How Much Overcapacity In China? Monstrous

WASHINGTON – It has been said many times that the recent commodity prices collapse is due to sudden lack of demand from China. The Chinese construction and infrastructure boom is over.
China stopped buying

China’s voracious appetite for copper, iron ore, glass, cement and other basic materials that just a few years ago led world commodities prices into the stratosphere is now over.

Commodities exporters ranging from Brazil to Australia, from Chile to Zambia are suffering because their once valuable products, due to lack of strong demand, are now worth a lot less.

We know of a global retrenchment of all major mining companies, from Glencore to BHP Billiton. Vale, the Brazilian iron ore giant, will borrow $ 3 billion in emergency financing.

Is this global mining industry carnage due to only to the collapse of demand from China? May be not all, but most of it. That said, how big was China’s boom? And, more relevant, how big a bust do we have now?

We know that China’s once insatiable appetite for all commodities was part of a gigantic investment and construction drive aimed at countering the ill effects of the 2008 recession that originated in the US. We know that this drive led to the creation of massive over capacity in many sectors. But how much overcapacity are we talking about?

Well, here is an example, reported in a WSJ editorial;

“Canadian scientist Vaclav Smil captures the scale of this [construction] folly with a statistic. From 2011 to 2014, China produced 6.6 billion tons of cement, compared to the 4.5 billion tons the US used over the entire 20th century”.

More cement than what the US used in a century 

Got that? In 3 years China used more cement than what America, the largest world economy, used in a century!

Even allowing for a much larger population (1.3 billion Chinese, versus 300 million Americans) that may have needed (in a real hurry, I might add), more housing, more commercial properties, and more new highways, these figures are staggering. No wonder that the Chinese rate of demand for more and more raw materials could not be sustained.

No more buying 

If we look into the future, after this gigantic raw materials indigestion, it is clear that China is not just taking a pause. It will take years before China will be able to cut down over production to levels more in line with actual domestic needs. Therefore, it is clear that China will not go back to the absurd buying spree that created the now defunct commodities boom.

And this means that all commodities producing countries better revise their business development models. Their future well-being will no longer be driven by Chinese demand.

Ripple effects 

And beware of the ripple effects. Large and small commodities exporters represent now a much bigger percentage of the global economy. With their economies down, expect these countries to buy  much less from America, Europe or Japan. This will not lead to a major global crisis. But it will slow everybody down. Therefore, 2016 will not be a good year for the world economy.

US will be hurt 

And there is no way that the US, thus far the best performer among many developed world mediocrities, will be able to insulate itself from these negative currents. Does this mean recession? May be not. At the moment, though, it is safe to predict even slower growth.

Will The Fed Raise Interest Rates? May Be Not

WASHINGTON – Until a couple of days ago, most economists bet that the US Federal Reserve would finally begin to raise interest rates at its December 2015 meeting, this way ending the anomaly of the longest era of zero interest in modern history.

Promising picture

The general picture looked propitious for such a move. The US economy just added 271,000 jobs in October, many more than expected. Wages are going up a bit. Unemployment is down. Overall, it seemed that the new data indicated that a strong economy would fuel more inflation. And this new trend would justify raising interest rates.

What will happen to stocks? 

And what about the consequences? Well, here it gets tricky. This Fed move on interests would signal to stock investors that the ground may begin to shift. Higher rates mean that in a short while, (depending on how fast the Fed moves to bring interest rates from zero back to a historic norm of about 4%), other investment instruments like savings accounts or bonds will become once again more attractive.

In short, if it is indeed true that this unprecedented era of zero interest created a stock market bubble because it forced people to move away from other forms of investments, then we can expect that its end may bring about a stock market decline, or worse.

Right now, people have an extra incentive to invest in stocks because –thanks to zero interest rates decreed by the Fed– it is the only game in town. You cannot make any money by placing your funds in savings accounts. When interest rates go up again, people will have choices.

Fed watching 

Because of all this, these days markets move up or down mostly on the basis of what analysts believe the Fed will or will not do, and how soon. This happens because stocks are sensitive to interest rates moves, and also because there is no action on any other economic policy front that may trigger market reactions.

Paralysis in Washington 

Washington is paralyzed by political dissent. Therefore, no chance of anything happening there that would influence economic policies and therefore economic and investment decisions. No serious public spending reform plan on the agenda, no changes to major entitlements, and no tax reforms that would modify economic incentives.

In other words, nothing is coming from Washington that would signal markets that soon it will be easier to go into business, create new companies, invest in them and profit from them.

Will the Fed move?

So, we are left with Fed watching. As noted above, looking at the positive signs from the US economy that were streaming in in the last few days, it looked as if the Fed would finally have the margin to move.

