Thursday, August 22, 2013

Wind Turbine Makers Poised for Return to Profitability

 
Wind-turbine makers are poised to make their first profit in years after shutting underused factories and abandoning a drive for growth at all costs.
Vestas Wind Systems A/S (VWS) of Denmark, the world’s biggest manufacturer, along with German competitor Nordex SE (NDX1) are forecast to have their first pretax profits this year since 2010, according to analyst forecasts compiled by Bloomberg. Gamesa Corp. Tecnologica SA (GAM) is predicted to make a net profit after a loss last year. Investors haven’t waited, driving up shares of the three companies an average 220 percent in 2013.
After manufacturers cut at least 9,000 jobs and closed the least efficient plants, turbine prices may rise for the first time since 2009. That’s helping them cope with European subsidy cuts and bruising competition that lowered prices by a quarter in an industry that drew $75 billion of investment last year.
“Overcapacity and the price war was a big part of the crisis,” Juergen Zeschky, chief executive officer of Hamburg-based Nordex, said by phone. “Now companies are doing their homework and becoming more efficient, optimizing their processes and achieving further cost reductions.”
The result is the three turbine makers lead the 31-percent recovery in clean energy shares this year along with billionaire Elon Musk’s electric-car maker Tesla Motors Inc. (TSLA), the top performer that has quadrupled, and California solar-panel maker Sunpower Corp. (SPWR), which has tripled.

Share Rally

Vestas in Aarhus, Denmark, surged to 109 Danish kroner through yesterday from 32 kroner at the end of December. The stock peaked at an intraday 700 kroner in June 2008 and hit a 14-year low last year. Spain’s Gamesa has more than tripled this year after reaching an all-time low last year. Nordex recovered 180 percent in 2013 after hitting a seven-year low last year.
“We’re definitely past the worst,” said Jacob Pedersen, an analyst at Sydbank A/S (SYDB) in Aabenraa, Denmark. “We’re seeing order intakes improve and positive earnings revisions.”
The outlook is not uniformly optimistic. Turbine demand is forecast to fall about a quarter to 36 gigawatts this year, according to Bloomberg New Energy Finance. The researcher expects a 5 percent drop in China, which may hurt domestic manufacturers Xinjiang Goldwind Science & Technology Co. and Sinovel Wind Group (601558) Co.

Earnings Rebound

Even so, most of the manufacturers are in the middle of cost-cutting programs that are beginning to show results. Suzlon Energy Ltd. (SUEL), which had the biggest Indian convertible bond default in history, is forecast to return to an operating profit this year, though interest payments will wipe that out.
Vestas is predicted to post operating profit of 103 million euros, according to the average of analysts surveyed by Bloomberg. Interest, tax and costs would push it into a net loss. Nordex may post a net profit of 10 million euros, and Gamesa is predicted to have a 41 million-euros profit, according to the forecasts.
Vestas is less than five months away from completing a two-year program to reduce expenses by 400 million euros and its workforce by about 30 percent. On Aug. 21, it replaced Chief Executive Officer Ditlev Engel with Ericsson AB executive Anders Runevad as second-quarter losses widened.
“If we execute our plans, then we will be profitable when we present our full-year results,” Chief Marketing Officer Morten Albaek said by phone.

Bigger Rivals

The “pure-play” manufacturers have suffered more than competitors such as General Electric Co. (GE) and Siemens AG (SIE), which are bigger industrial conglomerates.
GE Wind’s orders fell by a third last year while the company supplanted Vestas as the biggest turbine supplier, according to Navigant Consulting Inc. (NCI)’s BTM Consult.
Profit at Siemens’ wind unit declined 15 percent in the accounting year ended September 2012. Orders fell 24 percent. It’s working to cut 615 jobs, anticipating a smaller U.S. market.
At Nordex, Zeschky announced factory closures in the U.S. and China after taking over in March 2012. Those will slash a quarter of its manufacturing capacity.
“There’s still a lot of growing up to do,” said Zeschky of Nordex, which returned to profit in the first half of 2013. “It’s still a challenging market.”

Gamesa Outlook

Gamesa, which is based in Zamudio, Spain, reported a profit of 22 million euros for the first six months of the year after a loss last year. It’s announced 2,600 job cuts and will shut 24 offices to save 100 million euros a year.
“This industry was causing its own demise by building more factories everywhere and continuously competing on price,” said Daniel Patterson, an analyst at SEB AB in Copenhagen. “They’ve all woken up to reality.”
Cuts by the biggest manufacturers have reduced potential turbine supply 11 percent to about 72 gigawatts this year, according to Daniel Shurey, an analyst at New Energy Finance in London. A further reduction to about 67 gigawatts is predicted by 2016. Global installations were 44.8 gigawatts last year. A gigawatt is enough to supply 300,000 homes in the U.S.
“The huge cost reduction efforts of all the main manufacturers are starting to kick in,” Shurey said. “Capacity is starting to move down, in line with the lower demand.”
Tighter supply is helping boost prices. Machines for delivery in the first half of 2014 are selling for 1.01 euros a megawatt compared with 880,000 euros for those to be shipped in the second half of 2013, New Energy Finance estimates.
Gamesa Chief Executive Officer Ignacio Martin said on July 23 that there’s been “a stabilization of volumes and prices that is expected to continue.” GE Vice Chairman Keith Sherin said July 19 that pricing for renewables orders is up 11 percent, with new wind products “the biggest piece” of that.
“That’s a very interesting potential inflection point,” Patterson said. “If prices start to go up, then this entire industry and the stocks have more runway left.”
(Source: Bloomberg)

