|Monday 9th May 2011
CBI downgrades UK growth | Global economy is in a fragile state, warns BHP chairman | Moves to reduce Ireland's EU/IMF package interest rate | EEF calls for rethink on renewable power | Public sector pay still needs reform | HSBC delays decision on HQ relocation until UK banking rules are published | Private equity firm CVC could block Murdoch bid for F1 | Split with Scotland would make for a messy divorce | Top banks poised to drop legal challenge over PPI mis-selling | China's rising wages propel prices | How anchoring can set you adrift | Logging on to find Mr and Mrs Right digitally | When a university degree just isn’t enough | Facebook driving more traffic to news sites - Pew study | The World of Coca-Cola | No more space in South Africa's steel industry, says Kumba |
CBI downgrades UK growth
Britain's economy will grow more slowly than previously forecast, the UK's leading business group has warned, as high levels of inflation and the Government's austerity measures squeeze household spending.
Philip Aldrick - Telegraph - 9th May 2011
The CBI has predicted that GDP will rise by 1.7pc this year and 2.2pc in 2012, a downward revision from its previous forecast in February of increases of 1.8pc and 2.3pc respectively. Rising prices and unemployment, combined with spending cuts and tax rises, have left the UK far less robust than would normally be expected in a recovery, it said.
"The rebalancing of the economy is going to take time to feed through, and domestically it may not feel like much of a recovery for some time yet," John Cridland, CBI director-general, said.
The CBI's message is likely to be reiterated by the Bank of England on Wednesday at its quarterly Inflation Report. The Bank had downgraded its year-end growth forecast from 3.27pc to 2.6pc in February, and economists said it will have to do so again after first-quarter growth came in weaker than expected.
However, the Inflation Report is also likely to argue that the recent rise in inflation will be short-lived – although it may have to raise its short-term forecasts. The combination of weaker growth and falling inflation over time will give the Bank a strong platform from which to argue that interest rates should be left unchanged at 0.5pc.
Markets and City economists now expect the Bank to hold rates until the end of the year.
New data from accountants BDO, though, will continue to put the Bank under pressure over its wait-and-see policy. According to BDO, inflation expectations have hit a 29-month high. Its "Inflation Index" rose to 108.5 in April from 106.2 in March.
The Bank fears a rise in inflation expectations on the grounds that it could entrench rapidly rising prices in the economy. Inflation is already at 4pc, double the Bank's 2pc target.
According to the CBI, the high cost of commodities is expected to drive inflation above previously forecast, causing more misery for cash-strapped consumers, whose wages are failing to keep up with price rises. However, it is expected to come back down sharply.
The CBI expects the consumer prices index (CPI) will average 4.2pc in 2011, up from 3.9pc in its previous estimate. It said CPI will begin to fall back towards its 2pc target next year as the impact of January's hike in VAT to 20pc wears off.
Ian McCafferty, CBI chief economic adviser, said: "The recovery continues to be choppy and lacking in vigour.
"What remains striking is how little we expect the pace of growth to accelerate in 2012, and that it will be far less robust than we'd normally expect in the second and third years of a recovery.
"Of particular concern are rising commodity prices, which are putting more intense upward pressure on inflation."
Global economy is in a fragile state, warns BHP chairman Jac Nasser
Robb M. Stewart - The Australian - 9th May 2011
BHP Billiton chairman Jac Nasser warned today the global economy remains in a fragile state and people should be prepared for further downside as fiscal and monetary tightening and economic restructuring takes hold.
"In the longer term, there is no doubt that the world will rebalance and many countries will experience growth, financial recovery and higher living standards on a scale never before seen, Nasser said in a speech delivered in Melbourne.
Mr Nasser said that in the short term, however, fragility remains along with persistent levels of unemployment and threats of inflation.
Mr Nasser was named chairman of the Anglo-Australian company in March last year.
He has been a director since mid-2006.
