Is Huawei part of the Chinese US trade war?

Here's everything you need to know about Huawei, the Chinese tech giant whose founder's daughter was arrested and could spark an all-out trade war. The Huawei 'Princess' has become a pawn between US and China.

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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 - 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.

An evening with Paul Donovan, Global Economist

I recently had the privilege to meet Mr. Paul Donovan, Global Economist, Managing Director UBS Investment Bank on September 23, 2013 in Dubai. Paul co-authors the Global Economic Perspectives publication with other members of the Global Economic team. Paul regularly appears on CNN, Bloomberg TV, and CNBC.
Paul, very comprehensively, covered various developments in the global economy ranging from the selection of US FED chair to the Japanese issuing bonds, devaluation of currencies and region-wise economic outlook.
There was a Q/A session which allowed me to put forward questions/opinions to Paul and I am glad he answered those questions to my satisfaction. The following were the communications exchanged

1 - Creation of Fake Capital

“I own apples and Paul owns oranges and we both agree to exchange each fruit worth millions. Paul sells me the oranges and I sell Paul apples. Next morning, we are no more fruit vendors but banks with assets worth millions. How this creation of fake capital is preventing organizations and economies to bounce back?" I related this to what happened in Iceland (shift from fish to investment banking) and other European economies.

Paul’s response: As this was the very first question to Paul that evening, he smiled to me and said that this is quite unfortunate and many bankers in the hall will not like us for discussing this. He added that banks have realized this and regulations are being brainstormed and developed to overcome these issues. Banks are becoming more systematic than before. He added that a bad situation in Euro will result in good outcomes. Many banks have recently either ceased or limited their operations in the Middle East and other regions. Banks like BNP Paribas have ceased operations in most of the gulf countries and Barclays has limited its operations too. These banks have been influenced by their respective countries’ governments to return and invest in their local economies. The increase in lending within the Euro bloc will improve the economic conditions over the medium term.

2 - Volatile Commodity Prices

“Theoretically prices decline when demand falls. Prices of coal, gold and several other commodities have either declined or remained volatile amid increasing demand trends year over year. What is to be blamed for low commodity prices? Am I right in saying that high capex is to be blamed for low commodity prices ?”

Paul’s response: “Yes, it is true that excessive capex in certain regions has resulted in volatile commodity prices. Expanding upon your statement mis-allocation of capex and resources is to be blamed for volatile commodity prices.”

3 - Asset Nationalization

“Asset rationalization, by Jan 2014, in countries like Indonesia can create serious issues in the global economy as China imports more than 80% of its bauxite requirements from Indonesia. What implications will this carry for the Global economy ?”

Paul’s response: “As a global economist I am more concerned whether the world’s global resource requirements will be fulfilled. China has invested in countries in Africa and has acquired mines, which it cannot fully rely upon because in the past sudden shifts in the governments in Africa has also caused disruptions in the mining activities and complicated ownership structure. As a global economist Indonesia must continue to supply raw material to China as China processes resources primarily for its local economy. Indonesia’s move is politically correct but not on economic terms because it has energy crisis and processing industries need adequate and cheap energy supplies. This move will worry the Chinese and will have a global impact.” 

And, the intellectual evening came to an end.

Denying developing countries access to coal is like restricting food aid to the poor

Coal mining plays a significant role in many national economies. Developing countries rank highly among the world's major coal producing countries. In cases of China, India and South Africa coal is utilized for domestic electricity generation. Moreover, these countries have export markets generating export revenue. Colombia and Indonesia earn considerable export revenues from the coal production industry which is highly export-oriented. Coal currently provides 30% of the global energy needs, 41% of its electricity and 68% of its steel.

Coal in Electricity Generation

Pakistan is the sixth most populous country in the world with an estimated population of 184.35 million in 2012 - 2013. With a growth rate of 2.0 percent in 2012/2013, it is estimated that Pakistan will move to the fifth position by 2050. With rapid urbanization and population boom in major cities of Pakistan, the demand for electricity continues to exceed the supply. As per the Power and Water Ministry the supply of electricity stands at only 12,150 MW while demand is 16,400 MW creating a shortfall of 4,250 MW. Opportunity lies in the crisis, they say.

Increased investment in the technological development and higher labor productivity through improvement in education, health and training facilities are the main modes of increasing productivity of human resources. But how is this all possible without an investment in the energy sector, primarily coal.

Apart from being the sixth most populous state, the country is the sixth richest nation in respect of coal reserves, amounting to more than 200 billion tons. For further clarity, these coal reserves account for 2% of the reserves in the Asia-Pacific region and 0.2% of the world. Of this 200 billion tons, 185.5 billion tons (93%) of the coal reserves are in Thar in the province of Sindh which is 8 hours drive from the coastal city of Karachi. All coal is sub-bituminous and lignite in grade and is optimum for the energy sector. With the Chinese assistance Pakistan has 3 X 50 MW power plants in Lakhra, Balochistan and only 15 MW is being produced which is only 0.1% of the actual energy mix as displayed above. Majority of the electrification is via Oil which has traded above the $ 100 mark for quite some time in the international market and Pakistan nearly imports all its oil requirements. The other primary source is Gas. Gas is currently being increasingly consumed by the industries, households and the transportation sector in Pakistan. This has caused bottlenecks in timely supply of gas resulting in shortages and power cuts. The other source is hydroelectric where Pakistan faces an issue of water shortages in rivers and banks which have sources in Indian controlled Kashmir. There have been several rounds of dialogues between the two neighbors India and Pakistan to abide by the Indus Water Treaty and Pakistan has voiced its concern on international conventions and forums regarding India building dams in Kashmir. 