Rupee Panic: Paul Krugman

 
OK, the plunging rupee is the big economics story of the day, and I’m trying to get up to speed on the issues. My immediate question, however, is why the panic?
Yes, the rupee is down a lot in a short time — along with other emerging market currencies. In fact, its fluctuations are small compared with the obvious comparator, Brazil:
Bank for International Settlements and author’s estimate
(The BIS numbers only go up through July, and I estimated the last month from the dollar-rupee rate.)
We more or less know the story here. First, advanced countries plunged into a prolonged slump, leading to very low interest rates; capital flooded into emerging markets, causing currency appreciation (or, in the case of China, real appreciation via inflation). Then markets began to realize that they had overshot, and hints of recovery in advanced countries led to a rise in long-term rates, and down we went. (I don’t think QE has much to do with it, although your mileage may vary.)
So the recent decline is sharp. But should India panic?
This would be scary if India was like the Asian crisis countries of 1997-1998 or Argentina in 2001, with large amounts of debt denominated in foreign currency. But unless I’m misreading the data, it isn’t:
Now, the depreciation of the rupee will presumably lead to a spike in inflation — but it should be temporary.
So at first examination this doesn’t look like as big a deal as some headlines are suggesting. What am I missing?
(Source: New York Times)

Wednesday, August 21, 2013

Subway Targets Europe With as Many as 1,000 New Outlets in 2014

 
Subway, the closely held restaurant chain with more outlets than McDonald’s (MCD) Corp., plans to pick up the pace of openings in Europe by adding as many as 1,000 new locations in 2014.
The sandwich shop operator has 4,018 stores in Europe, where it has continued to grow during the continent’s recession and wobbly recovery, Assistant Regional Director Mike Charest said in an interview. The Milford, Connecticut-based company has opened about 500 stores a year in Europe for the past two years, and may add 800 to 1,000 next year.
 
Europe is the strongest, fastest-growing international market for Subway outside of North America, and will continue to be,” Charest said by phone from his Amsterdam office on Aug. 13. Subway’s strategy “works for us regardless of economic situation” by balancing affordability with high-quality food.
The U.K. is at the “top of the list” for growth in Europe, with a goal to have 2,000 outlets by 2015, the executive said. Subway has added 63 locations in the U.K. in 2013 to take the number to 1,544, up from 59 openings in 2012. Growth may also quicken in the Netherlands, Finland and Sweden, where at least 20 stores have been opened in each country in 12 months.
The company aims to be in Latvia, Lithuania, Georgia and Ukraine by the end of this year. Ukraine has similar growth potential to Romania, which has 16 stores after the first opened in April 2012, said Peter Mompalao de Piro, a Subway spokesman.

Brand Awareness

Strong brand awareness in the U.K., Russia and France helps development in those countries, Charest said. Subway plans to add 190 to 200 stores in Russia and 100 in France in 2014, maintaining the current pace.
Growth in Italy, Denmark and Belgium, which have 17, 15 and seven stores, has been “more challenging” due to difficulties establishing the initial profitable franchises that fuel development, Charest said.
Italy has “plenty of home-grown independents and chains to feed the market,” said Anya Marco, a director at London-based Allegra Strategies, a research consultant to restaurant companies including Subway.
Belgium is hard for international restaurant companies to enter because it’s a small market dominated by independents, while Subway’s difficulty in Denmark relates in part to a preference for established Danish chains, Marco said.

Room for Hamburgers

Subway’s European expansion doesn’t pose a problem for hamburger chains like McDonald’s and Burger King (BKW), given the company’s focus on deli sandwiches, Jack Russo, an analyst at Edward Jones & Co. in St. Louis, said in an interview. Similarly, Subway isn’t much of a threat to Yum! Brands Inc. (YUM), owner of the KFC and Pizza Hut chains, he said.
“The pie is big enough for everybody,” said Russo, who has a buy recommendation on McDonald’s shares and advises holding Yum! Brands stock.
Burger King’s revenue in Europe, the Middle East and Africa fell 10 percent in 2012 to $472.9 million even as 239 new locations brought the region’s total for the Miami-based company to 3,121. Same-store sales at Oak Brook, Illinois-based McDonald’s fell 1.9 percent in July from the previous year in Europe, where it gets 40 percent of its revenue.
Subway’s revenue in Europe increased 18 percent to $1.57 billion in 2012. Global store sales rose 9 percent to $18.1 billion.
The company’s European expansion is part of president and co-founder Fred DeLuca’s aim to have 50,000 Subway stores worldwide by 2017. Subway was founded in 1965 and opened shops in Ireland in 1994 and England in 1996, according to its website. It currently has almost 40,000 locations, compared with almost 35,000 for McDonald’s.
(Source: Bloomberg)

Tuesday, August 20, 2013

Miners Buying Hugo Boss Perfume as Chile’s Copper Booms

 
Since starting work at the Esperanza copper mine in northern Chile two years ago, Erick Moreno has tripled his salary and is preparing to buy his first home. The pay, he says, is so good that he’d never take a job elsewhere.
“I am going to die in this industry, I don’t see myself anywhere else,” Moreno said by phone from Antofagasta, a city on the edge of the mineral-rich Atacama desert. “When you start working in a mine, everything changes and in a very little period of time.”
While Moreno, 27, completed his engineering course at Antofagasta University, he says many fellow students dropped out to start work at the mines without graduating. Most of them already own their homes and drive sports cars, while many older miners have five or more houses, some far from the mines that litter the northern desert, he said.
Spending by high-earning miners is spreading through the economy, fueling a consumer boom and driving unemployment to its lowest since 1973. The nation, squeezed between the Andes Mountains and the Pacific Ocean, has become the wealthiest in Latin America, according to the International Monetary Fund, with gross domestic product per capita rising to about $16,300 this year from $4,780 ten years ago. World Bank President Jim Yong Kim last month congratulated the country on earning “high-income” status.
The rapid growth of mining and the consequent shortage of skilled workers means many workers earn bonuses in excess of the equivalent of $30,000 for agreeing to new contracts once every two or three years. BHP Billiton Ltd. says truck drivers at its Escondida mine get paid the equivalent of $80,000 a year, excluding the bonuses, more than their counterparts at mines in the U.S.

No Alternative

Moreno, who works in the maintenance department at the Esperanza mine owned by London-based Antofagasta Plc, says he feels sorry for friends who worked hard to get degrees and don’t work at the mines. Miners earn more than workers in any other industry, according to the pensions’ regulator.
The benefits aren’t limited to those living in the north. Many workers from poorer cities in the south work for weeks at a time in the north, before flying home for a few weeks off. Every day, they fill Latam Airlines Inc. (LAN) flights to the Atacama, where Codelco, the world’s largest copper company, Poland’s KGHM Polska Miedz SA and Japan’s Pan Pacific Co. are expanding to meet growing demand over the past decade from Asia. Chile exported $2.4 billion of copper to Asia in July, compared with $300 million 10 years earlier.