Mr Nasser also told the business luncheon today that the Australian mining industry needs flexibility to bring in highly skilled and trained people to augment demand for specialised skills.
He said Australia has a shortage of scientists and engineers.
"Many of the science and engineering skills the southern hemisphere resources industry needs are available in abundance in the northern hemisphere now," he said.
"In the short term, flexibility is required on labour practices, including immigration policies."
Mr Nasser said Australia can realistically become the global "centre of excellence" in resources.
"To do this, we need to continue to attract the best minds and skills the world has to offer and have internationally competitive labour practices," he said.
Moves to reduce Ireland's EU/IMF package interest rate
RTE News - 9th May 2011
The Irish Government has said moves are under way to reduce the interest rate on Ireland's EU-IMF loans, as speculation mounts that Greece could request more funding under its rescue package.
Financial markets are expected to respond when they re-open today to the Greek rumour that circulated throughout the weekend.
Publicly, officials in Athens and around Europe continue to insist that restructuring the Greek government bonds held by private investors is not on the cards.
But privately, officials increasingly concede that some form of restructuring - perhaps an extension of maturities on the bonds - may be inevitable.
Greece currently has a debt of €340 billion.
A high-level team of experts from the EU, the IMF and the European Central Bank will tomorrow begin examining the measures being taken by Greece to manage its national debt.
Chairman of the eurozone's finance ministers, Jean-Claude Juncker, has said there is consensus that Greece needs a new plan, and that the matter will be discussed at a meeting of finance ministers of all 17 euro zone states next week.
Germany has rejected suggestions that Greece should abandon the eurozone.
The comments from Berlin's Finance Minister followed a meeting with EU colleagues on Friday night, at which Greece's precarious fiscal condition was considered.
The Minister for Communications, Energy and Natural Resources said Ireland must secure a reduction in the interest rate.
The issue could be addressed by EU finance ministers next Monday and Tuesday when they meet to decide the terms of Portugal's bailout package.
Pat Rabbitte said yesterday that the case for a cut in Ireland's rate is unarguable.
He said Ireland intended to continue negotiating improvements in the bailout terms throughout the scheme's three-year life.
Mr Rabbitte said this would make sense in light of the situation in Greece.
EEF calls for rethink on renewable power
David Prosser - Independent - 9th May 2011
Manufacturers will today call on the Government to reconsider targets for the growth of renewable energy, following a new report that claims it may be too expensive.
The EEF manufacturers' organisation said warnings that renewable energy would remain more costly than the alternatives for many years to come should prompt ministers to consider other opportunities.
Otherwise, the EEF added, energy users in Britain, including consumers, would be forced to pay higher bills than necessary, while businesses would be put at a competitive disadvantage to international rivals.
The EEF was responding to a report from the Committee on Climate Change, the independent body set up to provide the Government with impartial advice on carbon budgets – as well as to monitor the progress Britain is making towards achieving its climate change targets.
The report said that in 20 years time, a decade after Britain is set to achieve ambitious targets for power from renewable sources, most of these technologies would still be more costly than low-carbon alternatives such as nuclear.
The EEF said the findings should lead to a review of the policy – and ultimately a shift towards an approach that includes more nuclear power, though such a move will be hard for the Goverment to promote in light of the recent problems at the Fukushima nuclear plant in Japan.
The organsation also urged the Government to consider planning for greater use of carbon capture and storage technology which aims to provide cleaner forms of existing power generation, as well as putting a much greater emphasis on energy efficiency.
Steve Radley, the EEF's director of policy, said: "Renewables must play a growing role in our energy mix and we need the right policies to ensure that this happens.
"But we need to ask if the 2020 renewable energy target is leading us down the wrong path."
Public sector pay still needs reform
Allister Heath - City AM - 9th May 2011
Times are becoming tougher for the public sector, which started shedding jobs last year and whose members are now facing a two-year pay freeze and an increase in pension contributions. But while the pain will be very real, austerity in the public sector needs to be put into context.
