Saturday, January 10, 2009

Peru in focus -- 2008 growth forecast, natural gas and a new contract for PetroPeru

Andina, a Peruvian news agency had some nice pieces on Peru to offer for those interested.

1. Peru sees solid economic growth amid global crisis -- Andina

It seems the central bank of Peru thinks the country will grow 9.1% in 2008, up from 8.9% in 2007. This will make Peru the fastest-growing economy in Latin America for 2008.

The bank predicts 2009 growth will be around 6.0% and attributes the slide mostly to decreasing revenue from Peru's metal exports.

Peru reported a trade surplus in 2008 of $3.1 billion, down from $8.36 billion in 2007, once again attributed in large due to shrinking revenue from exports and also from surging domestic demand for imports.

I'm not sure what happen Friday evening, but according to this other story on Andina, the Economy Minister revised GDP growth to 10% for 2008. I'll be sure to make a post later on in the weekend or early next week with growth estimates from other sources. Check out both stories and decide for youself =).

2. Peru natural gas output rose 27% in 2008 -- Andina

Good news for the natural gas sector in Peru. Total output during 2008 clocked in at 119.95 billion cubit feet, up 27% from the previous year reported Perupetro on Friday.

Increase in gas production was driven not by speculation from abroad but rather increasing gas consumption in electric power plants in the country. Although the article does mention how in December natural gas production declined by 4.7% compared to November/ December of 2007. Perhaps indicating the global slow down, and subsequent decrease in natural gas demand is hitting home in Peru as well.

Camisea natural gas plant

3. BPZ Resources signs $1.3 billion crude oil sales contract with PetroPeru

BPZ Resources says that the actual number of barrels sold will depend on commodity prices and the actual production of PetroPeru's Covina field in northwest Peru.

The deal covers the sale of roughly 17 million barrels of oil at an average price of $65/ barrel.

Video -- Argentina's Jewish community supports Israel

(REUTERS) Jan 9 - Hundreds of Argentina's Jewish community gather in Buenos Aires to show solidarity with Israel's military action in Gaza.

As Israel continued with its two-week offensive in the Gaza strip, Israel's Ambassador to Argentina Daniel Gazit and Carlos Fraun, President of the Argentine Zionist Organization, addressed the gathering at Buenos Aires' Jewish Centre.

Kimberley Lim reports of Reuters reports

FT Commentary -- How are frozen credit markets and the global slowdown being felt down in South America?

Stephen Fidler put together a great piece on January 8th where he presents various perspectives and analysis from South America on how the global crisis is affecting the region.

Across the continent, the crisis has brought about a large-scale destruction of wealth. Claudio Loser, a former western hemisphere chief at the International Monetary Fund, calculates that 40 per cent of Latin America’s financial wealth was wiped out in the first 11 months of 2008 through falls in stock and other asset markets and currency depreciation. That $2,200bn (£1,440bn, €1,610bn) loss alone could cut domestic spending by 5 per cent next year, he estimates.

On top of that, flows of credit from abroad have contracted sharply and the region, much of which depends on exporting raw materials, has been pummeled by a collapse in commodities prices. The deterioration in Latin America’s terms of trade – the price of exports divided by the price of imports – could hit even harder than the credit crisis, says Mr Loser, now with the Inter-American Dialogue, a Washington think-tank. “The fact that the terms of trade have gone so far against the Latin American economies in terms of agriculture, minerals and petroleum is really going to hit the region very hard,” he says.

Click here to access the full article from the Financial Times

Friday, January 9, 2009

South-South Cooperation -- Ecuador seeks $280 million credit line from Iran

Ecuador is reaching out to its new buddy, Iran for a credit line of $280 million usd to finance pipeline and other oil-sector related projects according to what Mining and Oil Minister Derlis Palacios told the Dow Jones Newswires yesterday (click here for the article, provided via Rigzone).

Senor Palacios seems confident Ecuador will get the money too. Stating in a telephone interview "We are asking for a credit line of $280 million, especially to invest in our pipelines. We are sure that this money will come."

This is all very intriguing. I must admit Correa has done some good for Ecuador and my opinions on him have personally evolved over the years, and in a positive way. However, messing around with Iran on the heels of months of intense fighting with foreign companies and THEN causing hysteria with the country's bonds will definitely reverberate for years to come in the international community.

Yes, it is true Ecuador probably would probably have a hard time securing a loan from any normal western financial institution and that it has all the right in the world to look elsewhere. I just question the path Correa and the political big whigs in Ecuador think is best for the future of Ecuador.