Indeed, on the surface, the US is doing fine. The stock market is buoyant. Lots of new jobs added in October. More Americans are employed. Higher interest rates, phased in a little bit at a time, would not smother this fairly solid economy.

Outlook not so good anymore 

Well, this was only a few days ago. But now things do not look so good anymore. For example, let’s take a look at commodities. By any measure the sector, a close proxy of industrial activities, looks awful. The Bloomberg Commodity Index is now down to its lowest level since the 2008 financial crisis. The price of copper, widely used in all sorts of industries, is now down to a six-year low. Most commodity prices are back to where they were before China engaged in its gigantic domestic investment program that drove up the cost of everything. As a minimum, this serious decline means that most industrial economies, and not just China, are slowing down.

Commodities down, world trade down 

And it gets worse. Because of sharply lower demand for their products, many emerging markets that produce and export commodities are either in a recession or close to it, (think of Brazil and South Africa). Besides, despite the official statistics pointing to lower but still significant growth, China is exporting and importing less of everything. This affects all its trading partners, from Australia to South Korea.

And there are more bad signs. Maersk, the Denmark based leading maritime shipping company, recently announced that it canceled several orders for new vessels. In other words, a giant player that manages a large chunk of world trade does not believe that current and projected global traffic volumes justify buying more container ships. (Incidentally, recent data about the movement of goods in and out of major US ports also indicate a sustained decline).

More Americans are working, but few good jobs

Back in the US, while more people have jobs, most of the recent additions are in leisure and hospitality, health care, and other services. Most of these jobs are low paying. In many cases they are not full-time. In other words, there are no new jobs in critical wealth creating sectors such as oil and gas, mining and manufacturing.

Sure, more American are employed, and this is good news. But their jobs depend on government spending (health care), and on the spending of other Americans employed in wealth producing sectors.

So, here is the thing. While we have more bartenders and waiters, we have had zero growth or declines in manufacturing, oil and gas, and mining. This is not a sign of a robust economy, going forward.

If the global economy slows down significantly, many US exporters will be hurt. Some, like Caterpillar, are already doing poorly. And this is because fewer foreign customers are engaged in new construction projects. Hence no need to buy more earth moving equipment from Caterpillar.

Other Central Banks not about to raise rates 

Last but least, you have to consider what the other monetary authorities are doing. The Bank of England just decided not to raise rates. The European Central Bank is engaged in Quantitative Easing and plans to have more of it, largely on account of disappointing growth within the Eurozone, (only 0.3% in the last quarter). The Japanese economy is (once again) sputtering.  Finally, China is trying to stimulate its economy by easing credit and lowering the amount of reserves banks need to keep. Therefore you can expect more, not less, monetary easing in the rest of the world.

So, here is the global picture. The US may be doing almost OK –for now. But the rest of the developed and developing world is slowing down. For this reason all other central banks will keep interest rates at zero or close to zero.

If the US acts on its own 

In this context, if the US will raise rates all by itself, as a minimum we can expect a massive flood of foreign capital seeking higher rewards into America. This would drive the US dollar further up, significantly hurting US exporters, including all major manufacturing companies. And remember that the newly added US jobs in leisure and hospitality largely depend on other gainfully employed people having the discretionary income to spend on restaurants and holidays.

Stampede out of stocks? 

And it gets worse. Everybody agrees that the US stock market is overvalued on account of zero interest rates that drove people away from other forms of investments. What we do not know is how overvalued.

Assuming even a modest Fed move on interest rates in December, we cannot expect rational, measured reactions. Foreign investors, fearing that the Fed might get aggressive, may flee from higher risk countries. The dollar shoots up. US exporters are hurt, badly. Their stocks sink, dragging down their vendors and suppliers. Other vulnerable stocks follow. Can this become a rout that drags down “everything”? Yes, this can happen.

Is the US economy rather weak, after all? 

Therefore, the odds are now against the Fed raising rates. But, wait a minute. If the Fed does not raise rates, then it signals to Wall Street that the US economy, contrary to its earlier analyses, is not that strong. If even a modest Fed move on interest rates might upset the whole thing, this means that the economy has no strong foundations.

For this reasons, some investors are likely to sell stocks anyway, finally realizing that they are holding stuff of dubious, most likely artificially inflated value.

Preserve your capital, stay out of over valued assets 

Either way, we lose. If investors were wise, they would give up the notion of making any money in stocks, given this weird environment characterized by a slow-moving US, a weak global economy, and expensive assets.