Research from Policy Exchange reveals that pay in the public sector continued to pull away from that in the private sector last year. Public sector workers are now paid more than private sector workers on every measure one chooses: the mean (or average) salary in the public sector worker is 4 per cent higher, the median (or typical) pay packet is 16 per cent higher and median hourly pay is 35 per cent higher (because public sector workers work fewer hours on average).
The report’s own measure suggests that the annual pay premium in the public sector is 24 per cent and a massive 43 per cent once pensions are included. For the second year in a row, mean pay was higher in 2010 in the state sector than in the private sector. It is a remarkable, epoch-defining shift – and it comes even though public sector productivity dropped by 0.3 per cent per year between 1998 and 2007, while it increased in the private sector by 2.3 per cent per year. Only the best paid private sector workers still earn more than their public sector counterparts.
These figures do not adjust for skills or experience. But controlling for factors such as education, age and qualifications (all of which are higher in the public sector) can be misleading, as Ed Holmes and Matt Oakley, the report’s authors, argue cogently. The public sector’s overemphasis on formal training, propensity to value qualifications judged as unproductive in the private sector and tendency to exaggerate the importance of seniority, could all contribute to the appearance of a more skilled, sophisticated and experienced workforce than is in fact the case. Putting these caveats to one side, after taking into account differences like age, experience and qualifications, but ignoring productivity and the like, the hourly pay premium for a public sector worker hit 8.8 per cent as of December. Such figures are clearly an under-estimate of the size of the gulf – and pay is only one factor determining a worker’s rewards.
State employees tend to receive safer, index-linked pensions, enjoy lower working hours, longer holidays, higher job security (the majority of the job cuts planned will be achieved by not replacing retiring staff or through early retirement, except in sectors with low staff turnover such as the police). Job satisfaction may also be higher in the public sector: if so, this ought to mean lower wages as jobs that workers enjoy doing are paid less than those they hate.
The two-year pay freeze will reduce the differential by just 3.4 per cent. It would have to last until 2018 to eliminate it altogether, including pensions. This would be unfair: good staff would quit, bad staff would stay and effort would not be rewarded. Instead, the pay freeze on individual salaries should be replaced by a freeze in the total pay bill for public sector organisations. This would allow the deficit to be cut, good public sector workers to be paid more – and bad ones who are enjoying an easier, more comfortable life than their hard-pressed private sector counterparts to be paid less or removed. There is nothing wrong with high pay – but only when it is deserved and affordable.
HSBC delays decision on HQ relocation until UK banking rules are published
Decision on moving its headquarters out of London until next year has been delayed in order to digest the final recommendations from the Independent Commission on Banking (ICB).
Josephine Moulds - Telegraph - 9th May 2011
The bank has privately warned that the ring-fencing approach favoured by the Commission, which would separate UK retail deposits and loans from the corporate book, could jeopardise its lending to UK companies.
Senior executives at the bank say this approach could force it to slash the size of its loan book if it does not have the corporate deposits to match.
The bank is unlikely to use deposits from European companies to fund lending in the UK because of fears that it would increase risk. HSBC counts Tesco and a number of other FTSE 100 companies among its UK clients.
The ICB, which is chaired by Sir John Vickers, is due to publish its final report in September.
HSBC has a routine review of the location of its headquarters every three years. A cost-benefit analysis of whether to stay in London was due to take place this summer, but has been delayed until the report has been published. A decision is unlikely to be made until 2012.
Some large shareholders would support a move as they believe the bank is suffering under the weight of new regulations in Britain, including George Osborne's levy on bank balance sheets.
Stuart Gulliver, chief executive of HSBC, is preparing to reveal results of the bank's strategy review on Wednesday.
It is thought the new head could announce plans to scale down operations in the US, where HSBC is nursing losses from its venture into sub-prime mortgages.
