, according to figures compiled by Barclays.
“It is a long time since commodities have been as popular with investors as they have so far this year,” said Kevin Norrish, an analyst at Barclays.
However, he added that the current buying was more short-term and opportunistic compared with the past. “The kind of commodity investment that is taking place currently is not the long-term buy-and-hold strategy for portfolio diversification and inflation protection that underpinned the huge inflows over the previous decade,” he said.
Despite oil’s rebound from the year’s lows, the average price for the quarter for WTI was $33.61, the lowest since the fourth quarter of 2003 and Brent, at $35.17 a barrel, was the lowest since the first quarter of 2004.
For oil companies, “the further fall in average prices means that first-quarter results are likely to show even more financial stress and greater minimisation of capex in a drive to conserve cash”, said analysts at Standard Chartered.
Both WTI and Brent have averaged below $40 for four straight months and below $50 for eight straight months.
Elsewhere in the commodities sector, copper was on course to finish the quarter up almost 3 per cent around $4,850 a tonne, while sugar was up 4 per cent at 16 cents a pound.
Warm weather and rising inventories depressed natural gas, which was one of the top losers, falling almost 20 per cent to $2 per million British thermal units. Cotton retreated more than 9 per cent to just over 57 cents a pound on continued worries about China’s record state stockpile.

How will 100% FDI in E-commerce will impact Indian Real Estate?

India is already host to some of the largest global e-commerce players. The announcement that 100% FDI will now be allowed in e-commerce is going to open the floodgates to a host of other players in this segment. The impact that this development will have on Indian real estate will be significant. Like their predecessors, the new players will require large office spaces to house their back-end teams and therefore will naturally direct this requirement to the country's top seven cities.
The second impact will be on the demand for warehousing and logistics real estate. Unlike the demand for office spaces, this additional requirement will be spread fairly evenly across Indian cities. E-commerce players need to be able to deliver quickly to their customers, and one of the most important clientele segments for them are in the tier 2 and tier 3 cities. We will therefore see a significant step-up in demand for warehousing spaces in and around these cities.
On the flip side, there has been a rider clause attached to the FDI liberalisation on e-commerce. This is that e-commerce players now will be unable to sell below market prices and not more than 25% of sales will happen via one vendor (this proviso does raise a question about the term ‘market price’, given that there is fairly broad accepted range for most products). In any case, this announcement brings brick-and-mortal retailers on a more level playing field, and would help to still the outcry over unfair trade practices to an extent.
Overall, this is positive for the retail industry; more rational behaviour will now prevail in terms of market trade practices, and mounting of losses by most e-commerce companies will be curtailed. Online sales may reduce as deep discounts disappear, although losses will also be capped.
If we look at the West, e-commerce and brick-and-mortar players coexist happily, and this dynamic can definitely reflect on the Indian terrain as well. With e-commerce in India still at the nascent stage, the base being low even now and the growth rate very high, there is enough scope for both e-commerce and brick-and-mortar retail to flourish.  

