To Privatize or not to Privatize: PIA

PIA - Unfortunate-much needed - Privatization

Nostalgia can be additive. It is hard to imagine an airline which was once run by Air Marshal Nur Khan, under whose exemplary leadership PIA was portrayed as the Ambassador of the nation is now edging towards privatization.

PIA not only helped Emirates & likes of Singaporean airlines to spread its wings but also owns the famous Roosevelt Hotel in Manhattan where several movies like Wall Street, Maid in Manhattan, Men in Black and The Dictator have been shot.

What went wrong?

Although there are lot of reasons for PIA’s downfall, but for me the negative numbers and accumulated losses in the balance sheet are results and not causes of the failure.

With pilots found drunk, crew members smuggling mobile phones, ghost employees who get paid for nothing, political recruitments, poor planning, interference from the govt and the elite class which travels business and uses privileges at a feeble cost are all to be blamed for this. There is no reason for the hue and cry for an ailing elephant close to its fall.

It is hard to imagine that an airline with merely 26 operational aircrafts supports a staff of 16,600 regular and 2,700 contractual employees. With 742 employees per operational aircraft, PIA is perhaps the world’s least efficient airline. No wonder the airline was running losses up to 3 billion rupees each month. In comparison, Air India with 27,000 employees for a fleet of 122 aircrafts carried 221 employees per aircraft. Several western airlines have fewer than 20 employees per operational aircraft.

Nawaz government seems to be following the Kenyan model. In 1994, the Kenyan government had sold 26% stake to a strategic partner and by the year 2000 it had doubled its passengers and cargo and started recording profits.

I strongly feel after the 26% stake in PIA is sold to an ‘unknown strategic partner’, the real story will begin which will be a turnaround for the national carrier. In the second stage, the GOP might manage an IPO which will be quite attractive for the Gulf and Pakistani financial institutions and the government might maintain 10-20% stakes in the airline. PM Nawaz recently spoke about employees being rewarded for not falling prey to the trade unions and reporting to work so there is a hint of 3-5% of stake for PIA employees who support this stance of the government.

Unfortunately, turning the table and making PIA profitable is not a possible task for the current government as the mess is huge. The objective here is to transfer this ‘burden’ on tax payers’ money to a taxable source of income for the GOP. The extra baggage needs to be offloaded!

Dying Oil Prices – Who are the winners and losers?

Global oil prices have fallen sharply over the past eight months, leading to significant revenue shortfalls in many oil exporting nations, while consumers in many importing countries are likely to have to pay less to heat their homes, drive their cars or run their energy houses.

From 2010 until mid-2014, global oil prices had been fairly stable, at around $110 a barrel. But since June prices have more than halved. Brent crude oil has now dipped below $50 a barrel for the first time since May 2009 and US crude is down to below $48 a barrel.

The reasons for the decline – China slowing down coupled with US surging production & shale gas revolution, OPEC’s determination to not to cut production and Iran edging towards entering global trade, black market sales from Iraq & Syria which means additional supplies.

So who are the WINNERS?

Mainly those countries that need to import oil. Within Asia, China, India, South Korea, Japan and Thailand have been the gainers. The benefits, cutting them short, lower inflation, lower business costs, improved purchasing power, correction of balance of payment and cut in interest rates!

Cheaper oil translates into lower inflation. Oil is used as a raw material in various industries such as petrochemicals, fertilizers and etc. As oil prices decline, the logistics become more economical and hence consumers will have to pay less. This will also make these products more internationally competitive. However, most of the agro economies in Asia continue to rely on imports of both petrochemicals and fertilizers due to increasing demands, unusual weather patterns and logistic issues due to poor infrastructure.

Both India and Indonesia have taken the opportunity to cut energy subsidies and raise taxes on energy. India imports 75% of its oil, and analysts say falling oil prices will ease its current account deficit. At the same time, the cost of India's fuel subsidies could fall by $2.5bn this year - assuming oil prices stay low.

Consumer inflation has hit a 5-year low in China. However, lower oil prices won't fully offset the far wider effects of a slowing economy.

Who has lost and why?

Most of the big oil producers like Malaysia and western Asian countries. For Malaysia energy exports account for 20% of the national economy, so cheaper oil is a problem.