Santiago Flights

Latam has increased flight frequencies from Santiago to the mining town of Calama to as many as 14 a day from eight in 2012, said Gonzalo Undurraga, the airline’s Chilean commercial director. Passenger traffic between the two cities leaped 51 percent to almost half a million in the first half of this year, he said in an e-mailed response to questions.
Chile’s mining boom has been fueled by surging copper prices, which quadrupled in the past 10 years to average $7,952 a ton in 2012. Based on production of 482,252 tons in June, that signifies $2 billion in additional exports every a month.
As a result, Chile’s mining industry attracted $30 billion in foreign direct investment last year, according to the United Nations.
Miners flush with cash have stoked consumer spending, with annual retail sales growth averaging 11.8 percent over the past three years, according to the National Institute of Statistics. Car sales rose 20 percent in July from a year earlier and have averaged more than 30,000 a month in 2013, compared with 7,335 a decade ago.

Economic Dynamism

“Mining investment explains the economic dynamism of the past three years,” said Felipe Alarcon, an economist at Banco de Credito & Inversiones in Santiago. “The current high wages of unskilled miners are not comparable to their peers in any other industry.”
Chile’s economy expanded 5.6 percent last year and 6 percent in 2011.
Spending by miners is so high that for each job created in the industry, three are generated elsewhere, Mining Minister Hernan de Solminihac said in an interview in Santiago last week. Many of those additional jobs are in retail.
Mariano Garcia, chief executive officer of TAIS DFS, which sells luxury perfumes, watches and cosmetics, has opened four stores in the tax-free zone of Iquique, close to mines run by Anglo American Plc, BHP Billiton and Glencore Xstrata Plc.
“Miners buy three to four perfumes when they come in, and they go for high-end brands like Carolina Herrera, Hugo Boss and Paco Rabanne,” Garcia said in a phone interview.
Ditec Automoviles, which represents Jaguar, Land Rover and Volvo in Chile, plans to open its first Porsche showroom in Antofagasta within 12 months, said Eduardo Costabal, the company’s chief executive officer.

Living Better

With 48 years’ experience in mining, Eduardo Catalano, 64, says northern towns have transformed completely in the past two decades. Supermarkets now sell caviar and spider crab, delicacies locals wouldn’t have recognized before, he said.
“Miners now dress, live and eat better,” said Catalano, president of the Miners’ Association in Copiapo, a town near Codelco’s Chuquicamata mine.
As mining expands, unemployment has fallen, with the national rate dropping to 6.2 percent in the second quarter after peaking at 11.6 percent in July 2009, according to statistics institute data. A study by the Universidad de Chile shows the jobless rate in Santiago fell to 5.2 percent in December, the lowest since 1973.
Nominal annual wage growth has exceeded 5 percent every month since January 2011. After being adjusted for inflation, wage growth accelerated to 5.1 percent in April before dropping to 3.8 percent in June.

Women Drivers

Mining growth has opened the door for women to take jobs traditionally performed by men. At Codelco’s new Gaby mine in the Atacama, women work in all areas, including driving the giant trucks that take the mineral out of the open pit. Female employees now account for 7.8 percent of the state-owned company’s workforce compared with 5.8 percent in 2000, according to a company statement.
Mining investments may total $112 billion by 2021, requiring an additional 40,000 workers, de Solminihac said. The industry currently employs 235,000 of Chile’s 8.3 million workforce.
Still, weakening demand from China has seen copper prices decline this year, while costs in Chile soar. The metal slid as low as $6,670 a ton on June 24 from a high of $8,380 on Sept. 14 last year. It closed at $7,306 yesterday.

Labor Costs

The Mining Council estimates investment in the industry will total $70 billion over the next decade, less than the government forecast of $112 billion, as prices weaken, costs rise and environmental regulations tighten. Barrick Gold Inc. faces delays at completing its Pascua Lama gold mine because of environmental disputes, while Codelco is studying delays to its Andina copper mine expansion as it looks to reduce investments.
Costs for mining companies have increased 40 percent in the past five years, while the average quantity of copper contained in ore mined declined 14 percent, Villarino said.
Labor costs can be 188 percent more in Chile than in other mining nations, Joaquin Villarino, president of Chile’s Mining Council, which represents major mining companies, said in an Aug. 6 speech.

Wages Stabilizing

For the first time in six years, wages in the mining industry appear to be stabilizing, according to Rodrigo Alonso, a risk manager at Anglo American’s and Glencore’s Collahuasi mine. Alonso’s salary jumped 20 percent when he moved two years ago to his present job from a similar position at Escondida.
Even so, Chile will maintain its position as the world’s top copper producer, simply because its deposits are the biggest in the world, said Paul Gait, a London-based mining analyst at Sandford C. Bernstein Ltd.
“Chile’s got to grow, it’s a third of the world’s final production,” Gait said in a phone interview.
Moreno is counting on the boom continuing as he saves up for his house.
“Esperanza has production capacity for at least another 50 years,” Moreno said. “The copper price is not relevant. Miners will stop making loads of money, but they will still make a lot. This industry is designed to bear price drops and keep miners making money.”
(Source: Bloomberg)

Monday, August 19, 2013

Tata Starbucks builds war chest for expansion to take on Cafe Coffee Day, Barista Lavazza, Costa Coffee

 
Tata Starbucks plans to open around 100 Starbucks cafes in the country by next year to match up to established rivals and is building a war chest for expansion by more than trebling its authorised capital to Rs 220 crore.

The 50-50 joint venture between US cafe chain Starbucks Coffee Company and
Tata Global BeveragesBSE 0.46 % will increase its authorised share capital from Rs 70 crore by creating additional 150 million equity shares of Rs 10 each, amounting to Rs 150 crore, the unlisted firm said in a board resolution filed last week with the Registrar of Companies.