Analysts suggest the bank might sell its US credit card operations, estimated to be worth up to £12bn.
HSBC is expected to plough funds into fast-moving economies in Asia, where strong loan growth, particularly in Hong Kong, has bolstered the bank. Some analysts say the bank may sell its 16pc stake in Chinese insurer Ping An.
Mr Gulliver is also expected to announce cost-cutting after a key measurement of costs rose from 52pc in 2009 to 55pc. In the UK, it is thought the bank could move its retail team from the Canary Wharf headquarters to a cheaper location.
HSBC is expected to announce a $6.1bn (£3.7bn) profit before tax for the first quarter, up 7pc from the same period last year.
Robert Law, analyst at Nomura, believes a full-year consensus for a profit of $24bn could be downgraded.
Private equity firm CVC could block Murdoch bid for F1
Exor and News Corporation are thought to be mulling the possibility of creating
a consortium with a plan for the development of Formula One
Christian Sylt and Caroline Reid - Guardian - 9th May 2011
News Corporation cannot make a move to take over Formula One by buying out the sport's minority shareholders because private equity group CVC has first refusal on any stakes offered for sale.
News Corp has confirmed that it has teamed up with Exor, an investment firm controlled by the Agnelli family, for a possible bid for F1.
CVC, which owns 63.4% of Formula One's Jersey-based parent company Delta Topco, has confirmed that it received a "friendly" approach from James Murdoch, News Corp's deputy chief operating officer, who "acknowledges that Formula One is privately owned by CVC and not currently for sale". But the Murdoch statement added that "over the coming weeks and months, Exor and News Corporation will approach potential minority partners and key stakeholders in the sport".
However, if this happens they could soon be met with a roadblock. The shareholders of Delta Topco are all bound by an agreement that was signed in November 2006 when CVC refinanced the $2.9bn (£1.75bn) debt which it used to buy Formula One . It gives CVC a veto over the sale of any of the other shareholders' stakes in Delta Topco and it states that CVC has first refusal if they decide to sell.
CVC's UK managing director, Nick Clarry, said: "The shareholders' agreement gives us control in any event, as they cannot sell without first offering the shares to us and we must approve all and any transfers."
This stops hostile investors building up a position in Delta Topco by buying out its minority shareholders, many of whom have voting rights.
Bambino, the family trust of Formula One's boss Bernie Ecclestone, owns 9.4% of Delta Topco, plus a further 5.3% as Ecclestone's personal holding.
Ecclestone told the Guardian that he believes News Corp is using the possibility of a Formula One bid as a front to secure investors for its acquisition of the 61% of shares it does not already own in listed broadcaster BSkyB.
News Corp is expected to pay more than £7.5bn to get complete ownership of BSkyB and Ecclestone says "they are trying to get some money together. if they find somebody who has come up with a few billion they can say we can't buy Formula One but would you like to come in with Sky. It is a good way of finding out if there is money out there."
Split with Scotland would make for a messy divorce
The debt-to-GDP ratio of an independent Scotland might prove
so large as to sink it financially before it was even born
Sean O' Grady - Independent - 9th May 2011
Like all divorces, the one that eventually may befall England and Scotland will be messy and mired in arguments about money. ("England" is here shorthand for "whatever's left of the UK – England plus Wales, Northern Ireland, Cornwall and the Scillies. Probably"). Of course it's not certain. The victory of Alex Salmond's Scottish National Party (SNP) in the Scottish parliamentary elections was impressive, but the Scottish people are canny enough to distinguish between a Salmond administration that will help them resist the cuts, and outright independence. Support for that is about one quarter to one third of the electorate, and that doesn't guarantee an "aye" vote in 2014, the most likely timing for the referendum promised by the SNP.
Still, the possibility of an independent Scotland is an intriguing one, and a real one, in that way that hitherto unthinkable political events sometimes stealthily drift into reality. Another three years of cuts might just do it – and Scotland's reliance on public sector jobs is a problem. Much more likely, though, is a continuing erosion of Westminster's economic control of Scotland, although that may not be a plausible alternative.