Saudi Arabia, the world largest and the most influential oil exporter, needs oil prices around $85 in the long run, but seems less interested to cut down supplies in order to pressurize the US shale gas industry and it can afford to continue this way for long as the country sits on a reserve fund close to $700 billion. Gulf producers such as the United Arab Emirates and Kuwait have also amassed a considerable foreign currency reserve, which means that they could run deficits for several years if necessary.

Europe is an interesting case here. A lot of analysts believe that Europe in general will benefit from the collapse in oil prices but its exposure to Russia jeopardizes the benefit realization. A recession in Russia and depreciation of the Russian Ruble will reduce investments in Moldova, Armenia, Belarus and all those European states which are vulnerable to dislocations in the Russian labor market because of the reliance on remittances from Russia.  Plus most of these countries import oil to process into other products such as petrochemicals and fertilizers, for which oil accounts for major portion of the cost. A decline in oil prices means fall in prices of these commodities too.

Will Iron Ore Prices bounce back ?

As per a latest report from CNBC iron ore prices will exhibit an upside potential of $ 17 from current levels. To read more, kindly visit: http://www.cnbc.com/id/101932339 

Stackers and reclaimers moving iron ore to rail cars at Rio Tinto's Port Dampier operations in Western Australia's Pilbara region, March 4, 2010. Agence France-Presse/Getty Images

Why we think prices will not bounce back?
We assess the prices to continue to decline or to the best stabilize at current low levels due to the following reasons:

China has a steelmaking capacity of 900 million tons. As per recent govt. policy China aims to cut 28.7 million tons which is the largest cut in the last four years. By 2017 it aims to cut 80 million tons of steelmaking capacity

Real Estate in China accounts for two-thirds of global iron ore purchases and 20% of China’s GDP. China Home prices fell 10.5% over first seven month of the year. Analysts believe that every city has an oversupply problem. According to China Real Estate Index System, 31 Chinese cities have excess housing inventories that will take more than three years to work down, after taking into account the amount of residential land sold between 2011 and 2013 and their respective annual housing sales.

Plus, writers and analysts believe that a cut in iron ore mining will cushion the decline in the commodity price. This might be theoretically right but in real it takes time to increase supplies when economies heat, similarly there cannot be immediate cut in supplies in response to declining demand. There has to be a ‘time lag’ affect.

Vale, Rio Tinto, BHP Billiton and FMG all raised their iron ore production and shipments by over 10% in the first half of 2014. At the same time, Shandong Iron and Steel Group Co. Ltd and China Railway Materials Group Co., Ltd have been successively shipping iron ore from mines they invested in Sierra Leon back to China. In Jan-Jun, China's iron ore imports from Sierra Leon jumped by 4.627 million tonnes YoY to 9.442 million tonnes. Moreover, average prices for imported iron ore were RMB100/tonne lower than those for domestic iron ore, with the former pegged at US$118/dmt and the latter pegged at RMB843.3/wmt (USD 138).

The imported iron ore market will remain bloated in the second half year, and is under pressures to go upwards amid slow crude steel output growth and increasing supply.

On Aug 18, 2014, iron ore swaps for Aug, Sept and Oct delivery fell to US$93.17 (-1.11)/dmt, 92.25 (-1.41)/dmt and US$92(-1.31)/dmt CFR respectively on the Singapore Exchange. Platts 62% Fe IODEX dropped by US$0.5/dmt to S$93.25/dmt CFR North China.

Will the World enter in to a global financial crisis like it did in 2008, due to another Oil upsurge?

Why is oil so important to the global economy? Has its importance gotten greater or lessened over time?

Undoubtedly, there has been huge progress in lessening the world’s dependence on oil as a commodity, from energy-saving innovations to the fracking revolutions. But the fact is that global demand for energy keeps on rising at a greater pace as the populations achieve higher standards of living. For example how many Chinese drove cars a decade ago? Now it’s the world’s biggest auto market.

In Libya the ongoing skirmishes between the government and rebel group have reduced the daily production of crude oil dramatically from 1.6 million bpd to an estimated below 200,000 bpd. In Iraq there has been an upsurge in conflicts between various militias which has interrupted production. In Nigeria, production has fallen due to leaks caused by the trouble makers. Moreover, Syria is in chaos and Egypt is still unstable.

