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...

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.

Merry Christmas -- Welcome to the New China-South America News and Analysis Site

In honor of ushering in the new year I've decided to officially change the name and address of this new reel. When I've been able to apply my full attention to updating and writing my own analysis of political and financial news, I've focused on events pertaining to countries in South America or China. When possible, I especially try to share stories and my personal take on cooperation between emerging markets of the "developing south." Third, due to China's dire need for commodity inputs to fuel their development and the abundance supply of many of the commodities needed by developing nations in South America, commodities are an obvious area which I will attempt to report stories that may not garner much attention in main stream press.

Welcome to South-South Cooperation. A humble news and analysis site on the vast internet, updated by a humble Peruvian-American economist from New York City who simply wants to share some thoughts and interesting news on topics frequently marginalized by the big names in media.

News Line: Energy in South America and China

Uruguay Opens bids for Offshore Oil, Gas Blocks – reports Uruguay Energy Ministry courtesy of Rigzone

On December 1-3, Uruguay Energy Ministry and ANCAP, the National Oil Company, will launch the offshore licensing round for exploration and exploitation of gas and oil. The blocks on offer, lie in the Punta del Este and Pelotas basins, where water depths range from 50 to 1500 meters, as well as another basin further offshore called Oriental Del Plata. The blocks' areas range from 2,500 to 10,000 square kilometers...

Click here to access the full story from Rigzone

PetroLatina Commences Drilling Colon-1, IDs 4 New Wells Sites in Colombia - reports PetroLatina courtesy of Rigzone

PetroLatina has announced a further operational update to that released on November 7, 2008.

La Paloma

The Company commenced drilling Colon-1, the first exploratory well to be drilled on the La Paloma block, located in Middle Magdalena Valley, Colombia, on Sunday, November 24, 2008. The Colon-1 well has been drilled vertically to a total depth of approximately 600 feet, to date. Drilling continues to be undertaken vertically to an expected total depth of approximately 9,072 feet in order to test the La Paz, Lisama and Umir formations. Drilling is scheduled to take 25 days in total at a cost of approximately $6 million...

Click here to access the full story from Rigzone


Petrobras' Platform P-53 Kicks Off Production at Marlim Leste Field – reports Petrobras courtesy of Rigzone

Petrobras announced that platform P-53 kicked-off its operations yesterday, November 30. This is the first production unit installed in the Marlim Leste field, in the Campos Basin.

The P-53 unit has total production capacity of 180,000 barrels per day of heavy oil, 20 degrees API, and compressing capacity up to 6 million cubic meters/day of natural gas. The platform's oil production will be offloaded to shore by shuttle tankers with the assistance of Autonomous Re-pumping Platform PRA-1 and the FSO Cidade de Macae. Part of the gas that is produced will be consumed by the platform itself as fuel to generate electricity, and the remaining will be exported to shore via the Campos Basin's gas network. The platform will reach peak production in the first half of 2010.

Click here to access the full story from Rigzone


Geopark Tests Positive Oil at Manekenk 1 in Chile – reports GeoPark Holdings Limited courtesy of Rigzone

GeoPark Holdings Limited has announced the successful testing of the new Manekenk 1 well on the Fell Block in Chile at an initial rate of approximately 1,300 barrels of oil per day equivalent (boepd). Geopark operates and owns a 100% working interest in the Fell Block...

Click here to access the full story from Rigzone


Peru's mining/hydrocarbons output rose 4.57% in Oct 2008 – reports Andina.com

Lima, Dec. 01 (ANDINA).- Production in Peru's mining and hydrocarbons sector expanded 4.57% in October from the same month last year, as the mining sub-sector increased 2.72%, the National Statistics Institute (INEI) said Monday...

Click here to access the full article from Andina.com


PetroChina Starts Developing Offshore Block in Bohai Bay – reports Dowjones Newswires courtesy of Rigzone

PetroChina Co. has started developing an offshore block in Bohai Bay with an output target of 3 million metric tons a year or 60,247 barrels a day, parent company China National Petroleum Corp. said Monday.

The Yuedong block, located in shallow water near Liaoning province, has rich reserves of heavy oil, CNPC said on its Web site, without elaborating.

Yuedong is part of the Liaohe field, China's largest heavy oil field, with annual output at 12 million tons a year or 240,986 barrels a day...

Click here to access the full article from Rigzone


China North East Petroleum's October Crude Oil Production up 135% - reports China North East Petroleum courtesy of Rigzone

China North East Petroleum has announced preliminary results for its October 2008 oil production.

Crude oil production for the month ended October 31, 2008 increased 135%, or 40,479 barrels, to 70,545 barrels from 30,066 barrels for the month ended October 31, 2007. On a sequential basis, crude oil production increased 4,627 barrels, or 7%, compared to the month ended September 30, 2008...

Click here to access the full article from Rigzone

News Line:

China Development Bank keen to support projects in Peru – reports Andina.com

Lima, Nov. 30 (ANDINA).- The China Development Bank (CDB) is interested in supporting infrastructure and agricultural projects in Peru as part of a cooperation agreement recently signed with Peruvian state-bank Banco de la Nación (BN).