Wednesday, March 30, 2016

Power stations in Indonesia: Shock therapy

A FLOTILLA of floating power stations is supposed soon to traverse the vast waters of eastern Indonesia. The ships, burning marine oil and leased from a Turkish firm, will be a temporary fix for the sprawling archipelago’s rising thirst for power. Indonesia consumes about half as much electricity as Britain, despite being four times as populous; about 50m Indonesians have no mains power at all. Shortages will grow more pressing as the country’s middle class expands: over the next decade or so, electricity demand is expected to rise by nearly 9% a year. 
Putting a stop to blackouts is a priority for the government. Last May President Joko Widodo announced an ambition to build more than 100 new power stations in five years (as part of an even bigger scheme to revamp the country’s creaking infrastructure). That plan, combined with work still hanging around from an earlier electrification drive, calls for about 43GW of new generating capacity to be added to the grid. This increase is comparable to the total installed capacity of countries such as Sweden and South Africa, and would mean almost doubling Indonesia’s power output. 
Such a scheme will require a huge expansion in the role of private-sector power firms. Independent power producers (IPPs) presently generate around 20% of Indonesia’s electricity; the rest is churned out by PLN, the state utility. Indonesia hopes they will build and operate most of the new power stations and that their home countries’ banks may finance them. Independents could eventually provide around half of the country’s juice.
Foreign power firms were once keen on Indonesia. Many fled during the Asian financial crisis in the late 1990s, and those that remained were forced to sell their power far cheaper than they had planned to. Lately, confidence has returned, encouraged by liberalising legislation and the new government’s ambitions. India and China also have gargantuan electrification drives, but in Indonesia a paucity of local expertise means it offers a greater opportunity for foreign builders and operators of power stations.
So far, firms from elsewhere in Asia have been keenest. One of the first big projects, a $2 billion power station in West Java, will be built by a consortium including Chubu Electric and Marubeni of Japan, and Komipo and Samtan of South Korea. Chinese companies are taking a leading role, despite a perception that some of the power stations China previously built in Indonesia were not entirely up to snuff. American and European utilities, for their part, are hanging back. Engie, formerly known as GDF Suez, a French firm with a long history in South-East Asia, has just sold its stake in one of Indonesia’s biggest power projects to Nebras of Qatar, as part of a global withdrawal from coal (though it remains keen on Indonesia’s promising but poorly-developed geothermal sector).
Traps abound. Acquiring land—a headache for infrastructure-builders anywhere—is particularly tricky in Indonesia, says Lenita Tobing of PwC, a consulting firm. The construction of what is supposed to be South-East Asia’s largest power station, a 2GW coal plant in Java backed by an Indonesian firm and two Japanese ones, J-Power and Itochu, is running four years late after scores of locals refused to sell their farms. Meanwhile, Indonesia’s transmission and distribution network, run by PLN (which remains the monopoly buyer of electric power), will need beefing up enormously, with financing from multilaterals like the Asian Development Bank (ADB), if it is to transport all the energy the proposed power stations will produce.
Mr Widodo’s administration is eager to help. It has created a “one-stop shop” to help foreign investors short-circuit Indonesia’s tortuous bureaucracy. Officials say they have cut the time it takes power firms to obtain permits from two-and-a-half years to about eight months. A new land-acquisition law, which came into force last year, may speed up negotiations; so will a recent presidential decree, says Agung Wicaksono, an energy-ministry official. Yet strong backing from Jakarta does not guarantee deference from provincial authorities, which under Indonesia’s political system enjoy great autonomy.
Some people fret that the scheme could fall victim to its own ambition. Indonesia’s power demands could probably still be met if the new power stations were added over ten years rather than hurried through in five, reckons Pradeep Tharakan of the ADB. The presidency may be imposing a tight deadline in the belief that unless it creates a sense of urgency, nothing will get done. Most in the business doubt that the electrification drive will be completed on schedule. Nevertheless, all the whip-cracking has some observers worrying that quality will be sacrificed for speed—and has some IPPs wondering if bits of the country might even end up temporarily with an excess of capacity. Indonesians should be so lucky. 

