Why nothing's being shipped, and why the fallout will be way way wi-i-i-i-ider than you think

The Baltic Dry Index (replaces the Baltic Freight Index). A composite of the Baltic Capesize, Panamax, Handysize and Supramax indices. The index is designed as the successor to the Baltic Freight Index and was first published on 1 November 1999.

Original charts etc from Wikipedia

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Foreign Reserves - no correlation with land mass, amazingly enough!

8.8.8!

So if the % of world reserves were proportional to land area...

• The US (0.6% of world reserves/ 6.5% by area) would be the size of Nigeria (0.87% of reserves.)
• Japan (13.9% reserves/ 0.25% area) would be larger than Russia (8.5% rsvs), say with an Indonesia (0.9% rsvs) or Libya (1.3% rsvs) stuck on the side.
• Both The Untied Kingdom, sans Empire, (0.7%/ 0.16%) and the ECB (0.7%/ 3.0%) would be about the size of Egypt (0.5%) or Mauritania (0.009%)
• China (25.9%!/ 6.4%) would a bit larger than Russia (8.5%), Canada (0.6%) and the US (0.6%) combined.
• Singapore (2.5%/ <0.01%) would be bigger than India (4.3%.)
• So would Brazil (2.6%/ 5.7%), for that matter...
• ... while India (4.3%/ 2.3% would be itself... PLUS Argentina (0.6%.)

You get the idea.

And no, I really can't draw any investment conclusions from this "analysis"!!

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I won't do the exact same thing with populations (too obvious!) but I will say that China's current population is about that of the whole world in ~1850. India's lagging behind only slightly, matching the whole world maybe twenty years earlier? The USA, #3 in the headcount stakes, clocks in at about 1,000 AD (or CE) with #4 Indonesia only about 100 years earlier. Brazil at #5 is only 200 years into AD-space, while #6 Pakistan and #7 Bangladesh individually would be like the world about 200 years the other direction, ie ~200BC (or BCE.)

Err... Buy the BRICS? Yeah! Think about the compounding effect since 1850! Scratch that.

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Stumble It!
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Asia - flattened by an Un-Flattening World

Excellent note from MS last night entitled HIGH TRANSPORT COSTS TO 'UN-FLATTEN' THE WORLD in which their economists note, in a glass-half-full sort of way, that with high oil prices driving transportation costs through the roof and the Asian export model under serious threat as a result, the development of domestic and regional consumption is a positive.

"We believe that, with rising transport costs, trade globalisation may slow significantly and the world will 'become more round'. Asia's trade model will be particularly affected. The near-term impact, in our view, is not positive for Asia; however, in the long run, this shock could coerce Asia into moving away from the export-led growth model."

(Maybe India rather than China has it right after all? Just a thought!)

The FT writes this morning, coincidentally, of P&G's rethinking of its supply network in the light of massively higher transport prices:

"Soaring energy prices are forcing Procter & Gamble to rethink how it distributes its products, with the world’s biggest consumer goods company shifting manufacturing sites closer to consumers to cut its transport bill."

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I wrote about the effect of transport costs on Asia recently here and here, but obviously didn't think it through quite as far as MS (and P&G)!

X vs. PKX... and the winnah is...

Here's the ADR of POSCO (ticker PKX in yellow, formerly Pohang Iron & Steel, or something like that) vs US Steel (ticker X in white, formerly known as USX, and before that, Federal Steel + National Tube + American Steel Hoop Co etc and, before that, US Steel.)

The market cap of PKX at USD45bn is (at the moment) almost exactly double that of X - a massive change from the ratio as recently as a year ago:


Both trade in USD, but obviously facing very different operating environments... From an article yesterday in Bloomberg entitled: "Bernanke's Inflation Cure Wanes as Import Costs Rise"

• The surging oil prices that are raising exporters' costs to ship everything from steel to sofas to America are encouragingc ustomers to buy more domestically made goods -- and giving the producers of those goods more room to raise their prices.
• ``Higher freight rates were the final straw in tipping the balance to domestic producers,'' coming, as they did, on top of a weaker dollar
• `` A weak dollar means that domestic producers are better sheltered from competition by foreign suppliers,'' Edmund Phelps, winner of the 2006 Nobel Prize for economics ... ``So the domestic producers here in the United States will have every incentive, therefore, to take advantage of that greater protection from competition by raising their markups.''
• Chinese steelmakers are doubly disadvantaged by higher oil prices. Not only do they face the added cost of shipping products to the U.S., they also must pay more to transport iron ore to their mills from Brazil and Australia.
• Pittsburgh-based U.S. Steel Corp. in contrast, is able to meet the majority of its iron-ore needs in North America from its two mines in Minnesota.