"China Development Bank is very interested in infrastructure and agricultural projects that involve development of rural communities in Peru," BN general manager Julio del Castillo told Andina news agency...

Click here to access the full story from Andina.com


BRIC Shoppers Will “Rescue World” Says Goldman Sachs Economist – reports Bloomberg's William Mellor and Le-Min Lim

Dec. 1 (Bloomberg) -- The best hope to keep the global economy growing may be people like Wei Yufang. A peasant who farms a small plot beside the mud-brown Huaihe River in central China, Wei has a modest dream: to buy an air conditioner to give her family relief from the dusty heat that each summer envelops Xiaogang (Little Hill) village in Anhui province.

With economies from the U.S. to Japan in recession, Wei and the other 2.8 billion people in Brazil, Russia, India and China may provide the consumer demand needed to counter the slump.

Jim O’Neill, the Goldman Sachs Group Inc. economist who in 2001 coined the acronym BRIC from the initials of the four big emerging economies, says the faster growth investors have come to expect from these countries will survive this crisis. O’Neill, who is based in London, says the citizens of the BRIC nations are poised to spend more. “The BRIC consumer is going to rescue the world,” he says...

Click here to access the full story from Bloomberg LP


China, India Drop Inflation Controls as Economic Growth Slows – reports Bloomberg's Nipa Piboontanasawat and Thomas Abraham

Dec. 1 (Bloomberg) -- China and India lifted controls targeting prices of products from vegetable oil to natural rubber after inflation eased in the world’s fastest-growing major economies.

China today stopped requiring companies to seek approval for some food-price increases, the government said. India dropped a ban on futures trading in natural rubber, soybean oil, potatoes and chickpeas, the consumer affairs ministry said.

...

“For China, the main focus of the government is to boost economic growth and prevent deflation,” said Wang Qing, chief China economist at Morgan Stanley in Hong Kong.

In India, Prime Minister Manmohan Singh dropped a seven- month ban on futures trading in natural rubber, soybean oil, potatoes and chickpeas...

Click here to access the full story from Bloomberg LP


China's Manufacturing Contracts by Record on Exports – reports Bloomberg's Nipa Piboontanasawat

Dec. 1 (Bloomberg) -- China’s manufacturing shrank by the most on record and export orders plunged, adding to evidence that recessions in the U.S., Europe and Japan are dragging down the world’s fastest-growing major economy.

The Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the China Federation of Logistics and Purchasing said today in an e- mailed statement. A second PMI, released by CLSA Asia-Pacific Markets, also showed a record contraction...

Click here to access the full story from Bloomberg LP


Following visit Russian leader calls for bigger LATAM role

Russian president Dmitri Medvedev said he was very satisfied with his Latinamerican tour which took him to Peru, Brazil, Venezuela and Cuba because it enabled to re-establish strong links with the region.

...

“Latinamerica is a region developing fast, which has a concentration of significant intellectual and natural resources, and most important the peoples of the region want to cooperate with Russia”, added Medvedev

...

“We are prepared to increase political, economic and military cooperation with Latinamerican countries and their leaders, particularly in a world with so many security problems and challenges.” ...

Click here to access the full story from Mercopress

Financial crisis... how some South American countries may do better than expected

Six months ago when commodity prices where at record high's it seemed as if South America was entering a golden age of prosperity. Or at least that they where on track. Of course many analysts and “experts” predicted there would be trouble if prices fell back down to reality. None the less, it seemed that surging demand from Asia and the lack of investment in supply capacity throughout the 80's and 90's would be sufficient to keep the prices of various commodities up.

I was personally of the camp which believed prices had come up a bit too fast, but where no less going to stay well above what they where in the late 90's and early 2000's. In the long-run I still believe this will be the case, however the recent global financial has proved me horribly wrong in the short-term.

It does however seem that one thing has been made clear from the recent crisis. At least some of the countries in South America have become better at managing their financial systems and internal economies. Many nations saved, paid off their international debt and invested wisely. Other's didn't and will pay the price (Argentina I mean you).

Here's some recent news worth taking a look at from the past week.

Peru – MTC 2009 budget proposal exceeds $1 billion

Last week Peru's transport and communication minister Veronica Zavala presented congress with a 3.3 billion sol ($1.07) budget proposal. The money according to BNAmerica's will be allocated to various segments of the transport sector. This includes highways, roads, airports, trains and the communication sector.


Peru – Luis Valdivieso, Peru's Minister of Economy and Finances has prepared 49 investment projects aimed to cushion Peru during the financial crisis

Andina.com reports that the Minister of the Economy and finances believes these 49 projects are aimed to keep Peru growing between six and seven percent for the next year.

“We won't allow any reduction in the public spending, consistent with a growth between six and seven percent. To face a possible reduction of fiscal income due to a loss of international markets, if necessary, there is a number of projects ready to fulfill this goal,” stated Luis Valdivieso.