US stock are over valued. Therefore it is not smart to keep buying them. Of course, if you go into cash, you make no money, we know that. Still, better to make zero profit than losing your capital. As I said, if investors were wise…

Commodities Exporting Countries in Deep Crisis

JOHANNESBURG (South Africa) – Renowned oil expert Daniel Yergin recently observed that the collapse of crude oil prices is just the last act of the commodities ongoing tragedy. Commodity prices exploded in recent years mostly because of historically unprecedented demand from China. But China’s boom is over. And commodity prices are essentially in a free fall, due to lack of demand.

The consequences of this collapse 

Yergin noted that this collapse is bound do have serious economic and political consequences in countries such as Brazil that for a long moment believed that they had become really rich by selling to China. Now the leaders, and the mining conglomerates that operate in their countries, know that it was only a dream. Except that many of them (very unwisely) borrowed a lot during the go-go years, using that dream as collateral.

How bad is it?

Well, how bad is it? Bad enough. According to a BBC report, copper dropped another 2% in recent days. It is now “at its lowest level in six and a half years”. 

Indeed, copper is now at $ 4,995 a ton. We are back to the depressed levels copper reached in 2009, when the world was right in the middle of the Great Recession. And here is the rest of the BBC report:

“Demand for copper, which is used across industry from construction to car manufacturing, has suffered from the slowing Chinese economy. 

Investment bank Goldman Sachs warned investors this week that prices would continue to fall. In a note entitled, “Copper’s bear cycle still has years to run”, its analysts predicted copper prices would probably drop to $4,800 a tonne by the end of December and to $4,500 by the end of next year. The decline in copper is only a part of a global meltdown in commodity prices caused by China’s economic downturn. 

Crude oil has fallen some 60% from June last year, thermal coal has been on a long 60% slide since 2011, and iron ore is down even more, close to 70% since 2010. 

The effects are rippling out into other sectors. On Tuesday, Japanese shipping business Daiichi Chuo Kisen Kaisha filed for protection from creditors, caused by the collapse in Chinese demand for iron ore and coal.

Unsurprisingly the collapse sent a shiver through the rest of the Japanese shipping sector. Nippon Yusen, Mitsui OSK Lines, Kawasaki Kisen Kaisha saw their shares fall between 4% and 8%.

And the effects spread far wider than the mining companies and their support services. Any economy dependent on commodity exports is seeing its currency punished. Australia, whose iron ore, coal, oil and natural gas fueled the Chinese boom, has seen its dollar lose more than a quarter of its value against the US dollar over the past year. [Bold added]

Chile, where copper makes up 30% of the value of its exports, is expected to announce on Tuesday that public spending, having grown almost 10% last year, will rise by half that amount this year. Economic growth there has slowed along with the fall in the copper price and a decline in investment in the mining sector.”

China’s binge

So, here is the thing. China engaged in the construction equivalent of a historic drinking binge. Its leader really thought that they could counter the 2008 Recession through gigantic debt-driven investments in “everything”: shopping malls, luxury condos, high-speed rail, ports and airports. In pursuing this construction extravaganza, the Chinese generated an unprecedented wave of commodities imports.

But now the enormous debt created to finance all of this construction is catching up with China. The boom is over. And the commodities sellers now know tow things. Number one, going forward China’s buying will be modest –at best. Number two, they will have to deal with the massive debt that they contracted in order to finance the growth of their sectors, so that they could meet China’s appetites.

Massive malinvestment

Well, China’s growth was driven by malinvestment. Sadly, it turned out that malinvestment was contagious. Everybody invested in additional capacity hoping that China’s absurd levels of demand for iron ore, copper and what not would continue essentially for ever.

South Africa will suffer, along with Australia, Brazil, Chile, Zambia, and many other commodities exporters. Add to this troubling picture the well publicized afflictions of all oil exporting countries, and then you cannot be surprised when reading that the IMF just revised down its global economic growth projections.

Still, please note that, if there are going to be negative economic repercussions in Germany because of the global slow down, in Brazil and elsewhere it is going to be a lot worse. Brazil and most of the other commodities exporters do not have a “Plan B”.


End Of China Boom Caused Commodity Prices Collapse

WASHINGTON – Global mining giant Anglo American just announced that it will downsize –in a dramatic way. It will cut 53,000 jobs. This is no surprise. It is the painful consequence of the end of the crazy China bubble.

Commodities are down

Indeed, all commodity prices are significantly down. Compared to 2014, iron ore is down 45%, copper down 25%, aluminum down 18%, and so on. And this collapse is due mostly to lack of demand from China.

If these are the painful consequences of the end of the China boom, it may be instructive to go back and see how it started.

How it all started

When China’s leaders announced a gigantic, publicly funded, stimulus package to counter the ill effects of the US-induced 2008 global financial crisis, the world applauded. “There you go. This is how you deal with this problem caused by the short-sighted and in the end stupid Wall Street crowd. This is a real fire wall. Nothing like the puny, timid package passed in Washington. You counter a major crisis with a really big package. This one will do it”.