While Tata Starbucks said it does not release financial information or future store count, its spokesperson said the company is committed to India. "The joint venture will invest over time, based on the demands of the business and the requirements of our customers, to build a strong presence in the market," the spokesperson said.

The US coffee chain has already signed two dozen properties, including in the suburbs of Mumbai and Bangalore, a real estate official aware with Starbucks' expansion plans said.

Starbucks is displaying an urgency to scale up at a time when most quick-service restaurant operators including
Jubilant Foods and McDonalds have reported slowing sales growth in the country due to a consumer slowdown.

Experts say Starbucks has been very selective in opening stores in the country.

"Starbucks has been opening stores only at locations where the catchment area can value its premium positioning," Ruchi Sally, director at boutique retail consultancy Elargir Solutions, said. "For them, the key strategy is return on investment from their stores and not just scale at the moment."

Starbucks, which entered the Indian market in October last, currently operates 18 stores in the country.

In comparison, rival
Cafe Coffee Day has more than 1,500 stores while Barista Lavazza and Costa Coffee has more than 100 stores each. The Indian cafe market is estimated at $230 million, or about 1,400 crore, and is expected to grow about 13-14% a year over the next five years. Globally, most cafe consumers are attuned to a takeaway culture, which helps retailers add margins with very little cost.

In India, however, many office-goers and students go to cafe to relax and spend hours on coffee and snacks. Also, real estate costs are high in India, making it important for retailers that average price realisation per square feet of space.

Starbucks in India seems to have done well on the profitability front. During Tata Global Beverages' quarterly performance presentation earlier this month, the company said Starbucks stores are already making cash profit. In a shopping mall in Mumbai the average monthly business of a Starbucks outlet is double the combined sales of two other coffee chains on the premises, an official of the mall operator said.

Starbucks CEO Howard Schultz had last year said that he expected India to be one of the top five markets for Starbucks. "India represents one of the most significant opportunities that we have in all of Starbucks. India should be one of the largest markets in the world for Starbucks. I would say one of the top five over time," he had said in an exclusive interaction with ET late last year.
(Source: Economic Times)

Petrol cars overtake diesel cousins in sales after over two years

 
Sales of petrol cars have overtaken their diesel variants after a gap of about 25 months spurred by a steady rise in the price of diesel, which has shifted consumers' interest from costlier diesel variants to cheaper petrol cars. Car makers are again changing production patterns with a bias for petrol variants, as there has been a spurt in its demand recently, industry executives said. Only 42% customers bought diesel cars in the first quarter of this fiscal year compared to around 54% in the corresponding period previous year.

Oil companies have been steadily hiking diesel prices that have decreased the lucrative gap between petrol and diesel variants, two senior executives working in leading automobile companies said requesting anonymity. In January, the government allowed state oil firms to raise diesel rates in small doses until retail prices are aligned with international rates, which shifted consumers' interest from diesel to petrol cars.

"Petrol cars are now back on consumers consideration. The market scenario is changing with consumers coming back to petrol models and we have seen a gradual swing for Verna and i20 variants," Hyundai Motor India senior vice president (marketing & sales) Rakesh Srivastava said.

According to industry data, auto manufacturers posted 12.5% increase in petrol cars sales last month, which happened at a time when automobile sector is facing a sluggish demand. But
the fall in the sale of diesel cars is much sharper, automobile executives said.
Petrol cars overtake diesel cousins in sales after over two years
Despite the muted market conditions, a positive trend is seen in sales of petrol vehicles last month on the back of rising demand for smaller entry-level cars like Maruti Alto, WagonR and Hyundai EON, they said. But, diesel car sales in July for models like Honda Amaze and Maruti Dzire have been dropping in recent months.

Fuel consumption data corroborate the changing trend. Although, the overall consumption of petroleum products including diesel sales had a negative growth in June this year, petrol consumption has shown a positive growth, the oil ministry's data-keeper, Petroleum Planning & Analysis Cell (PPAC) said in a latest report.

"There has been a growth of 5.5 % in the consumption of petrol in June, compared to an abnormally high growth of 31.2% during May, 2013. But, diesel consumption in June recorded a negative 1.9% growth," an official in PPAC said.

Consumption of petrol jumped by about 13% in April-June quarter this year while the growth of diesel was only 0.6%, the official said. But, PPAC officials cautioned that the trend could be reversed as the gap between diesel and petrol rates are increasing again because of sharp rise in international prices of the fuel and unprecedented depreciation of the
rupee against the dollar.

"While there has been a recent shift towards petrol due to price changes, we are expecting both petrol and diesel to sell in equal ratios and stablise in the long term," says Maruti Suzuki's Chief Operating Officer (marketing and sales) Mayank Pareek.
(Source: Economic Times)

DHL walkout likely to hit JLR factories in Britain

 
Workers delivering auto parts to Tata Motors-owned Jaguar Land Rover (JLR) factories in the UK are expected to unveil a walkout plan next week. Logistics firm DHL has been holding talks with the staff union, which is now expected to give notice of industrial action on Tuesday.
According to The Sunday Times, DHL contacted JLR chief executive Ralf Speth on Friday to inform him that it had failed to reach an agreement with Unite, the union.
DHL, which employs 1,800 people at JLR’s three main plants in the country, manages warehouses and the delivery of parts to production lines. A logistics blockade could bring operations at Solihull and Castle Bromwich in the Midlands and Halewood on Merseyside to a standstill, forcing a shutdown. It has also emerged that Unite is seeking legally binding assurances from the car maker that its plant in China, due to open in 2015, will not affect production in Britain.
The first vehicle to roll off the Chinese production line will be the popular Evoque “baby Range Rover”, currently made at Halewood. “The management of Jaguar Land Rover can’t make any assurances while this DHL issue is going on,” the newspaper quoted a source as saying.
The Tata Group firm generates export revenues of almost £11 billion a year and is one of Britain’s largest employers, with 24,000 workers. It is investing £2.7 billion this year to help launch new models to keep up with demand from India and China.
The company is also in advance stages of plans to increase the size of its Halewood plant, which could result in creating up to 1,000 new jobs. DHL employees, who often work alongside better-paid JLR workers, want a large pay rise to put them on similar terms. DHL has reportedly offered a 4.5% increase starting from January this year and 3% or the rate of inflation in 2014. However, Unite wants a 12.8% rise over two years for workers who bring parts to the line, plus 20.6% for drivers over the same period.
Tony Burke, assistant general secretary for manufacturing at Unite, said “We’ve got no comment to make. Its still a difficult situation.” In 2008, the Jaguar Land Rover company was established when Tata Motors acquired the Jaguar and Land Rover businesses from Ford.
(Source: Livemint)