(I've mentioned shipping costs and Asian exports here before - but that didn't address the double-whammy mentioned above!)

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Sure enough, being stuck between a rapidly shrinking lump of iron ore and a hard place, the Chinese steel producers today agreed to cough up to RIO and BHP for basically the same c.i.f. price that they're paying for iron ore from Vale (formerly known as CVRD, which stood for... oh, never mind), ie up to double what they'd previously been paying, and higher than expectations. (So did Nippon Steel & others, I believe.)

The Rise (and Rise and Rise) of Rice

Comment from Merrill Lynch (link to a note this morning):

• "There are many tsunamis in the agri world, but this is a big one The floods in Southern China will cause huge damage to China's rice production. There will be extensive damage to a host of other crops but let's focus on Asia's staple : rice.
• "David Cui reckons that up to 13m tonnes may be lost, or over 10% of China's harvest. To put it into context, 13m is equivalent to the total exports out of Thailand and Vietnam combined : the world's top 2 exporters. It's two years' worth of US production. The equivalent in the oil world would be Russia not producing any oil for four months... Where would oil prices be then?
• "And another snippet : if China wants to replace this lost crop by importing, that would soak up 50% of global trade... so where do we think rice prices are going to head in that monopsonistic scenario ?
  
• The point is that China subsidizes rice prices by about 40% vs global prices and these floods have to put pressure on global prices exacerbating the situation. Unless China raises domestic prices, smuggling, already an issue, will escalate."

(What would I buy to play this? Noodles.)

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A word from my distant past that I've not heard in ages:

In economics, a monopsony (from Ancient Greek μόνος (monos) "single" + ὀψωνία (opsōnia) "purchase") is a market form with only one buyer, called "monopsonist," facing many sellers.

(Thank you, Wikipedia!) And yes, the writer's a Brit.

What's worse for Asia than fewer orders from the US?

We get the WSJ in print, but I'm too cheap to also pay for it online (Rupert, are you there? I get FT.com free with my paper...) If you do, you can see the article here.

"Stung by Soaring Transport Costs, Factories Bring Jobs Home Again"

So basically, not only are you seeing inflationary wage pressures in the factories of Asia and the US's "Strong Dollar" so-called "policy" hurting costs on an FOB basis, (though FX translation gains for overseas sales remain the bright spot for US corporates,) NOW you have shipping transport costs driving costs at the CIF level through the roof too.

Net net, not good.


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The Strong Dollar Policy

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We already saw a bit of an impact on service jobs (in India) in this post. I thought it was funny at the time.

Playing with your Food plays

Credit "don't call me CSFB" Suisse is out with a glossy mega tome, the like (and weight) of which we rarely see these days, on the theme of food and rural income in Asia. (Never mind about the trees.)

The central thesis is that Asia's need for food self-sufficiency will rival the Western world's need for energy, with demand growing at a faster clip than supply... with inventories in Asia now already at a 30 year low, this problem will take years to fix. Total acreage supply in Asia is growing at only 0.3% per annum since 1990 - the only way Asia can meet its growing demand is through yield enhancement.

In the meantime (during the meanwhilst), rural incomes will likely grow at a rate so far only seen in urban centres. That's 1.7bn people connected to agriculture in Asia, and rising farm investment and rural income is likely very different to how most investment portfolios are focused. Most of the research I see these days focuses on urban wealth creation (BMW-aspiring yuppies and supermarket/ department store shoppers.)

The CS STOCK PICKS with which I currently agree
(one or more of which may be current portfolio positions, either long or short):

- CHINA: China Mobile, Chaoda Modern Agriculture, China Agri-Industries
- INDONESIA: United Tractors, Bisi, Indofood,
- KOREA: CJ Cheiljedang, Namhae Chemical
- MALAYSIA: KL Kepong
- SINGAPORE: Noble, Olam, Indofood Agri,
- TAIWAN: Taiwan Fertilizers, Sesoda
- THAILAND: Big C Supercenter, Thai Union Frozen

(And for those of you who squint at big reports, here are the slides.)