Well, the package was big, no doubt. In fact it was so big that it unleashed a gigantic China boom. Goaded by the central authorities, the Chinese provincial Communist Party chiefs ordered massive construction projects. They built and they built “everything”: luxury housing, commercial real estate, shopping malls, infrastructure. And of course, for a while this worked out well. Companies were doing well, workers were employed, and so on.

They over did it

Yes, except that the Chinese over did it. And not just a little bit. They over did it in a grotesque, historically unprecedented way. They overbuilt everything, everywhere. And of course, in order to fuel this boom, they added too much capacity in all the sectors that supported it. Too many steel mills. Too many ships to carry what seemed to be an ever growing supply of iron ore. They augmented capacity in glass, cement, copper wire, you name it.

Boom in commodity producing countries

And this is only half the story. Until this craziness lasted, the Chinese boom fueled an economic boom in commodity producing countries. Brazil did extremely well by boosting its exports to China. Same for Australia, and many African countries.

But this Chinese debt fueled boom, induced by ill-advised public policies ordered by Beijing, had to come to an end. Simply stated, there is too much supply, not enough demand. And in the meantime, China total debt skyrocketed to unprecedented levels.

Mining companies trying to adjust

And now? Well now we see the outcome of this gigantic malinvestment. As indicated above, British mining Giant Anglo American is trying to cut its losses by eliminating 53,000 jobs. World wide the mining industry is in bad shape, and so are the countries whose growth depends on it.

China’s policies did not work

What is the lesson of this? The lesson is that Chinese policy makers are just sorcerer apprentices who believed that their smart ideas would provide effective tools that would beat a negative global trends caused by reckless American policies.

True enough, all governments around the world tried to enact measures that would limit the damage. Washington intervened massively to prevent the collapse of American financial institutions. It also bailed out General Motors, the giant car manufacturer that was already in serious difficulty before the Wall Street financial collapse. Still, while we can debate the wisdom of the counter measures, overall Washington did not make the problem worse.

The Chinese wanted to avoid the economic consequences of a financial crisis they did not create. And this is understandable. However, in their zeal, in the end they created a huge debt-fueled boom that caused a massive misallocation of capital, in China and across the world. If you just lost your mining job in Australia, Brazil or South Africa you know this.

Chinese over capacity will be sold to us

And this is not the end of the bad news from China. If you were wondering what will China do with its massive over capacity in practically every industrial sector, here is the answer. They will do their very best to sell their gigantic steel (and everything else) surplus to us, at rock bottom prices.

You see, this being China, they simply cannot shut down money-losing steel mills, this way causing massive unemployment. No, they will keep producing, at a loss if necessary, and dump the stuff here, this way causing US steel producers to go out of business.

With Or Without A Major Crisis In The Ukraine, Putin Determines The Agenda

By Paolo von Schirach

Related piece:

March 4, 2014

WASHINGTON – What is truly worrisome about the ongoing Ukrainian crisis is that Putin sets the stage and the tempo. A startled and frankly frightened world is on edge after Putin invaded the Crimea because he got mad after his strategy to get the Ukraine back into Russian orbit failed. Instead of saying: “You get out, Mr. Putin, or else“, the West muttered: “Oh Brother, what is he going to do next?” Well, calm down. After a few days of ominous silence, Putin finally talked, saying mildly reassuring things. Relax, Russia is not going to invade the Ukraine. And the West is relieved. “Thank God, he is going to be nice, after all. Oh Boy, this was a close call“.

Putin determines the agenda

The upshot here is that, one way or the other, Putin is in command. The timid and disorganized West at best is in a reactive mode. Where is America’s leadership? Where is the European Union? Where is NATO? No united front. Oblique and generally innocuous statements in Europe. Big words with no chance of an organized follow on in Washington. This is the sad spectacle.

And look who is winning: Russia. A rather sorry-looking “has been”, a country masquerading as great power only thanks to the considerable cash flow provided by oil and gas exports. This otherwise semi-developed petro-state gets to determine the mood in Europe and in America. (Consider this: even with all its oil and gas revenue, Russia per capita GDP is only $ 18,000 a year. This places it at number 77 in a descending world scale, below semi-bankrupt Argentina and just a few notches ahead of Botswana. Not exactly economic giants. In contrast, the US per capita GDP is $ 52,000 a year. The US is number 13 in the same world ranking. And do keep in mind that the spots at the very top are occupied by special cases like Qatar, Singapore and Luxembourg).