Moody’s downgrades Bank of Baroda, Canara Bank and Punjab National Bank

 
Credit rating agency Moody’s Investors Service on Friday said it had downgraded the so-called financial strength ratings and baseline credit assessments of Bank of Baroda, Canara Bank and Punjab National Bank (PNB).
It also said the outlook on Union Bank of India’s financial strength ratings had also been changed to negative.
“The downgrades for Bank of Baroda, Canara Bank and Punjab National Bank, and the negative outlook to Union Bank of India primarily reflect the challenges of the current macroeconomic environment, which have been exacerbated by the depreciating rupee and high levels of inflation,” Moody’s said.
Bank of Baroda and Canara Bank’s rating was downgraded to ba2 from ba1, while PNB’s rating was downgraded to ba3 from ba1.
The rupee on Friday touched a record low of Rs.62.01 per dollar in intra-day trading after opening at Rs.61.35. India’s wholesale price inflation spiked to a 5-year high of 5.79% in July.
“Measures by the Reserve Bank of India (RBI) to support the currency have not reversed the depreciation, implying that interest rates may remain elevated for a longer time. Against such a backdrop, Moody’s expects public sector banks in particular to find difficulty in responding to slower economic growth, deteriorating asset quality, and declining margins,” Moody’s said in a statement.
The deteriorating macro-economic situation apart, Moody’s pointed to the the worsening asset quality at Indian banks, with total non-performing assets and restructured loans rising above 8% of their loan book.
“These problem assets indicate a risk that capital ratios will remain under pressure; a situation which is compounded by the relatively low capacity of the banks for internal capital generation..,” Moody’s said.
For the fiscal ending March 2014, the Indian government has set aside Rs.14,000 crore in its budget to raise bank capital levels, “and we expect recipients will include the four mentioned,” Moody’s said.
(Source: Livemint)

Biggest Shipping Line Says Emerging Market Warnings Misplaced

 
A.P. Moeller-Maersk A/S (MAERSKB), owner of the world’s biggest shipping line, said concern that emerging markets are losing their growth momentum is overdone.
“The underlying story is very good,” Maersk Chief Executive Officer Nils Smedegaard Andersen said in an interview on Aug. 16. “Our expectation remains that the U.S. will be the key driver of growth, but we’re also relatively optimistic on emerging markets. There is growth potential, even if we have a temporary set-back in commodity prices.”
 
Investors dumped emerging market assets last quarter amid signals from the U.S. Federal Reserve it might scale back the stimulus that’s underpinned demand for higher-yielding securities. The MSCI Emerging Market Index lost 9.1 percent in the three months through June, while the JPMorgan Emerging Markets Bonds Index dropped 5.6 percent.
The selloff also followed a collapse in China’s export gains in May. In July, China’s Finance Minister Lou Jiwei said the government might be able to tolerate economic growth as slow as 6.5 percent, compared with an official target of 7.5 percent. The remarks were subsequently retracted on state radio.
Since then, several key indicators have signaled that growth in the largest emerging-market economy may be set to accelerate again. Industrial output in China beat analyst estimates in July while export and import figures were also stronger than forecast.

Middle Classes

Andersen said a key driver behind emerging market growth remains its rising household wealth, underpinning demand for imports transported in his ships.
“A lot of people there are entering the middle class,” he said. Gains in household wealth are also evident in the U.S., where a housing recovery is buoying consumer demand, Andersen said.
“We still believe that the U.S. will be a positive story for the coming years, in the short-term supported by more consumption following real estate prices going up and deleveraging taking place,” he said.
Maersk raised its earnings forecast last week for its container-shipping unit, Maersk Line, after second-quarter profit almost doubled. The company said lower fuel prices and costs offset a drop in freight rates.

Supply Glut

Maersk Line has trimmed its fleet and slowed vessel speeds to curb capacity after a supply glut drove down freight prices. The Shanghai Containerized Freight Index -- a measure of prices for cargo leaving the world’s busiest port - - was 22 percent lower at $1,133.14 at the end of June compared with a year earlier. Asia-to-Europe trade is Maersk’s most important route.
Maersk Line cut its forecast last week for growth in global demand for seaborne containers to as much as 3 percent from as much as 4 percent previously.
Europe remains a concern, Andersen said. Though there are signs the “situation is stabilizing, we should also be careful in forecasting any significant growth for the euro zone, given that there are still deleveraging issues,” Andersen said.
(Source" Bloomberg)

U.S. Stocks Beat BRICs by Most Ever Amid Market Flight

 
Investors are favoring U.S. stocks over emerging markets by the most ever as fund flows and volatility measures show institutions are increasingly seeking the relative safety of American equities.
Almost $95 billion was poured into exchange-traded funds of American shares this year, while developing-nation ETFs saw withdrawals of $8.4 billion, according to data compiled by Bloomberg. The Standard & Poor’s 500 Index (SPX) trades at 16 times profit, 70 percent more than the MSCI Emerging Markets Index. A measure of historical price swings indicates the U.S. market is the calmest in more than six years compared with shares from China, Brazil, India and Russia.
 
Cash is draining from emerging-market ETFs and flowing into U.S. stock funds at the fastest rate on record as bulls say an unprecedented third year of higher earnings growth will support the S&P 500 even as the Federal Reserve begins to remove stimulus. Developing-nation investors say the ETFs will lure more cash after equity valuations reached a four-year low.
“The weakness in emerging markets and the associated economic troubles have encouraged some investors to reallocate from the emerging world to the U.S.,” James Gaul, a fund manager at Boston Advisors LLC, which oversees about $2.3 billion from Boston, said by phone on Aug. 15. “The U.S. is seen as the most stable economy at the moment, and the equity market is viewed as having better prospects than the rest of the world.”