Pulp producers in Brazil: Money that grows on trees

LOOK north from atop the 120-metre (390-foot) bleaching tower at the Horizonte 1 pulp mill, and all you see is plantations of tall, slender eucalyptus trees. They stretch from the factory gate, across the gentle undulations of Mato Grosso do Sul, a state in Brazil’s centre-west, all the way to the horizon. “That’s our competitive advantage,” explains Alexandre Figueiredo, who is in charge of production at the plant. Its owner, Fibria, is the world’s biggest producer of “short-fibre” cellulose pulp, which is used to make such things as newsprint, nappies and banknotes. (“Long-fibre” is used for high-grade paper and packaging.)
As its name suggests, Mato Grosso do Sul (roughly, “southern thick bush” in Portuguese) has vast expanses of cerrado, or tropical savannah, a chunk of which was long ago turned into farmland, some of which has more recently been planted with eucalyptus. Most of Fibria’s 568,000 hectares of plantations lie within 200km of its mills. Eldorado, a rival with a mill on the other side of Três Lagoas (a city of 115,000 that is fast becoming Brazil’s cellulose cluster), needs its lorries to drive only a bit farther. No other firm in the world has such ready access to its raw material. Add the balmy climate and rich soils of Brazil’s south and centre-west—where, as Joe Bormann of Fitch, a credit-rating agency, puts it, eucalyptus “grows like a weed”—and it is easy to see how Brazil has conquered 40% of the global short-fibre market. 
Investment in technology is paying off, too. In the late 1990s Brazilians introduced a fast-growing eucalyptus variety that can be harvested after just seven years, compared with the two decades or more it takes to grow pine, the main source of cellulose pulp in the northern hemisphere. Next door to Horizonte 1, Fibria is building a high-tech nursery with technology devised by Dutch flower growers. Eldorado pioneered the use of drones to map the topography of its woods and optimise planting and harvesting.
Pulp producers are also thriving thanks to the storm that is sucking life out of much of the rest of Brazil’s economy. From his vantage-point, Mr Figueiredo waves towards the only clearing in the arboreal landscape: an unfinished Petrobras fertiliser plant a few kilometres away. Construction stopped in 2014, when the state-controlled oil giant emerged as the locus of a multibillion-dollar bribery scandal that may yet topple Brazil’s government (see article). That is in stark contrast to the frenetic activity directly below him, where a second, 8.7 billion reais ($2.4 billion) production line is taking shape that will more than double Horizonte 1’s current annual capacity of 1.3m tonnes, once it is completed in late 2017.
Recession and political upheaval have brought Brazil’s currency, the real, down by three-fifths against the dollar since 2011. That is a boon to pulp producers, who export nearly all their output. Standard & Poor’s, another rating agency, reckons that production costs in dollars dropped by $50 per tonne in 2015; another $40 per tonne was saved on maintaining mills. UBS, a bank, calculates that for every 10-centavo decline against the greenback, Brazilian producers’ earnings rise by $15 per tonne.
As the real has tumbled, global pulp prices have held steady, whereas some of the other commodities Brazil produces have slumped (see chart). As it rebalances from investment to consumption, China may build fewer bridges, hurting Brazilian iron-ore exports. But the Chinese are buying more bog roll; and over 40% of Brazilian pulp producers’ output is turned into tissue for the Chinese market. Between 2013 and 2023 annual toilet-paper sales will grow by 7.4m tonnes, with China accounting for nearly half of the rise, according to RISI, a consulting firm.
The combination of a cheap currency and healthy demand has pushed Brazilian producers’ margins to mouth-watering levels. Fibria’s rose to 53%, on record revenues of 10.1 billion reais, last year. With earnings equal to 75% of revenues in the fourth quarter of 2015, Eldorado’s margins set an all-time industry high. This helped ease its debt burden, which remains large compared with rivals’. Klabin and Suzano, two other big Brazilian firms, also had a good year, even if, as integrated producers of both pulp and its products, their mostly domestic papermaking businesses suffered in line with Brazil’s economy.
Can it last? Overcapacity is one worry. Last May CMPC, a Chilean concern, fired up a plant in Rio Grande do Sul state in southern Brazil that will churn out 1.3m tonnes of pulp a year. This month Klabin produced the first bales at a 1.5m-tonne plant in nearby Paraná state. Eldorado is breaking ground on its own expansion project in Três Lagoas, which could add another 2.3m tonnes to annual output. And that is just Brazil. Global capacity is poised to grow by 2.7m tonnes this year alone, estimates UBS; demand by just 1.5m tonnes. That will surely weigh on prices eventually. And the real has recently begun to pick up, as markets bet on a change of government and thus an end to Brazil’s political and economic paralysis.
Brazilian pulp bosses nevertheless seem chipper. If pulp prices fall, older, high-cost producers, mainly in the northern hemisphere, may go out of business, reducing any excess capacity. In the long run, demand for tissue can only grow. As Marcelo Castelli, Fibria’s boss, observes, the average Chinese still uses just over 5kg of it a year; in developed countries the figure is 10-20kg.
As for the currency, Eldorado’s boss, José Carlos Grubisich, notes that the industry survived a rate of 1.6 reais to the dollar five years ago. With the exchange rate now around 3.6, there is a long way to go before it begins to hurt. Even the rich world’s falling demand for printing and writing paper is not such a worry: it means there is less used paper for recycling, which should in turn shore up demand for “primary” pulp.
Though Brazil’s pulp industry is booming, it is on the lookout for new uses for its eucalyptus timber, from biofuels to green substitutes for plastics. In the past few years Fibria has bought stakes in several startups with promising technology, including one in Canada. It is sizing up two more. “Money can grow on trees,” Mr Castelli promises. “It just takes time.”