The West has a lot more wealth

This is crazy. A semi impoverished state with a third-rate economy determines world events. It should be quite different. The West, with its power founded on real wealth creation made possible by free institutions, should dominate. And we certainly have the resources. The combined GDP of the US and the European Union is more than US $ 35 trillion, compared with Russia’s mere US $ 2 trillion! However, instead of using intellingently our considerable wealth, we allow the neighborhood bully to determine whether we can feel at peace or under threat.

This is a bad situation.  Sane people would call it intolerable.

Bringing Russia into the West

And remember that the whole point of bringing Russia into the G 7 Club (thus creating the G 8) was to make post-Soviet Russia feel welcome and at ease in the West. Ditto for its belated entry into the World Trade Organization, WTO. The idea was that a democratic Russia, willing to play by the rules, had only to gain from a closer association with the West. And what did we get as a result? The invasion of Georgia in 2008, and now the invasion of the Crimea.

An authoritarian regime

Instead of learning from the Western experience, Putin created his own semi-authoritarian state. For all practical purposes, he re-nationalized Russia’s vast energy sector, while he created a climate of open intimidation against any domestic opposition. And now he proved that he is capable of truly crazy things (Crimea) when he gets mad, as in this case caused by the blistering political defeat he just suffered in the Ukraine. With no apparent fear of any consequences, Putin invaded the Crimea, and then he threatened all out war against Kiev. And he did all this, in open breach of many established international law principles, essentially with impunity. Who is going to resist him? Nobody.

A post Cold War order?

In fact, stock markets sink when he makes threats, and they rally when he says a few conciliatory things. Therefore Putin is the modern tyrant who holds sway and whose mood changes we all must fear. In fact, as he is moody, all the more reasons to be extra nice to him, in order to avoid provoking another temper tantrum.

Is this our idea of the post Cold War international political order? Is this the end result of the carefully crafted “reset” with Russia smartly engineered during Obama’s first term, (and executed, I might add, by then Secretary of State Hillary Clinton)?

Putin will keep the Crimea

That said, even though we may have a welcome de-escalation regarding the Ukraine, as I predicted, (see link above to a related piece), there is no sign that Putin is about to relinquish his grip on the Crimean peninsula. The region is now under total Russian control. I believe that, as soon as things calm down a bit, Russia will force a referendum whose outcome will clearly indicate that the Russians in the Crimea want a higher degree of “autonomy” in the context of a loose federation with the Ukraine. This will be de facto independence and de facto Russian control over the Crimea.

Is this the way to make constitutional changes?

In this case, the facts on the ground favor Russia. Most Crimeans are ethnic Russians. And probably they do not mind Russian domination. Therefore, my sense is that, as long as there will be no formal breaches of basic international law principles (such as an outright annexation) the world will acquiesce. That said, even though the Russians in the Crimea may indeed prefer greater autonomy, and do not mind a closer association with Russia, this is certainly not the way to put forward a constitutional change agenda.

This way of doing things, with a clear military threat in the background, sets a bad precedent. And this is not good. Not good at all.

Underneath China’s Still Impressive 7.5% Growth There Is A Mountain Of Debt

By Paolo von Schirach

August 28, 2013

WASHINGTON – The official news about China is that the number two world economy, expertly managed by the careful Beijing technocrats, is adjusting to a slower but still very impressive rate of growth. After an amazing almost 30 year run with more than 10% growth, year after year, from now on China will be cruising at 7.5% a year. If you think that Europe is barely above zero, while the once mighty America is advancing at a pitiful 2% rate, 7.5% is fantastic.

Too much debt

Well, this is what appears. But it is not so. Not even close. The truth is that China’s growth is largely artificial and now mostly debt driven. And debt is growing at an alarming rate. If you read the hard-hitting pieces on China’s debt crisis published by The Financial Times on August 27 and 28, you get a truly scary picture. China’s construction boom, itself one of the major drivers of GDP growth is based mostly on speculation and enormous amounts of bad debt that now call into question the solvency of many local financial institutions. Likewise, Chinese corporations for years over estimated demand for almost everything. As a result there is enormous overcapacity in practically every sector, from coal to chemicals to steel. Corporate debt, much of it held by non official banking institutions, has skyrocketed. 

And this is has nothing to do with the predictable ups and downs of the business cycle. Here you have a major country whose growth is now sustained mostly by an enormous amount of debt. The good news is that China’s exports over time generated huge cash reserves. However, if a large portion of this capital will have to be used to cover all this red ink, there will be a lot less available for productive investment. Therefore, assuming that this scenario is correct, forget about 7.5% growth, year after year.

Local governments and corporations are in trouble

Just a few illustrative facts drawn from the excellent FT articles referred to above. China is now the most indebted among emerging markets. Aggregate debt (corporate, household, government) has soared from 40% in 2007 to 100% in 2012. Local government debt usually does not include debt carried by local non-bank financial institutions. Therefore, while official figures indicate local government debt level up to 16.8% of GDP, in truth this goes up to 57.8%.