ETF Deposits

The S&P 500 slid 2.1 percent to 1,655.83 last week, paring its gain this year to 16 percent, as data on rising retail sales, subdued inflation and a drop in jobless claims fueled speculation the Fed will cut monetary stimulus, known as quantitative easing. The central bank will probably reduce the $85 billion in monthly bond purchases next month, according to 65 percent of economists surveyed by Bloomberg. Futures on the S&P 500 rose 0.2 percent at 7:55 a.m. in London today.
Brazil, Argentina and South Africa led developing nations higher last week, driving the MSCI index up 0.7 percent for the first advance since July. The equity gauge has fallen 9.2 percent this year.
Investors have sent cash to U.S. equity ETFs every month since November, with deposits totaling $32 billion in July, the most since September 2008, according to data compiled by Bloomberg from about 1,500 funds. There have been withdrawals from emerging-market stock ETFs in five of the past six months, on pace for the biggest annual outflow since Bloomberg began tracking the data in 2000.

Revenue Exposure

U.S. companies that generate the most sales from Brazil, Russia, India and China have trailed the S&P 500. Firms taking in at least 20 percent of revenue from those countries climbed a median 13 percent this year, according to data compiled by Bloomberg on the 41 companies that disclosed financial data from the so-called BRIC nations.
Yum! Brands (YUM) Inc., the owner of the KFC and Pizza Hut chains, counts on China for half its sales. The Louisville, Kentucky-based company slid 3 percent last week and posted a 13 percent decline in July same-store sales from China as diners remained reluctant to eat chicken amid an outbreak of avian flu.
Mosaic (MOS) Co., the second-largest North American potash producer, has dropped 24 percent this year as Russia’s OAO Uralkali abandoned limits on output that underpinned prices and quit a trading venture with Belarus that controlled supplies from the former Soviet Union. Mosaic, based in Plymouth, Minnesota, gets about a third of its revenue from BRICs.

Stock Swings

As money shifted away from emerging markets, volatility diminished in U.S. equities. The S&P 500’s 30-day historic movement dropped 29 percent to 8.75 this year, while the measure for the MSCI measure of 21 developing nations surged 83 percent to 13.3, data compiled by Bloomberg show.
“Investors are going to go where they’re treated best and right now the U.S. stands out,” Bruce Bittles, chief investment strategist at RW Baird & Co., said by phone from Sarasota, Florida, on Aug. 15. His firm oversees $100 billion. “A lot of bearish sentiment is building in emerging markets. Eventually once it reaches extreme, which I don’t think it has yet, it will provide a strong base for the markets to rally from.”
Cisco Systems Inc., the biggest maker of networking equipment, said last week that it’s cutting about 5 percent of its workforce amid weaker sales from overseas including China. The company’s ability to meet its long-term growth target of 5 percent to 7 percent a year will partly depend on emerging markets, according to Chief Executive Officer John Chambers.
San Jose, California-based Cisco generates about 42 percent of revenue outside the U.S. and Canada. The stock tumbled 6.8 percent last week, the most since May 2012.

‘Inconsistent Growth’

“The changes in macroeconomic conditions in the emerging markets, both positive and negative, are driving more inconsistent growth,” Chambers said on an Aug. 14 conference call. “We need some consistency there. We’re not seeing it.”
Capital is fleeing developing nations as China’s economy grows at the slowest pace in 13 years, India’s current-account deficit widens to a record, and persistent inflation in Brazil erodes purchasing power. The share losses are a reversal from the past decade, when the countries led gains during a commodity boom and rising consumption from the middle class.
The potential reduction in U.S. stimulus has strengthened the dollar against 14 of the world’s 16 major currencies this year, attracting global investors to appreciating asset values. In countries such as Brazil, the weaker exchange rate makes imports more expensive and threatens to drive prices for consumers higher. The Indian central bank raised two interest rates in July to contain the rupee’s decline. The currency touched an unprecedented 62.0050 per dollar last week.

More Inflation

“Slow growth, more inflation and tightening central bank policy is not a good combination,” Michelle Gibley, director of international research at San Francisco-based Charles Schwab Corp., said by phone on Aug. 14. The firm manages $2.12 trillion in client assets. “Part of the whole idea of QE was to push investors into riskier assets, and now they’re doing the opposite.”
The U.S. rally pushed the S&P 500’s valuation up 13 percent to 16 times reported operating earnings, close to the highest level since May 2010, data compiled by Bloomberg show. Declines from Chile to Turkey left the MSCI index’s multiple at 9.4, down 7.5 percent since the end of last year and close to the lowest since 2009.
Developing nations are attractive because concern about less Fed stimulus is overdone, said Chris Hyzy, who helps oversee about $325 billion as chief investment officer of U.S. Trust. Samsung Electronics Co. shares trade at the biggest discount to Apple Inc. in two years, data compiled by Bloomberg show.

Alive, Well

“The outflows occurring in emerging markets have more to do with the nervousness over less liquidity than the actual economic cycle,” Hyzy, based in New York, said by phone on Aug. 15. “The bull market is alive and well.”
The last time U.S. shares traded at such a premium and volatility versus emerging-markets was similar to now, was in June 2004, when the Fed started to raise interest rates from a 45-year low of 1 percent. Emerging markets rallied 29 percentage points more than the S&P 500 in the next 12 months, according to Bloomberg data.
Investors are rewarding U.S. equities with a higher premium after executives generated bigger profits even as global growth remained sluggish. Analysts forecast an 8.9 percent rise in S&P 500 profits in 2013, compared with a 4 percent increase for stocks in developing countries, based on the average of more than 11,000 estimates compiled by Bloomberg.

More Certainty

Should the projections come true, it would mark a third year of faster earnings growth by American corporations, the longest run in data going back to 1995.
U.S. “earnings have delivered and there is more certainty going forward,” Andres Garcia-Amaya, global market strategist at JPMorgan Chase & Co. (JPM)’s mutual funds unit, said in an Aug. 8 telephone interview from New York. The firm oversees $400 billion. “I’m OK paying up for more certainty, rather than having cheaper valuation while having a lot more uncertainty.”
JPMorgan Chase shares have rallied in 2013 as CEO Jamie Dimon led the company to record earnings over the past three years. Shares of the New York-based bank are trading at 8.4 times reported operating earnings and analysts’ estimates show the lender will boost profit by 9 percent in 2013, data compiled by Bloomberg show.