Tuesday, March 29, 2016

Tata confirms plan to sell UK steel businesses

The British steel industry suffered a severe blow as Tata, the Indian steel giant, confirmed fears that it was about to put its UK business up for sale.
Late on Tuesday the Indian group said it was “looking at strategic alternatives” to the current ownership “to explore all options for portfolio restructuring, including the potential divestment of Tata Steel UK, in whole or in parts”.
Steel workers had been waiting for days for a decision to be made by the Tata board 4,700 miles away in Mumbai over the fate of Britain’s steelworks.Earlier, union sources had revealed that the company was poised to announce the sale of its British steel operations, plunging several plants — at Port Talbot, Rotherham, Corby and Shotton — into uncertainty.
Stephen Kinnock, Labour MP for Aberavon — who had joined Community union officials in Mumbai to try to persuade the Tata board to keep Port Talbot, Britain’s largest steelworks, open — told the South Wales Evening Post that the company intended to sell the steelworks.
Instead of the hoped-for approval of a rescue plan, Tata is intent on selling its UK businesses in a move that will come as a hammer blow to the remnants of one-time British Steel.
Tata painted a stark picture of the prospects for its UK business, saying that trading conditions in the UK and Europe had rapidly deteriorated recently due to “structural factors” such as global oversupply, increasing imports, high manufacturing costs and weak domestic demand. These were likely to continue into the future and had “significantly” affected the long-term competitiveness of its UK operations.
In comments that may damp hopes of finding a buyer, the company’s board concluded that the turnround plan for the Port Talbot was “unaffordable”, the assumptions behind it “very risky” and the likelihood of delivery “highly uncertain”.
Leanne Wood, leader of Plaid Cymru, demanded a recall of the Welsh national assembly to co-ordinate a political response to the news.
“The priority now must be to seek out a reliable potential buyer to ensure that the highly-skilled workforce at Port Talbot can continue to produce world-class steel,” she said.
Roy Rickhuss, general secretary of Community, the steelworkers’ union, said: “Our worst fear that Tata would announce plant closures today has not been realised  . . . it is vitally important that Tata is a responsible seller of its businesses and provides sufficient time to find new ownership.”
The priority must be to seek out a reliable potential buyer to ensure that the highly-skilled workforce at Port Talbot can continue to produce world-class steel
- Leanne Wood, Plaid Cymru
Jeremy Corbyn, Labour leader, said ministers had to act to protect the steel industry and the core of manufacturing in Britain.
“It is vital that the government intervenes to maintain steel production in Port Talbot, both for the workforce and the wider economy, if necessary by taking a public stake in the industry,” he said.
Tata revealed that it had been in talks with the government, seeking support for the UK business — within the scope of European state aid rules — and that these would continue.
Earlier in the evening, the government had denied a claim that it was on standby to part-nationalise Port Talbot.
Amid repeated rumours that the state could step in to rescue the industry, one official said the government was “looking at all viable options”. Asked whether that included part-nationalisation, he said: “Not to my knowledge.”
Ministers are open to providing support, for example loans or loan guarantees or through further help with procurement. But a private sector sale is the preferred solution, not least because taking responsibility for the steel plants could leave taxpayers on the hook for large losses and invoke EU state aid concerns.
Unite, Britain’s largest union, called on the government to intervene. “This is a very dark day for the proud communities and a proud industry which is now on the verge of extinction in this country,” said Len McCluskey, general secretary.
British steel workers had delivered for Tata through “thick and thin”, he said. “They will feel a grim sense of betrayal by this decision, because they know that given half a chance they can make Port Talbot and sites across the UK profitable and successful.”
Port Talbot is heavily lossmaking, reflecting the troubles faced by British steelmakers. A combination of high costs and low steel prices on the international market has severely damaged the sector, leading to thousands of job losses over the past year.
They will feel a grim sense of betrayal by this decision, because they know that given half a chance they can make Port Talbot and sites across the UK profitable and successful
- Len McCluskey, Unite
In January 750 job cuts were outlined at the south Wales plant, under a turnround plan devised by local management. The government was on standby to offer support for that plan but was first waiting for a commitment from Tata.
In recent weeks concerns had grown that Tata Steel had cooled on further large investment into its UK operations. The company has poured £3bn into its European operations since acquiring Anglo-Dutch steelmaker Corus in 2007 for £6.2bn.
Tata is in the process of selling its long products business, based at the Scunthorpe steelworks, to investment firm Greybull Capital. It confirmed on Tuesday that talks with Greybull would continue. The government has been in talks with the prospective buyer over a commercial loan to help fund a £400m rescue deal.
The move to sell all assets comes just as conditions in the European steel market are showing tentative signs of improving. Since the end of last year, steel prices in the UK have gone up by about £30 to £285 per tonne, according to Platts, the price consultancy.
“The environment for British steelmakers is a lot better than it was,” said Colin Richardson of Platts. “But my personal view is that [the improvement] isn’t sustainable when you look at global overcapacity and waning demand in China”.

Will value investing stage a mighty comeback?