Uruguay confident of weathering financial crisis reports the Financial Times

Interestingly enough, little old Uruguay seems in good position to weather the financial crisis, while it's bigger neighbor, Argentina, does not. The government seems confident that Uruguay can get through this crisis, even if Argentina continues to edge towards economic upheaval, as evident by the countries recent seizure of private pension funds, the governments horrible handling of recent protests and generally scaring away international investors...

China: What's going down “east-side?”

With the world economy faltering, recovering, crashing, entering crisis, deflating, **input whatever other term you've been reading** many are hoping China will some how cushion the global down turn. Lets consider this from both ends of the spectrum.

There's one side of analysts, experts, observers, etc who believe the Chinese economy as the largest contributor to global GDP growth the past few years is in a position in which it can help the global economy move through this economic depression. Then there's the other side that inexorably links the Chinese economy to rich country demand for their cheap exports... which is decreasing at an alarming rate according to the figures.

From the perspective of a young economist who is currently living in Suzhou, China the truth lies somewhere in the middle. Before you (the readers) close this page and assume that's the obvious answer hear me out. It's not that simple...

From the window of the pizza place, which offers me high speed internet where I am currently writing this post from I see the following.

Fireworks exploding in the distance to celebrate the grand opening of something big. I don't know for what, but if i've learned anything from the past few months of living in Suzhou, a show of this caliber means the following: the government is celebrating some major achievement, a big night club has something to brag about, or perhaps a shopping center or a residential complex is opening its doors. Fireworks are a usual tactic employed as way to dazzle the populous, attract business and of course... to ward of bad spirits (which is what the tradition of exploding fireworks in China is traditionally for).

I can also see various cranes in the distance, where workers are building various new structures six days a week. These include 15-20 floor apartment complexes, 20-45 floor office buildings and other structures which I would guess will have something to do with the government.

The third thing I can see, which is worthy of mention is a giant fenced off whole in the ground which blocks the pedestrians view of the construction work underway for a new subway system set to open in 2010.

These points support the first side of the story. The Chinese economy, on the domestic front is going to keep growing even if the rich countries of the world slide even further into recession. A “Pandora's Box” of sorts has been opened here in China. The opening of the Chinese economy, the robust growth of the past two decades, the massive migration of hundreds of million of rural residents to urban centers, massive inflows of FDI and a variety of other factors have created a situation where the central government must needs to either facilitate to the best of its ability or risk imploding from within.

The recent decrease in commodity prices will only help China keep its modernization / urbanization/ domestic growth (whatever you want to call it) going. Six months ago, I was analyzing how demand was so strong in China that it mattered little in the long run how high the prices of commodities went, because in the end the Chinese would not abandon their aspirations to well... keep growing. From this perspective, plummeting commodity prices (much to the detriment of my senior thesis in which I predicted they would keep rising) is a blessing in disguise.

China's recent $586 billion stimulus package and the record slashing of Chinese interest rates is an effort by the government to keep this going. Infrastructure, housing and all that jazz will continue. This means jobs and therefore continued consumption by consumers. This also means China will keep buying the commodity inputs they need to build. So, to conclude this side of the story, this means China will continue to grow.

However, and now here comes the “dark side.” Even the two trillion plus dollars in foreign reservers Beijing claims will finance all of this, can not and will keep this going indefinitely. The money will run out, or more likely simply start to no longer be worth spending if the rest of the world, particularly the rich world doesn't get out of this global economic crisis.

Living in the wealthy Jiangsu province, home to the city I live in (Suzhou), Shanghai, Nanjing, Hangzhou (VERY wealthy cities), and various government projects I'd call the crown jewels of the governments efforts at modernization it is hard to imagine what the rest of the country is like from time to time. Due to the lack of internet and the lack of available information I havn't exactly been up to date on certain things.

For instance, in todays news alone, Bloomberg reported the following:

1 – Aluminum slumps by limit in Shanghai on Production Speculation
2 – Baosteel (China's biggest steel-maker) faces “most difficult” period in 30 years on Crisis
4 – China's small businesses face “tough winter,” more closures

“Small companies face a “tough winter,” said Li, whose organization claimed 76,000 members in the first half of this year. Two-thirds of China's small toy makers closed in the first nine months, according to customs data."

So in conclusion... as I stated above, the truth lies somewhere in the middle. If the rich countries of the world don't start buying again, China will stop growing as fast as it has been.  That is just how it is.  A large portion of the Chinese economy is still heavily depended on exports, and if that disappears it doesn't matter what happens on the domestic front. 

China will have to face the facts.  The effects will be catastrophic and horribly de-stabilizing. Which is why China is going to try to do everything in its power to present such a catastrophe from occurring, and if that means helping out more to revive the global economy I think China will assume a more active leadership role.  So far it seems they have.  How far they will go will only be seen in the months to come.

It's anyone guessing game at this point. Lets see where the next few months lead.