At what point do separate powers over taxation, public spending, financial regulation, business and competition become so extensive that the idea of Scotland in the UK is no longer sustainable – if only because it brews up resentments in England? We may soon find out.
So Scotland a nation again, then. The first question would be what currency to adopt. Sterling is an option, theoretically. The Irish did this after the establishment of the free state in 1922, and that lasted until 1978. After a brief period of monetary independence, the punt gave way to the euro, and we all know what happened next; boom and bust. SNP politicians used to be fond of the euro, and pointed to the examples of Ireland and Iceland as what was achievable for a small dynamic financially adventurous nation at the edge of the EU. Of course, they're more circumspect about joining northern Europe's "arc of prosperity" now. Would the SNP promise a further referendum on whether to join the euro soon after a successful vote on independence?
Joining the euro is a much more realistic prospect in an independent Scotland than in the UK, and could be disastrous. Without the freedom to devalue the Scottish currency, Edinburgh would be trapped in the eurozone with deflation the only way to ensure competitiveness long term – and with the same baleful consequences as are now being experienced in Greece, Ireland and Portugal. The PIGS might then be Portugal, Ireland, Greece and Scotland rather than Spain, which appears to have escaped the contagion, for now. Such a prospect would complicate the independence referendum at any rate.
Scotland would, though, get full access to its oil, although that has been a declining asset, plus, within EU rules, its fishing rights. It could also capitalise on its superior education system, and promote the sort of low-tax environment that helped the Irish and the east Europeans win inward investment.
But there are weaknesses in Scotland too. It is no longer propping up the foot of the UK's economic league table – more prosperous than the West Midlands now, for example – but it is not about to join the BRICs, either. Scotland, for all its strengths, would be much more like an amalgam of Ireland and Greece than to Germany in its fundamentals; relatively uncompetitive, with a big undercapitalised banking sector and a nasty overhang of private and public debt.
Which brings us neatly to the second big question, of how much of the UK's national debt Scotland ought to take on. And, within that, how much of the debt related to rescuing the semi-nationalised Scottish-based Royal Bank of Scotland and, arguably the Scottish bit of the Lloyds/TSB/Halifax/Bank of Scotland combine. Either way, the debt-to-GDP ratio of an independent Scotland might prove so large as to sink it financially before it was even born; 100 per cent of GDP is well within the bounds, being about 10 per cent of the UK's projected £1tr debt and Scottish GDP at about £100bn.
Scotland's non-existent track record in managing public finances might also leave markets to impose an immediate "risk premium", meaning even higher borrowing costs, lower investment and lower consumption levels immediately. Apart from Edinburgh New Town, where there would be rush for handsome townhouses to serve as embassies and high commissions, property would be swiftly devalued. Short term, independence would be tough, until Scotland demonstrated its strengths.
Which raises the third question. How effective would the Scots be at managing their own affairs? No worse than the English, it might be said. At least part of the reason why its great banks got into trouble was because the regulators in London failed. Then again, Sir Fred Goodwin was very much a home-grown product of the Scottish financial establishment. The Scots are no longer obviously superior beings when it comes to finance. Geographical tensions and sectarianism are also threats to cohesion.
The economic risks then, for an independent Scotland are substantial, and probably prohibitive. Being a relatively small nation inheriting sizeable debts (through no fault of its own, beyond the fact that Britain had a Scot as Prime Minister and Chancellor running them up), and a large financial sector many times GDP, the chances of getting policy right are slimmer than they might be.
Which leaves the much more likely path of increased financial and economic autonomy within the UK: "fiscal federalism". We are moving towards that, with the Welsh and Northern Irish following the Scots' lead. The Scotland Bill now passing through Westminster will grant Holyrood further powers to vary taxes beyond the 3p in the pound currently available – a 10p variation in income tax, plus freedom for stamp duty on property, landfill tax, air passenger duty, and the aggregates levy.