Market rebounds are very topical at the moment given the performance of asset prices so far this year. Can value investing, a strategy that has notably languished for the past decade, make the biggest comeback in 2016?
Such a prospect is generating buzz among investors who think areas of the equity market, notably energy, miners and materials, are looking very cheap and worth buying now with an eye to reaping long term gains.
According to various measures, global value stocks trade at a discount of 35 per to the broad market, well beyond the average 20 per cent of the last decade says BlackRock. This comes as the S&P value index, up 0.7 per cent so far this year, has outperformed the broad market and more importantly, the S&P growth index, which has fallen 1.3 per cent in 2016.
For the past year, however the S&P value index lags behind its growth rival by around 3.4 per cent, illustrating the frustration of investors who have bought shares on the basis they look cheap in the past year. The burning question is whether some share prices are now truly cheap to power the performance of value further ahead of that shown by growth stocks.
‘’We gave up on value after thinking it was looking good in the past. We have been waiting for momentum to change, and are seeing some positive signs, so we are watching value closely now,’’ says Jack Ablin, chief investment officer at BMO Private Bank.
The brutal market sell-off that has afflicted sectors such as oil, gas, mining and banks has seen many companies across these areas pop up on the radar screens of value investors.
‘’There has been a lack of truly cheap stocks over the last decade for value investors,’’ argues Jason Williams, a portfolio Manager analyst at Lazard. ‘’Significant returns tend to come when stocks are cheap not only on a valuation basis but also on a depressed profit basis. However, things are now changing, as a few sectors are currently trading at large discounts to book value.’’
He says stocks grouped banks, oil & gas and basic resources are currently trading at unusually large discounts to book value. Mr Ablin says: ‘’On thing that is comforting for value prospects is how oil has absorbed a barrage of bad news and risen.’’
The risk beckons, however that cheap stocks can continue getting cheaper. Another way of looking at a low price to book ratio, is that the market doesn’t see something as being under valued, rather that the company and its sector face bigger problems.
There’s no shortage of reasons to think that banks, miners and energy companies face a prolonged period of pain before things really turn for the better. Much hinges on whether the recent rebound in commodities and easing of worries over China and other emerging market economies holds up.
Already we are seeing signs of the bounce since mid-February in sentiment showing signs of fraying. From a fundamental view, many investors note little has changed in recent months.
It remains to be seen whether investors pull away from strategies that have worked well in recent years against the backdrop of aggressive monetary support from central banks.
That has favoured stocks noted for having low volatility, high quality and strong growth prospects and Lazard notes this has ‘’driven extremely strong performance from momentum- and sentiment-orientated investment styles in recent years’’.
As always timing is a critical aspect of successful investing and Mr Williams adds: “The timing of a resurgence in the valuation premium is difficult to forecast, and may begin in one sector before it spreads to the entire market. But for those investors who have found that having exposure to value stocks was a headwind to their ability to achieve strong and consistent alpha, that headwind may soon turn into a tailwind.’’

Construction machinery sales upswing likely after long downturn

Global sales of construction equipment such as bulldozers, diggers and dump trucks are expected to expand in 2017 after five years of shrinkage, according to Off-Highway Research, a consulting firm.
Machinery manufacturers including Caterpillar of the US and the UK’s JCB have been hit since 2012 by falling demand, which is rooted in China’s economic slowdown and the negative impact this has had on industries including construction and mining.

The consultancy said unit sales should increase 5 per cent next year, based on on analysis of data from about 1,500 interviews with machinery manufacturers and dealers.Off-Highway Research is expecting a rebound in global unit sales of construction machines in 2017, driven by the gradual replacement of ageing vehicles and its prediction of an improvement in commodity prices.
The construction machines business, which generated $78.3bn in revenue last year, has shrunk by almost a quarter in dollar terms since peaking in 2011.
Off-Highway Research said China’s deepening economic slowdown and falling commodity prices were responsible for unit sales of construction equipment declining 17 per cent last year to 685,536.
With sales shrinkage in North America and Japan in 2015, the only major markets to record increases in unit terms were Europe and India.
“[The year] 2015 was worse than expected for the global construction equipment industry,” said David Phillips, managing director of Off-Highway Research.
Emerging markets were generally weak — the only significant exception being India — and developed regions of the world were not strong enough to offset the painful declines we saw in countries such as China.”
Sales of equipment in China tripled between 2007 and 2011 in dollar terms, when the country accounted for four in every 10 construction machines bought.
But since then, weaker building activity means that unit sales last year were down 72 per cent compared with 2011.
While this has hit Chinese machinery manufacturers such as Sany and XCMG, which face inventory and factory overcapacity, the effects have also been felt by Sweden’s Volvo and Komatsu of Japan.
Caterpillar last year warned it could cut up to 10,000 jobs by 2018 as the company forecast a fourth year of falling sales.
“Very few companies around the world are as profitable as they were three or four years ago — largely because of the downturn in China,” said Mr Phillips.
“When it comes, the recovery is likely to be gradual, reflecting weak business confidence and the uncertain geopolitical outlook around the world.”
Off-Highway Research is predicting a 3 per cent decline in global unit sales of construction machines this year.
Alongside weak demand, another problem for machinery manufacturers is the large number of idle vehicles that can be sold second hand for much lower prices compared with brand new.