If the political situation changes and new leadership seeks to pursue a different path, one less antagonistic of the international community perhaps, it will be a hard process of re-affirming confidence after all of it.

However, if the world was fair I think Ecuador should be able to go ask Iran for a loan if it wants. They are in the end both developing countries that could probably benefit from cooperating with one another. Sadly we don't live in a fair world, and considering the degree to which Ecuador is connected to the international financial system, I think it should have thought a bit more carefully about its foreign policy in the last year or so.

Commodities in focus -- Copper rises in London trading as China begins to stockpile raw materials

The commodity sector has been hit hard by the global economic crisis, especially in terms of the speed of its decline. For much of 2008 as other equities faltered, shares of commodity and energy stocks seemed immune, many times leading the major US indices into the green despite poor performance in other sectors.

When markets began to tank between September – November this all changed. Year to date (2008), oil is down around 60%, copper 50%, natural gas 20%, etc. As commodities plummeted miners profits shrank, exploration slowed, new mining projects became unfeasible in light of depressed prices and speculators who had been relying on energy and raw materials as a safe investment or inflation hedge withdrew their money.

If the stimulus packages being enacted by governments around the world successfully help to re-invigorate the global financial system and we see a recovery in confidence and economic activity the recession may end sooner than expected. If this happens commodity demand will once again explode, especially considering how so many producers and explorers have scaled back their operations.

China is not oblivious to this. Much like China's logic behind securing resources in Africa to avoid supply disruptions, China is now concerned about supply disruptions that may occur if demand picks up.

Bloomberg and Reuters reported this morning that China's Reserve Bureau, the country's stockpiling agency, is buying aluminum. Analysts seem to think (and I agree in this situation) that if they are buying up aluminum at cheap prices, they will do the same for other metals.

“Aluminum inventory in warehouses monitored by the Shanghai Futures Exchange declined 18% in the past week, the largest decline since April 2007, figures from the exchange today showed. China’s Ministry of Land and Resources said two days ago the country would build emergency stockpiles of copper and other items to guard against potential supply disruptions.”

(click here to access the full article from Bloomberg, republished by the Mining Journal)

China is smart to do this, with the country's massive foreign reserves and depressed commodity prices it makes sense for them to stockpile the resources they need to ensure their development. China is worried about its slowing economy because of the potential for political unrest in bad economic times.

Considering the fact China continued to purchase commodities when they where selling at their recent historical highs, it must feel like shopping at a giant fire sale for the Chinese who can now scoop up a huge stockpile of raw materials and energy for depressed prices.

Thursday, January 8, 2009

Indian's version of Enron shakes up Bombay exchange

Satyam Computer Services, one of the largest outsourcing companies in India has just reported it has been inflating profits for years, sending its shares down 80% in Bombay trading. This is hardly good news for India's financial system which is already struggling in the wake of the Mumbai (Bombay) Terrorist Attacks and due to the generally bleak economic picture in the global economy.

The Bombay Stock Exchange's Sensitive Index, or Sensex fell a record 52% in 2008. After news broke yesterday the exchange tumbled 7.3% and also sent the Rupee down. The New York Stock Exchange halted trading of shares in Satyam after news, saying it needed to review the situation.

Reuters reports, "Ramalinga Raju, founder and chairman of India's fourth-largest software services exporter, said in a statement that Satyam's profits had been massively inflated over recent years. He added that no other board member was aware of the financial irregularities at the Satyam, which in Sanskrit means "truth."

(click to access the full story from Reuters or Bloomberg)

Copper prices in 2009 and 2010

Chile's state copper commission Cochilco predicts the price of copper will average $1.60/lb in 2009 and $1.50/lb in 2010.

Cochilco executive VP Eduardo Titelman explained at a Santiago news conference that the demand for copper in 2009 and 2010 is likely to be "modest."

Considering Chile is the world's biggest producer of copper, it is good the country invests a lot of energy into copper forecasts. Check out the chart on this post from IncaKola News comparing Cochilco's copper forecasts with the real market prices between 2005 - 2009.

I'd say they do a pretty decent job, most of the time that is...

For major copper producers like Chile and Peru this might spell bad news. Both depend heavily on copper which in 2007 averaged $3.23/lb. If Cochilco's predictions are correct, the two countries should trim their spending over the next two years.