At the local level, local governments used to make money by expropriating farm land that was then sold to developers. Land holdings were used as collateral to obtain cash that would finance infrastructure. Well, now the construction boom has halted because developers have over built. Many of them are in big trouble as they have unsold inventory that cannot be liquidated. In the meantime all the sectors, such as steel and cement, that used to be driven by the construction boom are suffering because of demand contraction. Back to the local government, with the end of the construction boom, now they own far less valuable land that is no longer accepted as collateral. Hence a mounting debt crisis at the local level.

Back to industry, many state-owned corporations now are kept artificially alive via easy government credit funneled to them via state-owned banks. Smaller companies that do not have easy access to credit are struggling. Some now pay their bills through promissory notes. Others disguise their troubles through increased unpaid leaves for their workers, so that official employment numbers appear unchanged.

No problem?

As all this is unfolding, we are told that there is no problem. And this is indeed the real problem. Denial and obfuscation is not a good way to deal with an emerging crisis. Remember Greece? Until the day (back in 2009) in which the Greek Government announced that it had cooked the books regarding the actual level of its debt, it all seemed perfectly normal.

In the US we have had our spectacular 2008 crash. While we can debate how the main actors and the regulators did not see this coming, after the collapse policy-makers and the public knew what had happened. And, sure enough, we have had our own gigantic bail outs. Still, when the Federal Government essentially took over General Motors, it did so publicly, at the same time demanding a credible restructuring plan that included closing down facilities, destruction of jobs, plus salary and benefits cuts for those lucky enough to keep a job.

No transparency

There is no such publicity and transaparency in China. Ttherefore there is far less pressure to restructure in order to obtain leaner and more competitive state owned corporations. As to the local governments and their troubled finances, most likely their debts will become government debts. Still, debt is debt –and it slows you down.

In the end, for sure China must have many healthy companies that are doing and will be doing well. Still, digging a bit deeper, as the FT has done, we discover a country with huge and as yet undeclared systemic problems. It is going to take time and a lot of money to fix all this. China’s economy will stay large. But it will be far less impressive than you would have thought.


Mexico Will Amend Its Constitution, Allowing Foreign Companies To Invest In Its Energy Sector

By Paolo von Schirach

August 13, 2013

WASHINGTON – If I were Vladimir Putin or Ali al-Naimi, Saudi Minister of Petroleum, I would be really worried about the latest news from Mexico. President Enrique Pena Nieto is pushing forward an amendment to the Mexican Constitution that would eliminate or at least curtail existing barriers to foreign investments in the country’s oil and gas sectors. 75 years ago President Lazaro Cardenas nationalized the Mexican oil industry. The sector became  a monopoly managed by Pemex, a state-owned corporation.

Amending the Mexican Constitution

But now the Mexican leaders realize that Pemex is very inefficient. Its technologies are not up to date. However, given the constitutional barriers that prevent outside investments, it is almost impossible to find good ways to involve foreign firms in the energy sector. The push to amend the Constitution comes from the knowledge that Mexico has huge untapped resources, both conventional oil and gas as well as unconventional (mostly shale) gas. Mexico’s official reserves are 115 bln barrels of oil equivalent, comparable to Kuwait. But the figure could be a lot higher.

US energy independence

It is obvious that with the active participation of major American, European and other energy companies, Mexico could start developing all these reserves. Beyond the economic benefits for Mexico, from a geo-political stand point The United States of America would have the opportunity to get a larger share of its oil imports from Mexico. Combined with increased domestic production and greater reliance on Canadian oil, the US would reach “Hemispheric Energy Independence” even sooner than expected.

And this means no more OPEC oil for America.

More gas

Furthermore, Mexico has the fourth largest shale gas deposits in the world. As soon as this gas becomes available, this would further increase world supply. As America has plenty of its own shale gas, most the Mexican gas will be turned into LNG and exported to energy starved Europe, China and Japan.

Russia and OPEC will suffer

This is why Russia and Saudi Arabia should be worried. Their only valuable resource is likely to become less valuable on account of increased global supply. Look, even in a best case scenario it will take a while for Mexico to amend the Constitution and then enact the legislation and all the necessary regulations that will eventually enable foreign energy companies to participate in the exploitation of its vast energy resources. But this is going to happen, for sure.

A new energy map

As a result, in just a few years the world energy map will look entirely different. North America will become a net exporter of shale gas. Thanks to increased domestic output and more supplies from Canada and Mexico the US will get all the oil it needs from North America. As a result, Washington will no longer be obsessed with the danger of oil supplies disruptions originating in the Middle East. Consequently the responsibility for ensuring the unhindered flow of oil through the Strait of Hormuz will shift from America to China and Japan –the major oil importers that rely on those supplies.