Higher Premium

Industrial & Commercial Bank of China Ltd. (1398)’s profit growth is projected to slow to 7 percent in 2014 from 8 percent this year, according to analysts’ estimates. The stock trades at 5.9 times earnings, near a record low, amid concern that an economic slowdown will increase bad loans and the government’s plan to loosen its grip on interest rates will hurt lending margins at the Beijing-based bank.
The U.S. economy will expand 3 percent in 2015, almost double from this year’s pace, according to the median estimates of 89 economists compiled by Bloomberg. Over the same period, combined gross domestic product in BRICs will stay the same at a growth rate near 5.9 percent and the Chinese economy will decelerate to 7.2 percent from 7.5 percent.
“That really creates an inflection point,” Jerry Braakman, the chief investment officer of First American Trust in Santa Ana, California, said in an Aug. 13 phone interview. His firm oversees $1 billion. “China hasn’t fallen off the wagon yet, but it’s getting dangerously close and that’s what scares people. If you’re trying to hide away from that Chinese impact, then buying U.S. assets might be a safety net.”
(Source: Bloomberg)

India’s newspapers shrug off industry woes

 
 Newspaper executives in the US or Europe can only fantasise about the problems confronting their Indian peers: how to source the extra newsprint for rising circulations and catch the eye of the millions of new readers each year. 
Chennai and Kolkata are a long way from Boston and Washington, where two of the best-known US titles were sold this month – the Boston Globe for only $70m, less than a tenth of the price the paper fetched a decade ago.
In India, first-year students still peruse the monsoon-damp pages of The (Calcutta) Telegraph and proprietors wage newspaper wars from Hyderabad to Lucknow to snatch their share of a growing cohort of readers. Last year was seen in the industry as exceptionally tough – because newspaper and magazine revenues rose only 7 per cent as the country’s economy slowed.
“Yes, but we are used to 15 per cent growth,” says DD Purkayastha, chief executive of ABP, one of India’s largest media groups. “Advertising growth has also been fairly handsome in the past decade.”
 
This is a country with hundreds of profitable daily newspapers in a plethora of languages. Dainik Jagran (Daily Awakening), a Hindi newspaper that is the top-selling daily, boasts a readership of more than 16m.
“Profits even in slower times like these seem to be holding up,” says Jehil Thakkar, head of media and entertainment at KPMG in India. “They are down from the boom years, but they are still within 8-14 per cent [for after-tax profit margins].”
In the US, newspaper advertisement revenues have fallen every year since 2005 and at $22.3bn last year are now less than half what they were then, according to the Newspaper Association of America.
India’s population of 1.3bn is not only growing but also becoming more literate. Print continues to take the lion’s share of media advertising – 46 per cent or Rs150bn ($2.4bn) of the total advertising pie of Rs327bn, according to a report published by the Federation of Indian Chambers of Commerce and Industry and KPMG. Over the next five years, Indian print advertising revenues are forecast to grow at more than 10 per cent annually.
The latest driver of newspaper circulation is a push by media groups into vernacular languages and hitherto neglected towns and villages. Average newspaper penetration in India is low at 14-15 per cent, says Mr Purkayastha, but while in cities, penetration exceeds 70 per cent, in the countryside it is as low as 5 per cent. “Those people are getting literate and they have started reading newspapers.”
Manas Ghosh, editor of the 10-year-old Bengali-language edition of The Statesman, a Kolkata daily dating back to 1875, says Indian papers have begun championing local causes and reporting local affairs to attract new readers. His paper backed the vociferous (and successful) campaign against the building of a Tata Motors car factory on Bengali farmland to make the Nano, a small car now assembled in Gujarat on the other side of the country.
“The strength of vernacular dailies in India is the strength of the coverage given to districts, which is not done by the English dailies,” he says.
All good things, however, must come to an end. Although forthcoming elections will make the next 12 months another “boom time” for the Indian print media, says PN Vasanti, director of research group CMS, India’s economic slowdown has forced proprietors to recognise the vulnerability of their business model.
People who go and watch television more go back to check facts in print. That’s a very unusual phenomenon
- PN Vasanti, director of research group CMS
“It’s not as hunky-dory as it looks from the outside,” she says. “The business is not so rosy. The cost of printing has gone up.”
The cover prices of Indian newspapers are among the lowest in the world. Even premium English-language titles such as The Times of India sell for the equivalent of less than 10 US cents a copy. That makes profits excessively dependent on volatile advertising income.
One surprise, including for newspaper groups that invested in them, is that the country’s 100 or more television news channels – many of them sensational and argumentative – have not done more damage to readership or advertising revenues.
“The more television channels we have, the more people are going back to reading,” says Ms Vasanti, who calls it the “appetiser effect” of TV. “People who go and watch television more go back to check facts in print. That’s a very unusual phenomenon that doesn’t happen anywhere else in the world.”
As in Washington, Boston or London, it will be the internet and mobile devices that finally kill the old-fashioned newspaper, although India’s dailies should continue to thrive until accessible broadband internet reaches the parts of the country where newspaper circulation is currently rising.
“The web is more of a threat to the English-language newspapers,” says Mr Thakkar, noting that internet penetration in vernacular languages is still very low. “The English-language reader tends to behave much more like the western counterpart.”
Mr Purkayastha of ABP says: “The order will be first the big metros, followed by the smaller towns, then the rural areas. That process may take 15 years.
“We keep on innovating. We know the tsunami is coming.”