The Oil price has a record of plunging the globe into recession. Kirk Spano, the founder of Bluemound Asset Management, assessed that the spiking oil prices in 1973, 1980, 1991, 2001 and 2007 contributed to a greater or lesser degree to the economic recessions of 1973-74, 1980-81, 1991-92, 2001-03 and 2007-08 that were painful for all equity investors. The global financial crisis of 2008 was no different with a sudden spike in oil prices to $147 a barrel that broke the back of several economies.

It’s a problem when a country like Japan which is technically advanced has to shut down its nuclear stations post the earthquake or when a country which does not fall in the fault line, Germany, has to do the same post the public vote on the matter. Oil is abundant, safe and easily consumed at a price.

Are we not sensing a déjà vu this summer?

Iraq plays an important role for market stability. With current production of 3.3 mbpd Iraq is the second largest producer in the OPEC cartel and it has the potential to become larger player. Current predictions by the International Energy Agency (IEA) show Iraqi production growing to 4.4mbpd in 2015 and to nearly 6mbpd by 2020.

An eventual decline in Iraqi exports would mount pressure on energy hungry economies of China and India to increase their imports of Iranian oil. Russian oil exports would become crucial for global markets, potentially further strengthening the former Soviet Union’s position in Ukraine. Finally, a major spike in oil prices would help regimes like Venezuela too. If Iraq falls, oil prices would shoot up breaking previous highs and spread unrest in the region.

Ukraine Crisis: Time for Europe to give (clean) coal a bigger share

Did anyone of us ever think that switching from coal to imported gas could pose a major risk to the security of energy supplies in Europe?

At least six European countries rely exclusively on one country for natural gas supply – Russia. During a recent press conference Donald Tusk, the Polish prime minister called for changes in the EU energy policy and added that “Germany’s dependence on Russian gas may effectively decrease Europe’s sovereignty”.

EU relies on Russia for 30% of its natural gas imports, with 80% of that delivered through Ukrainian pipelines. Ukraine is a major gas transit nation for supplies from Russia to EU. Earlier this month Russia warned it could stop distributing gas to Ukraine over unpaid bills and any such move can have dramatic consequences for the EU.  With Europe’s main natural gas supply route at risk this provides the policy makers in the EU re-think and direct more attention to Europe’s indigenous coal resources as well as secured and reliable coal imports.

Source: BBC News

Coal accounts for 90% of the EU’s fossil fuel energy and natural gas accounts for only 7%. Hence, it is not surprising at all that Europe imports almost 70% of its natural gas and as per a report from European Commission it will have to import close to 80% by 2030.

Coal continues to remain integral to EU, as it creates jobs, keeps the domestic producers in business and more importantly reinforces the continent’s energy security. Imported coal has been a reliable source of energy for Europe. Unlike natural gas coal imports are not dependent upon transport infrastructure such as LNG terminals or pipelines so any drop in supply from one country can be easily filled by another supplier. Currently, 60% of EU’s coal imports come from the USA, South Africa, Australia & Colombia & 25% is sourced from Russia.

There is a strong security argument against over-reliance on natural gas imports from Russia and this should be given more attention in the EU’s 2030 framework for climate and energy policies. None of the targets, measures & policies proposed as part of this package should force Europe into a position where it is slowly abandoning the most abundant, affordable and secure energy fuel it is endowed with to the benefit of imported natural gas.

Ukraine - China to the Rescue ?

Ukraine prior to the crisis:

• Aging industrial sector, eastern Ukraine, primarily engaged in manufacturing of steel for Russia
• Elephant size debt of USD 35 billion
• A politically and ethnically divided population
• The private sector mainly or fully controlled by oligarchs
• Endemic Corruption
• Massive Inequality (the rich are too rich and the poor too poor)
• Energy Crisis
• Low foreign reserves mainly due to poor export figures

The US and IMF has offered billions of dollars, contingent on energy subsidies & opening up the economy. Ending energy subsidies is to ensure that the loan amount facilitated by the West does not end up in Russian banks as Ukraine is reliant on Russia for its energy needs. However, ending energy subsidies also means close to double increase in price of energy, which means many Ukrainians would freeze next winter and the aging industries would go out of business. The EU bloc will not do a favor buying not so competitive goods.

Ukraine was the fourth largest corn exporter in 2012-2013, behind Brazil, the US and Argentina. It is also the sixth biggest supplier of wheat and exported 7.1 million tons in 2012-2013. The financial crisis may affect the production of crops with farmers having trouble to pay for fertilizer, after the Ukraine’s currency decline against the dollar.