But, more than anything else, Russia and Saudi Arabia, countries that today make money because of high oil prices, will see their revenue flow go down and their influence diminished.

Americans Have Discovered Hummus – Growing Sales For The Sabra Brand

By Paolo von Schirach

August 4, 2013

WASHINGTON – For once there seems to be  a positive connection between healthier eating habits practiced by a growing number of Americans, increased sales of  chickpeas based hummus, and the opportunity for Virginia farmers  to start growing a new variety of chickpeas instead of tobacco. It all started with the successful marketing of Sabra products (a joint venture between Israel’s Sabra and Pepsico) in the US market.

Hummus for America

As a result, more and more Americans have discovered hummus, a delicious Middle Eastern dip made with chickpeas. Sabra dips, along with other varieties produced by different brands such as Tribe, are becoming quite popular in America. While hummus sales volumes are still way behind salsa and other dips and snack foods, Sabra products are doing better, year after year. 

 Chickpeas will replace tobacco in Virginia

Well, now Sabra has established a new production plant in Virginia. The problem is that US chickpeas are grown mostly in the North West, creating thus a supply chain uncertainty. Indeed, it may be a problem for East Coast based Sabra to depend entirely on the reliable delivery from the West Coast of  its most essential ingredient.  

For this reason, the firm, (that now runs its main processing plant in Chesterfield County, Virginia),  turned to crop specialists at the Virginia State University for help. There they connected with India born Dr. Harbans Bhardwaj. He started experimenting with different varieties of chickpeas that would grow well in Virginia’s more humid climate. Most importantly, he has to select a variety that will develop resistance against a nasty fungus that attacks chickpeas plants, potentially destroying entire crops.

If Dr. Bhardway will succeed, then many Virginia farmers will have a good opportunity to start planting chickpeas instead of tobacco, in order to supply the Sabra processing facility.

Health dietary habits spur good business

And here is the real story. Tobacco is bad for you, as it is the basic ingredient to make cigarettes. And cigarettes may kill you. Chickpeas instead are really good for you. This humble legume is packed with proteins, several phytonutrients and fiber. 

The fact that Americans like hummus made with chickpeas represents a positive dietary change for a population that is in general addicted to unhealthy stuff. So, here is the happy picture. Americans develop a healthy eating habit. Sabra makes money selling hummus, and Virginia farmers will also make good money growing chickpeas, (instead of nasty tobacco), this way ensuring a reliable supply for the Sabra processing plant.


Once America, With Canada’s Help, Becomes Energy Self-Sufficient, Expect Major Geopolitical Changes

By Paolo von Schirach

May 2, 2013

WASHINGTON – Imagine this brand new scenario for world energy. America will start producing at home a lot more of the oil it needs. Besides, it will import even less because many of its heavy vehicles will be converted to cheap and abundant Compressed or Liquefied Natural Gas (CNG/LNG) now produced in America, this way further diminishing the need to import crude. As consumption will still be larger than domestic production, the US will continue to be a net oil importer. However, increased imports from Canada and soon Brazil will guarantee “Hemispheric Oil Independence”. This means that for the first time in recent history the Western Hemisphere, through a combination of US production, plus larger imports from friendly neighbors, will have all the energy it needs to fuel the world’s largest economy.

US will no longer rely on OPEC oil

A fantasy? Not really. Many reputable projections indicate that America is well on its way to reach this goal. In just a few years America will stop importing oil from the Persian Gulf, Africa and hopefully Venezuela. This is a game changer, with obvious geopolitical repercussions. You can bet that a “semi-energy independent America” will downgrade its interests in Middle East issues. You can bet that  Arab Israeli matters, including a final solution to the eternal Palestinian mess, will no longer be regarded as important. By the same token, the US navy presence in the Persian Gulf will be diminished and eventually eliminated.

Japan to take a more active role in securing oil flows

The world sees these new developments. Indeed, Japanese Prime Minister Shinzo Abe, during a recent visit to Saudi Arabia, discussed issues related to Persian Gulf oil flow security with his Saudi hosts. The hint is that Japan in the future may take a more active role in protecting, possibly with navy deployments, the unhindered flow of the Gulf oil its economy is totally dependent on. Having seen the proverbial writing on the wall, Japan is already planning for a not so distant future in which the US 5th Fleet, now anchored in Bahrain, will no longer be policing the sea lanes for America’s own benefit but also for the benefit of all other major oil importers, first and foremost Japan. 