Facing losses and grain glut, U.S. farmers to plant more corn

Three years into a grain market slump, U.S. farmers are set to plant more corn, taking a calculated gamble that higher sales will help them make up for falling prices without triggering even more declines.
Forecasts suggest that at current prices growers will be able to cover their variable expenses such as seed and fertilizer. By planting more and scrimping on everything from labor to crop chemicals, farmers hope to cover a portion of hefty fixed costs, including land rents.
Their strategy marks a reversal from the last time that prices for corn, soybeans and wheat fell for three years running in mid-1980s. At that time, farmers cut production and prices began rising.
Illinois farmer Dave Kestel said he would be lucky to break even on the corn he planned to start planting in April on his farm in Manhattan, an hour's drive southwest from Chicago. He aims to plant roughly the same area as last year, about 500 acres (202.34 hectares), despite lower prices.
"It's a vicious circle, but you still do it," Kestel said, about planting corn.
Barring a weather disaster, more corn planted means a bigger harvest that will add to massive global crop inventories that have kept prices below break-even levels. The swollen stockpiles also make any price recovery unlikely even if U.S. output were to decline.
With no rebound in sight, cranking up production might be the best shot U.S. farmers have at balancing their books in a falling market, economists say.
Still, many will fall short of covering the outlays they cannot change, and paying for land and the cost of depreciating machinery will drag operations into the red, they warn.
Variable expenses often make up roughly half of a corn farmer's costs, economists say, although those vary from farm to farm and state to state.
"There still is a fixed cost out there no matter what you do, so the incentive is to go out there and get the variable cost covered and eat into the fixed cost," said Gary Schnitkey, a University of Illinois economist.
In major grain-producing states of the Midwest, losses from growing corn this year could top $100 per acre, according to forecasts from economists and academics.
In central Illinois, for example, planting corn will bring in gross revenues of $777 per acre, according to University of Illinois estimates. After variable and fixed costs of $858 per acre, farmers are expected to lose $81 an acre.
This year is shaping up to be the first time since records began in 1973 when U.S. farmers have increased corn plantings in the face of a three-year slide in prices.
The U.S. Department of Agriculture (USDA) forecasts farm incomes will fall 3 percent this year after a 38 percent slump in 2015 and a 27 percent drop in 2014. Big harvests threaten to prolong the pain well into 2017.
For corn, cash receipts are expected to drop 1.7 percent from last year to $46.4 billion, according to the USDA.
In the 1980s, farmers cut production after prices dropped and put land into the government's new Conservation Reserve Program (CRP), which pays farmers to let fields sit fallow to benefit the environment, said Dwight Aakre, a farm management specialist for North Dakota State University's Extension Service, which offers advice to the public.
The deadline for enrolling in the program for 2016 has long passed.
Instead, farmers are betting on corn because it offers greater potential than soybeans for blockbuster yields if the weather is favorable, and for higher prices if the weather is not, economists say.
The USDA is expected to estimate corn plantings at 90 million acres (364,217 square kilometers), up 2.2 percent from 2015, and soybean plantings at 83.1 million, up 0.5 percent, in a report on Thursday, according to analysts polled by Reuters.
That would put corn plantings about the same as the latest projection from February, at an area roughly the size of Germany. The USDA in February estimated soybean plantings would be lower at 82.5 million acres.
Aakre said plantings should shrink to help prices eventually recover. However, farmers focus on keeping their operations afloat this year, instead of tightening global supplies.
"The industry needs to contract, but if the farmer contracts he makes (his) situation worse," he said.
To save money, Kestel, a mountain climber and former flight attendant, is repairing his planting machine himself, rather than paying a mechanic $80 an hour to do it. He may not pay for an airplane to spray his crops with fungicide as he did last year.

"I figure I'm out here cutting a fat hog," he said.