The current energy mix is quite expensive which is causing unrest in public and pushing businesses out of the country. The Pakistani economy can save around $26 billion in fuel costs over the next 15 years if thermal plants of only 420MW are shifted to coal.

Many of the countries with significant coal reserves also have significant coal production. However, Pakistan is counted amongst those nations whose coal reserves are yet to be utilized at a large scale. This provides economic opportunity to further develop the coal extraction industry and poses a great potential for a secure and affordable domestic energy supply using the indigenous coal reserves.

Pakistan currently imports more than 6 million tons of coal annually to meet the requirement of its thriving cement and ailing steel industry resulting in loss of foreign reserves and lost employment opportunities at home.

The current prime minister of Pakistan, Mr. Nawaz Sharif and his government, have several times shown interest in setting up greenfield power projects in Gadani and converting diesel and furnace oil based thermal power plants to coal. There has been no constructive talks on how could Pakistan mobilize its internal resource to attract capital inflow.

Earlier governments had policies directing towards exploiting the local Thar coal reserves to produce energy, but due to Asian Development Bank’s withdrawal of USD 1.4 billion in finance, Pakistan will resort to coal imports, atleast in the short run, to provide cheap electricity to the consumers and breathe life into industries, textile in particular. It appears that multilateral banks listen only to their donors, not their customers. And donor governments, like the US and the EU, are more interested in being politically correct on climate control than actually addressing poverty. It is interesting to note that US is the largest producer of coal, accounting for 13.4% of the global coal production and consumes 88% of the coal produced domestically and half of the electricity produced in the country is generated through coal.

For critics: Coal has a bad reputation due to the widely held view that it causes global warming and is responsible for death of many miners. What people don't tend to realize that coal has changed the living conditions of many in the developing countries such as India and China. For example, China, a model country for the developing world, has witnessed 536% growth in GDP since 1990 and more than 660 million people have been lifted out of poverty. Today more than 99% of the Chinese population has access to electricity. Coal has proven to be a "critical enabler" for successful economies. This has helped countries to further invest in cleaner technology and renewable energy resources. Coal is potentially the "fuel" towards any successful economy.

Japan - The latest sick man of Asia?

The Japanese are going through an immense economic+political transformation with a collapse in the export sector in a much globalized version of recession and the more radical promises of the political parties such as increased spending on military and tougher stances on territorial disputes with neighbors which worries China.Till date, Japan's involvement in global politics, at least since the world war 2, has been only to the extent of summits which has helped Japan in promoting a soft image of itself as a global producer for many established brands. Such as portrayal did not only contribute to Japan's growth, but it benefited the entire region including China and the Koreas.

Shifts in paradigm can have some serious repercussions for  Japan and in fact it has started to face some.

Japan recorded a Government Budget deficit equal to 9.70 percent of the country's Gross Domestic Product in 2011. Historically, from 1960 until 2011, the Japanese government budget averaged -2.7% of GDP reaching an all time high in 1961 of 2.6% of GDP and an all time low of -10.5% of GDP in 2009.

The Japanese finance ministry reported a 549 billion yen trade deficit in Nov. 2012, higher than expected. The major cause of this decline is due to the territorial spat over islands between China and Japan which has in turn impacted the shipments to China, Japan's largest export market. The Chinese have initiated a strict boycott of Japanese products which has not only impacted Japanese exports to China but Japanese manufacturers who run facilities in China to meet consumer demands around the globe. 

A weak Japanese yen is not strenuous enough to make Japanese exports competitive in international markets as it is still higher than what it was five years ago, hurting exporters' profits. 

Who benefits? Using a macro lens, it's a lose-lose situation for all the stakeholders and it is just like adding fuel to fire (further exacerbating the economic crisis). Using the micro-lens, South Korea seems to be the winner in the short run. Its giants are improvising their products, both automobiles and electronics, and capturing market share in world markets. 

It can't be said that the Japanese are in a recession, unless officially announced. However, the facts and figures do not show a progressive image either.

History Repeats Itself

I was going through the newspaper a few days back and I was surprised to read that an unemployed Chinese turned to a millionaire when he borrowed money from the bank to trade in 100 tons of garlic. To my surprise he made a profit of 125%…Wow!!! so is this a better investment than gold ? My answer is YES!…
Reasons: the demand for vegetables tends to be inelastic which means whatever happens to your income there will be a negligible impact on the amount you spend on food items. The second reason which I want to bring to your knowledge is that what exactly happened in the 1930′s “Great Depression”. There was a transition in an economy , a clear shift from the agriculture sector to the manufacturing sector and then in the 90′s when the Asian stock markets (known as the tiger economies) declined there was a shift from manufacturing to service industry. So what will happen now? Is there another sector left to exploit ?NO…The present scenario suggests that most of the non-oil producing countries will gradually shift to the traditional industry – YES the agricultural industry. Russia which is currently experiencing negative growth asked its steel workers to start potato cultivation on state owned lands. China is providing its farmers with cheap credit so that they can afford luxuries in order to encourage agricultural production, and EU pays excessive subsidies (under the Common Agricultural Policy) to its farmers. Agriculture sector will further grow due to increase in investments made by Saudi Arabia in Australian lands for crops and many other Non-Agricultural industries are investing in countries like Pakistan, Bangladesh and etc.
More importantly this will also serve to the basic need of every human being and that is to live in an environment free from carbon, but nevertheless it will have drawbacks attached to it.