So, here is the brand new scenario. Once America will no longer depend on OPEC oil, the free flow of Middle Eastern oil will become the responsibility of the heavy users: Japan, China and India. Therefore, expect major diplomatic, political and security rearrangements between the Gulf Region and Asia.

The end of OPEC?

On a different level, if the Western Hemisphere becomes indeed a major oil producer satisfying America’s entire energy needs, expect the OPEC cartel to suffer greatly. OPEC’s ability to control world oil prices is predicated on an environment of increasing demand and tight supplies in which only OPEC has significant spare capacity. But if this changes dramatically, if Canada and Brazil have enough oil to supply America and then quite a bit in excess to sell to others, then OPEC’s ability to impose its own prices will, mercifully, end. OPEC will keep selling oil, but not at the prices it sets (by manipulating supply) based on its own convenience.

The Saudis apparently are already adjusting to this new situation. They have announced that they will stop investing in added capacity. Which is to say that they have determined that in the next few years there will be no significant additional world demand to justify added production. The Saudis certainly do not want to flood the market with excessive crude oil supplies, this way causing  prices to collapse. 

Russia will suffer: end of the oil rent

By the same token, in a world with plenty of spare oil, expect Russia to suffer as well. As of now, its major source of economic strength comes from oil and gas exports. A lot more oil and gas in North America changes the global market outlook. As America no longer needs foreign gas, European importers can find alternatives to Russian gas. And plentiful oil will mean lower prices. Good for all importing ntions but bad news for Russia and other large exporters that have used the rent provided by inflated oil prices as the major driver of their economic development. They better start looking for other ways to sustain their fragile economies.

Urban Farming Coming To Brooklyn, New York – The Beginning Of A New Green Revolution That Will Transform How We Grow And Deliver Food

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By Paolo von Schirach

Related story:

November 5, 2012

WASHINGTON – I have written before (see link above) about the potentially disruptive innovation of “vertical urban farming”. And now a TIME magazine story, (Local food Grows Up, October 15, 2012), points out the economic potential of the broader urban farming concept. Urban farming is not a new idea, (think about “Victory Gardens” created in war time). But it is a revolutionary, new idea as a scalable, profitable and cost effective large scale enterprise.

Agriculture is complicated

Agriculture is a rather complicated business. Until now it was assumed that, in order to make money, agricultural enterprises in advanced economies needed to have massive scale, so that they could keep their prices low while selling large quantities. But large scale farming has to depend on enormous amounts of land, complicated and costly supply chains of refrigerated warehouses, trucks, wholesalers, distribution points, etc. Not to mention unpredictable weather. The strawberries you buy at your local supermarket usually come from far away. And distance has a cost, (trucks, truck drivers, fuel), that adds to the price you pay. Besides, this means produce sitting in refrigerated warehouses and trucks for much longer. So it often does not taste that “fresh”.

Grow it in the city?

Well, imagine that someone can grow the same strawberries in your city. They are culytivated in a green house located on a roof top, picked up, transported to the same local supermarket where you shop, located just a few blocks away, and you can buy them literally hours after they have been harvested.

Sounds crazy? Not really. The TIME story describes Gotham Greens, a successful enterprise growing fresh produce on a roof top in Brooklyn, New York . This is a very sophisticated operation, based on hydroponic cultivation and computerized temperature controls. The only problem for this urban ag corporation, is scale. Even though the systems they use are highly productive, Gotham Green is very small, and it just cannot keep up with demand.

Go vertical and you add quantity

Well, here comes “vertical farming” to the rescue. Just as skyscrapers resolved the problem of squeezing a lot of people in a limited urban space, imagine a skyscraper for lettuce and broccoli. Instead of using the small surface of a roof top, this systems will give you 40-50 floors or more of growing surface. Have many of these vertical greenhouses and you could grow the entire food supply for New York City within NYC.

Now, this is truly disruptive innovation! If you can picture that, you can picture the amazing consequences. Vegetable are plentiful and cheaper year round. No use of soil. No need for the long and expensive logistic train from farm to market. End of land erosion. End of overuse of fertilizers with all the well known adverse environmental consequences.

A new green revolution

We are not there, yet. But we will get there. Right now the challenge is to find the best design that will guarantee optimal lighting, temperatures, ventilation and what not up and down the lettuce skyscraper. New computerized systems will take care of that. After that, it is all about economics. How much will it cost to build the structure. What is the possible yield and what is the market price for the products that will be cultivated will determine the size of the vertical greenhouse and the types of produce that it will farm.

When this idea will be scaled up, it will help consumers, energy savings and the environment. Many if not most of the large scale food production corporations will go out of business because they would not be able to compete with mass produced vegetables cultivated within cities. This means that all that land can be reforested with huge benefits for the environment and wild life. It will be a better world.