However this may prove difficult for Chile and Peru to do with upcoming elections and the looming global recession in the background. Chile is fortunate to have stashed away significant reserves from the boom years. Peru is not as lucky and will find it even more difficult to trim its spending than it's southern neighbor which has proved on various occasions it is far more capable of exercising restraint and making sound economic decisions when necessary.

Wednesday, January 7, 2009

China goes shopping for commodities

If you have kept up to date as I try to do with China's oversea investments in the commodity and energy sectors you're probably aware of the fact China has been shopping for commodities in emerging markets.

Africa and to a lesser extent South America where the main benefactors of China's spending spree from 2000-2008. The two continents are home to abundant supplies of natural resources China needs to sustain economic growth. The two continents are also home to various countries that are hungry for foreign direct investment in their commodity sectors which until recent had been the main fuel behind their respective economics booms.

China also had a edge up on their western counterparts in many of these countries. Some countries in Africa and South America intimidate traditional western investors due to political instability. Others have such a horrendous human rights record that many western firms are morally inclined not work in them.

With the global slow down in full swing, cash rich Chinese companies and investment groups now find themselves in a different position. Frozen credit markets, plummeting commodity prices, depressed stock market prices and a cloudy horizon in the future have led many mining companies from developed countries to search for long-term investors with the capital to keep their operations running until the global economy improves.

China has shifted its attention away from Africa, instead focusing on possible investment opportunities in Canada, Australia and South America. Keith Spence, president of Global Mining Corp, a China-focused resource investment company was quoted in a great piece published in the Financial Times yesterday.

"The Chinese realize there are massive opportunities in the market. A year ago, they were going to Africa to acquire early-stage development assets. But now they are looking for larger tonnage, longer life, later-stage assets. There is less of an emphasis on emerging markets, because now there is choice."

Last month China's largest zinc producer, Zhongjin purchased 50.1% of Australian zinc miner Perilya for $32 million usd. Chinalco, a Chinese aluminum company has suggested it may increase its stake in Rio Tinto to nearly 15%.

(click here to access the full article on this topic from the Financial Times)

I must say it is interesting to see that although China finds itself in a more lucrative buying position that it has not shunned South America. Evidence to suggest the Chinese may perceive South America as more than simply another commodity rich area in which to extract untapped resources.

Rather it may be that South America has come to represent a region that has well developed assets, worthy of purchasing for the long-term. China is forging much closer ties with fellow APEC members Chile and Peru. China is quickly working with Peru to finalize a Free Trade Agreement and already has one with Chile. China is increasing its investment in agricultural commodities in Brazil and Argentina and hopes to continue easing visa restrictions for many of its citizens on travel to the region.

Below I've included a chart of Chinese investments / cooperation with Latin American countries. I assembled this chart about 6 months ago for my independent study / thesis. If you know of any other instances of Sino-Latin America interaction please by all means let me know and I'll update this chart.

Tuesday, January 6, 2009

Economics in play -- mixed messages from South American commodity producers

The current economic crisis has hit commodity producers in South America hard. All the talk about decoupling, booming domestic demand and well planned budgets will be tested as commodity exports plummet.

The big names in financial news (Reuters, Bloomberg, FT) reported this morning Brazil, Colombia and Chile have plans to sell bonds in international markets. All three of these economies depend heavily on revenue which is derived from commodity exports The recent tumble in commodity prices is not welcome news for these countries, which until just recently where some of the fastest growing emerging markets in the world.

Bloomberg LP reports Brazil will sell $1 billion of 10 year-notes, Colombia plans to raise what it calls a “benchmark offering” of roughly $500 million, and Chile has yet to release a figure on how much it will raise but its finance minister has confirmed it is very plausible the country will indeed issue its first foreign bonds since 2003 in order to help fun its fiscal stimulus plan.

(click here to access the full article from Bloomberg LP)

More bad news was released this morning when Brazil reported Industrial output dropped the most in 7 years. This is not a good sign. Internal demand from consumers in countries like Brazil and China remains high, but is not sufficient to keep these economies growing at the rates they have enjoyed during the past few years.

According to economists at Bloomberg, Brazil will expand at its slowest pace this year since 2003. Growth forecasts made by the Central Bank of Brazil are being cut in half for 2008 and economists are now predicting interest rate cuts later in January.

(click here to read more on this topic from Bloomberg LP)

One bit of good news comes from Braskem SA, Latin America's largest petrochemical company. It is currently in the midst of a 4-day rally in Sao Paulo trading. The gain comes as Peru announced plans to construct a new petrochemical plant in the southern port of Marcona.