In the current scenario, the survival for Ukrainians lies in the production and export of grains. The country which has expressed interest in Ukraine’s grains is China. Ukraine is expected to become China’s largest overseas farmer in 3 million hectare land (i.e. 7% of Ukraine’s land). China cannot grow enough grain to feed its billion+ population. The good thing about the Chinese is that they don’t mingle with the internal affairs of the countries where they develop infrastructure. Their funding and support is not contingent on beneficiary countries engaging in the sort of austerity that the IMF, Europe and the US prefer to impose on any country who goes them for financial support. For China, food security for the future generations is critical and it will be ready to pay a premium for the same.

Ukraine has got two core issues; one is debt and the other is inequality. The West will not allow a massive restructuring on default of debt & yet rain dollars. Ukraine cannot even afford to cut its ties with the Russians as it is heavily reliant upon Russia for its energy needs. Ukraine will have to maintain friendly ties with Russia to secure gas supplies at discounted rates. Ukraine will have to turn to China and improve its productivity and head to become the biggest exporter of grains.

Let me summarize the above in a manner where it becomes easier to understand the dynamics surrounding Ukraine post Crimea annexation. Ukraine’s western back government will soon have to put more focus in diplomacy with Russia and furthering ties with China than relying on Europe and the IMF who have no history of pulling out ordinary men from unemployment and poverty.

Fear Universities producing more "Professional Photographers" than Professionals

Surprisingly, owning a DSLR (Digital Single Lens Reflex Camera) is kind of like having the best fountain pen in 8^th grade, and the latest smartphone in high school.

A trend which continues to spread like wildfire in universities and colleges, almost everyone throwing their Cybershots & Olympus (such good cameras) away for the expensive DSLRs to capture the very same moments but in high resolution.

My personal assessment is that three out of four or perhaps more own a DSLR because their peer got one, who recently uploaded a random picture on facebook which got a dozen likes and if he/she can then why not me. Ouch! Did I hurt anyone? I am not sorry for that! This is the same lot which would wear an expensive wrist watch observing you wearing one or buy an expensive parker pen because you used a US$5 pen. Don’t worry! You were smart because that pen consumed less ink and earned you max marks. Expensive pens consume more.

Once I had approached an institute to know about photography and I was told that I need a digital camera (cybershot then) and would require to take some beginner classes for three months and this would all cost me close to US$ 200 (excl. the camera). Unfortunately, these professional institutions are filing for bankruptcy as many of us believe that owning a DSLR officially makes one a professional, so who needs to go to a learning institute.

Youth creating official groups with a copyright sign on facebook (as they fear their professional photography might be the Da Vinci’s code) naturally run around everywhere with their cameras – leaping into random spots and not only fiddling with the buttons of the cameras but with the joints & limbs of individuals being photographed. (You got to read more)

The empowering part of the DSLR: It really doesn’t matter you take a picture of your friends posing awkwardly with someone picking nose in the background or capture stray dogs as part of your ‘Wildlife’ album, they will fetch some very encouraging comments.

Comments like:

“You are such a talent, I shall hire you for my wedding”

“The picture is beautiful bro, dogs are my best friends”

Add a few likes in the range of 70 – 100 which is equivalent to a GPA of 3+. – Is that what you live for? Cheap Huh!

A parents point: Each picture their son or daughter clicks is heavy on their pockets. Prior to joining the university many planned to become doctors, engineers & chartered accountants but these guys are busy clicking, sharing & liking and by now they have included it on their facebook description that Photography is an area of interest to them. Imagine a kid saying: Dad, I went to the top business school, punctured your pocket, gave you sleepless nights, and look what I have learned - the art (photography) because that’s what I did most of the time. I have got all girls in it and have made mom’s work simple.

Very few of us will take the pain to go through the hassle of learning techniques & improving skills to convert a hobby into a profession. But for the majority, their expensive DSLRs are the loves of their lives – until University ends.

Hence, owning a professional camera & creating a page on social websites with watermarked snaps is not enough to be termed as a pro.

To ensure I stick to the purpose of the blog: Smartphones are increasingly substituting professional cameras and 2013 witnessed close to 10% decline in camera shipments compared to 2012. Smartphones continue to enhance capability to produce images with minimum input requirements.