US energy boom helps fuel Barack Obama’s export goal

 
 
The value of US fuel exports has grown faster than other goods and commodities during Barack Obama’s presidency, according to a Financial Times analysis, emerging as a driving force behind his goal to double exports by 2015.
The data offer further evidence of how the US domestic energy boom – led by expanding oil and natural gas production and higher prices – is reshaping its economy.  
The US became a net exporter of fuel in 2011 for the first time in two decades, as rising exports combined with slower imports.
According to Census bureau export data reviewed by the FT, the value of petroleum and coal exports more than doubled from $51.5bn in the year to June 2010 to $110.2bn in the year to June 2013. This placed it at the top of the rankings of export growth.
Oil and gas exports were second, with a 68.3 per cent increase over the same period but based on smaller nominal values. Primary metals and livestock exports have also experienced strong export growth under Mr Obama, well above the average 32.7 per cent for all commodities.
Rayola Dougher, a senior economic adviser at the American Petroleum Institute, a powerful lobby group for the US oil and gas sector, said: “We have been a real engine of growth at a time when other industries have been languishing.”
In January 2010, Mr Obama called for a doubling of exports within five years in an ambitious effort to reboot the US’s industrial base. At the time, the US was producing monthly exports worth $143bn, with goods exports accounting for $99bn. Since then, US exports have gradually increased, but the 2015 goal remains elusive.
By this June, monthly US exports overall were worth $191bn, with goods exports at $134bn, rising about one-third compared with three and a half years earlier.
Though the goal of doubling exports has already been met with fuel products, the traditional manufacturing activity that Mr Obama had in mind when launching the National Export Initiative still has a way to go.
“When the president talks about trade, when he talks about creating middle class jobs, when he talks about turning the US economy into an economy that lasts, he usually talks about manufacturing, those are the classic American living wage jobs,” said Alan Tonelson, an economist at the US Business and Industry Council. “There’s no chance that he’s been thinking mainly about petroleum.”
The commerce department declined to comment.
The Obama administration has taken some steps towards boosting energy exports – such as starting to approve new facilities for the export of liquefied natural gas. But some business lobbyists say the rise in US energy exports has come in spite of White House policies, rather than as a result of them.
“They could really blow the door off our trade deficit if they tore some of those barriers down,” said Christopher Guith, vice-president for policy at the US Chamber of Commerce’s Institute for 21st Century Energy.

Brazil tries to fill the potholes in its path to growth

 
Fernando Atisto has one of the most dangerous jobs in Brazil. He delivers fresh produce to São Paulo’s central market.
“The roads getting here are terrible and, aside from that, dangerous. There are a lot of potholes even on the privately run ones,” said the truck driver, who has just delivered a haul of apples to the Ceagesp market from São Joaquim in Santa Catarina state, more than 800km away.
 
When people in South America’s biggest city shop at the supermarket, they rarely spare a thought for the sacrifice required to ensure there is food on the shelves.
In a country with some of the world’s poorest infrastructure and most congested cities, every apple or piece of meat that reaches a supermarket must undergo a journey that is as perilous for truck drivers as it is tedious.
Ranked 101st out of 144 countries for its infrastructure by the World Economic Forum, the parlous state of its logistics and urban transportation networks has emerged as one of the most critical challenges facing Brazil’s economy.
So critical has the problem become, it has also emerged as an issue in next year’s presidential elections following mass protests in June that were sparked by a proposed modest increase in bus and metro fares.
In response, the government is proposing an investment programme that if realised would be the country’s biggest and most rapidly implemented in history. In logistics alone – ports, airports, railways and roads – the government is looking to invest R$100bn (US$42bn) next year and the same again in 2015.
“We will only be able to think: ‘Ah, now we have contracted all of the infrastructure projects we need’, when we have invested R$100bn a year for five years, or R$500bn, which is what we estimate is the deficit in [logistics] infrastructure,” said Bernardo Figueiredo, president of the federal government’s Logistics and Planning Company.
For the time being, the cost of this deficit is borne by producers. Brazil relies on trucks for 58 per cent of its transport needs, including most of its agricultural produce, in comparison with the US, which moves just 32 per cent of its cargo through roads, with 42 per cent travelling by rail and 25 per cent by waterways, according to a report by Credit Suisse.
The situation is worse for soya, one of Brazil`s fastest growing exports to China. Brazil moves 82 per cent of its soya by road, compared with only 25 per cent in the US. This means Brazilian soyabean costs $145 per tonne to move from farm to port, nearly six times what it might cost for a US producer.
“If you think of how important Brazilian agricultural production is for the world, that means unfortunately more expensive food for the rest of the world than it should be,” said Fernando Martins of Bain & Company. “That’s the way the situation is going to be for the foreseeable future.”
The reliance on trucks, combined with under-investment in roads, has made driving the second-most dangerous activity in Brazil after being a gangster. Traffic accidents are the second highest cause of death by injury in Brazil, second only to homicides and ahead of suicides. Accidents are the second most costly health problem after malnutrition.
The inefficiency does not stop at the roads. Maersk, the shipping company and port operator, says it takes a container an average of 21 days to clear Brazil’s main port, Santos, compared with only two days for Rotterdam. In Brazil’s cities, the metro system of São Paulo, a city with nearly 1.5 times the population of London, is just one-sixth the size of that of the British capital.
To fix these problems, the government is auctioning R$133bn of roads and railways as well as ports and main airports. In addition, there are R$81bn in metro, bus and other urban mobility projects being opened for private sector investment, according to Credit Suisse.
The June protests have given new urgency to the overall infrastructure drive, which had become stalled in bureaucracy and bickering over returns, with the government keen to minimise perceived price gouging by private investors.
The government had been offering real returns of just 5.5 per cent on toll road projects, for example, an amount that has been adjusted up to 7.2 per cent following a lack of interest from the market. This has led many to argue the government would be better off leaving the whole issue of returns to the market to decide through a competitive process.
“If auctions are well designed, you don’t have to worry about pegging returns at a ‘right’ level,” said Arminio Fraga of Gávea, a fund, and a former head of the Brazilian central bank. “It’s not just about execution, it’s also about ideology.”
After all, while users do not like high prices, worse is the present state of affairs, in which only 16 per cent of Brazilian roads are paved.
Pablo Sanches, who does the 750km drive carrying meat between Tapejara in Paraná state to São Paulo two times a week, says the trip would take eight instead of 10 hours without the potholes.
“We are seeing everywhere people saying Brazil needs to progress and end corruption and improve our roads but we are seeing no improvements on the roads, they are all equal or worse,” Mr Sanches said.