Braskem, has been actively seeking natural gas and raw materials at competitive prices in South America. Peru has lined up $8 billion for its energy industry. Additionally, Braskem already had plans to build a plant in Peru that would be supplied by the Camisea gas fields.

(click here to access the full article from Bloomberg LP)

Recent developments in Peru seem to have bolstered investor confidence in the company which had previously been exploring natural gas investments in Bolivia and Venezuela. In both cases, there were various difficulties that emerged in working with the governments of Morales and Chavez. It seems, Braskem's new choice of opting to work in Peru is being interpreted by the market as the correct one.

I find it pretty interesting, that the mere construction of a Petrochemical plant in Peru, can turn the heads of investors and cause a petrochemical company trading in Brazil to go on a 4-day rally. It just shows how markets can move based on people's perception of regions they know little about.

I just hope investors realize that the rosy picture the international financial community paints of Peru may change if the government continues to fail at bringing prosperity the more remote regions of the country where much of Peru's raw materials are extracted from. For now though it seems the investors are content with Braskem's decision to avoid working with the left wing, anti-American regimes in Bolivia and Venezuela...

Monday, January 5, 2009

Hungry for IPO's in 2009? Do Chinese and Brazilian firms have the capacity or guts to test the market?

It seems just yesterday that Chinese IPO's where the talk of the town. Even if you were not buying them yourself, it still seemed as if everyone else was. When you consider what an IPO is, it's no wonder why the investment communities appetite for them has disappeared.

When companies go public they offer a certain portion of their company to shareholders. In exchange shareholders invest their money in hopes of seeing a given company grow and prosper. If a company grows and prospers, shareholders are rewarded by seeing the value of their investments rise. If the company preforms poorly investors see their investments loose value.

If you have cash lying around would you trust your money in a company looking to expand or finance some project in the context of the economic climate today?

Chinese companies are feeling the pinch, turning to banks instead the stock market to raise the capital they need. The Financial Times reports “Mainland companies last year raised a record $100bn in IPOs on exchanges in Shanghai, Shenzhen and Hong Kong – far more than established bourses in New York or London.”

(Click here to access the full article from the Financial Times)

In response, the Chinese Government is attempting to encourage banks to lend to companies looking for expansion capital. The recent interest rate cuts make lending cheaper, which will help entice banks to lend, but if history repeats itself Chinese banks may find themselves with a great deal of outstanding loans that can not be repaid.

This happened in the late 90's and it could happen again. Especially if the Chinese economy is not able to weather the global recession as well as many hope. Additionally, many IPO's from 2006 and 2007 benefits not from legitimate investments from people who had faith in their business, but rather from speculative investors who wanted a piece of the profits.

Chinese media, Xinhua, reports Pricewaterhouse Cooper (PwC) expects IPO's will rise in value by 45% in the second half of 2009 as a result of the government stimulus package. PwC forecasts Companies will raise about 150 billion yuan (22 billion U.S. dollars) through IPOs in China in 2009.”

State media in China should be analyzed with a bit of skepticism for obvious reasons (it is filtered if you didn't know). This fact alone contradicts with the figures presented by the Financial Times that in 2009 over $100bn was raised. It would be nice to be told what base measure they are using when they figure the 45% increase. If anyone feels like checking out the PwC report you might be able to find out.

(Click here to access the full article from Xinhua)

Brazilian IPO's also seem to be having a tough time, as reported by Bloomberg LP today.

“The point isn’t that VisaNet isn’t interested in listing, but that there have been problems, in this market, in pricing the offer in a way that shareholders will be satisfied,” said Victor Mizusaki at Sao Paulo-based Itau Corretora, the brokerage unit of Brazil’s biggest non-state bank. “There is a deadline to turn in all the paperwork and to price the offer, and the time limit was running out.”

Brazil’s boom in IPOs dried up last year with only four companies going public compared with 64 in 2007 as the global financial crisis sent the benchmark Bovespa index down 41 percent and reduced investors’ appetite for riskier emerging-market assets. Companies raised more than 70 billion reais through initial and additional stock sales in 2007, according to data from exchange owner BM&FBovespa SA.

(Click here to access the full article from from Bloomberg LP)

All in all, I'd say IPO's are going to far and wide in the developing world for 2009. All these countries have seen the incredible attraction they garner when times are good and investors are flowing with confidence and money. They also see that when times are bad, people will pick and choose their investments very carefully. Meaning far less appetite for risky investments, in particular with companies that have yet to face the pressure of being traded and valued within the context of this chaotic and unpredictable market.