That great sucking sound...

Remember that great sucking sound heard across Asia over the last few years? Of manufacturing jobs flying into China from Asia, and indeed the rest of the world? Well, Dong Tao of Credit Suisse in a short note this morning (will expand on it more later, I expect) is calling "The beginning of the end of an era – troubled export sector" - his key points are that the new labour law will further hurt competitiveness, adding to the existing pressures on exporters such as surging wage costs, currency appreciation, high material/energy prices, and reduced tax rebates. The hit is more likely to be felt in the Pearl River Delta (~ around HK) than in the Yangtze River Delta (~ around Shanghai,) and among Japanese and Korean companies with manufacturing there than by H-shares. Conclusion?

"The rising wage rates and improved labour right is bad for capitalists and export sector, but positive to workers and domestic consumption. We see the economy leaning towards domestic sector over the next decade, perhaps with slightly slower growth but better quality of growth."

So, find China domestic consumption plays for your long term long positions... A bit obvious, actually!

(... but I may try and come up with a short list of possible plays in the coming days/weeks.)




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I think I've sorted how to include links from CS. Here's Dong's April 2nd note on inflationary risks in China - particularly worrying rise input costs, and clearly colouring his view on export competitiveness, above.

More Rice Pain (but somebody gains)

From this morning's FT in an article gloomily entitled "Farmers Doomed to Pay Price for Export Restrictions":

"Countries such as Argentina, Kazakhstan, India and Vietnam have stopped their farmers selling crops abroad or taxed exports heavily in an effort to keep local markets well-supplied and local prices for those crops low. This means the farmers in these countries are not benefiting from record international prices. At the same time, these farmers are facing higher costs in the shape of higher prices for diesel, seed and fertilizers. The result? Some farmers are cutting their acreage."

So who could benefit from this miserable situation?


Trust the good guys over at Jamie Dimon's shop to point out in a flash note today that China is increasing tariffs on fertilizer exports by a huge amount to try and keep more of the stuff at home (and affordable.)

Beggar-thy-non-Middle-Kingdom-neighbours and (further) enrich fertilizer companies everywhere (except in China)...

"The Chinese State Council announced today (April 17) that a decision has been made to impose a special tariff of 100% on exports of fertilizer and fertilizer raw materials from China... effective from April 20 through September 30, 2008... Substantially Lower Chinese Exports Likely... (this) will further tighten the global supply/demand balance."

China inflation - chicken feet or Wal-Mart socks?

Contrasting interpretations of data coming out of China today.

Wang Qing at Morgan Stanley notes that "Food Prices in the 1st Week of April Continued to Decline" on a sequential basis. "Meat and vegetable prices experienced the largest drop. Meat prices declined by ...6.5% from the levels of ... the monthly average in March ... while vegetable prices declined by 12.3%." Not much commentary, but obviously positive news, on balance, even though "wholesale price indices ... show that the average prices for agriculture products and vegetables increased by 1.2% and 1.5% compared to the last week of March".

Meanwhile, Credit Suisse's big cheese economist, Dong Tao is reporting today that risk remains to the upside for inflation across the board, with the March Purchasing Manager's Index showing not only strength in the headline and new orders figures (second highest readings since inception 3 years ago) led by infrastructure investments, but also that INPUT PRICES are rising fast... to THE highest level ever. Good sign of a rebounding economy, but part of that is seasonal, part of that is catch-up from the snowstorm. Given inflation risks, he sees rate hikes in 2H08 and 10-12% RMB appreciation vs the USD in 2008.

He writes: "the pressure is all on the inflation front, as input costs continued to surge. While market consensus and the government are focused on food inflation, we see an across-the-board inflation on the horizon. Besides the rising material costs, anecdotally, the wage rate is also rising fast and accelerating, as people’s expectation on inflation has changed. The surge in global food prices does not help the situation. As wage pressure spills over from the manufacturing sector to the services sector, we anticipate a much quicker price hike given that the services sector does have the pricing power and has little room to improve productivity."

On balance, I think the figures are market positive near term. Comments from Wen last week on the importance of economic growth alongside inflation concerns indicates that the govt is aware of the continuing risks to growth, including softer net exports going forward... but food inflation remains the key, and with continued softer data on that front, policy developments may continue to surprise the market on the upside for the time being.