In line with the recommendations of the Calman commission, an amount equivalent to the 10 per cent of UK tax revenues now allocated to Scotland will be deducted from the grant currently made to Scotland from the UK. If the Scottish Government simply applies a 10 per cent tax rate, it will theoretically end up with the same revenue as would have been the case had the proposal not been implemented. So it could vary income tax quite radically. Yet why should the English tolerate a neighbour with a much more benign tax regime if, as many perceive, they are subsidising that neighbour?
If fiscal federalism and independence are not viable, then Scotland might be better off staying where it is, although the momentum is against that.
Way back in the 1980s and 1990s Scottish Tories used to argue that devolution would inevitably lead to independence. It must be no comfort for the likes of Michael Gove to be proved right now. Will he, I wonder, have to apply for a work permit be allowed to keep his London-based job? And would he qualify under the immigration cap?
As I say, it will be a messy divorce.
Top banks poised to drop legal challenge over PPI mis-selling
Barclays may have to set aside £1.4bn to cover PPI claims
Jill Treanor - Guardian - 8th May 2011
Britain's leading banks are poised to admit the size of their multibillion- pound compensation payments for missold payment protection insurance as they prepare to drop their legal action against the terms being imposed by the Financial Services Authority for customer redress.
After the abrupt U-turn by Lloyds Banking Group last week and its surprise move to take a £3.2bn provision for PPI, Barclays, Royal Bank of Scotland and HSBC also face revealing the scale of their bills to draw a line under the PPI debacle.
Barclays is expected to announce a provision of between £1bn and £1.4bn, possibily as soon as on Monday while bailed out RBS has indicated it will take longer to finalise the size of its provision, estimated in the region of £1bn. HSBC which reports first quarter profits on Monday, forecast to be up 7% to $6.1bn (£3.7bn) by Nomura, may also not yet have agreed the size of its compensation bill after being more determined to fight against a move by the City regulator to change its rules on PPI retrospectively.
The British Bankers Association has been coordinating a legal challenge on behalf of the big four banks and had widely been expected to ask for leave to appeal a high court ruling in April that upheld the FSA's strict guidelines on PPI. However, the decision by new Lloyds chief executive António Horta-Osório to withdraw from the legal challenge – giving his rivals just hours notice – put pressure on Lloyds' rivals to abandon the legal challenge ahead of Tuesday's deadline.
It has appeared that the remaining major players were ready to drop the legal case although some of the smaller building societies involved are still to make a decision on whether to proceed. An announcement from the BBA is expected on Monday.
Stephen Hester, chief executive of bailed out RBS, conceded last week that the bank would need to make a provision in the second quarter of 2011 - the size of which was still being calculated - and indicated that the bank's market share was around a third of Lloyds, which dominated the market with a 40% share of the once-lucrative business. This led analysts to conclude a provision of nearly £1bn would be needed to cover the claims.
Barclays is also facing a charge of more than £1bn as its seeks to improve its relationship with its customers. At its annual meeting last month, chief executive Bob Diamond conceded that he knew the bank needed "to do a better job for customers".
"We accept that the number of complaints we receive is too high and we're working hard to reduce them," he said.
Announcements by the banks in the coming weeks are expected to lay bare the scale of PPI. The last official estimate by the FSA was made in August last year when the regulator expected claims to reach £4.5bn. With Lloyds making a provision of £3.2bn, observers are now expecting the total bill to double to about £9bn.
PPI was sold alongside loans and was intended to keep up repayments if the policyholder of the insurance fell ill or lost their job. But, the policies did not pay out as frequently as might have been expected and in some instances appeared to be sold as a condition of a customer taking out a loan. In 2004 the Guardian reported that only 15% of the income banks were taking in from PPI was being paid out in claims.
The FSA has now introduced a new regime for PPI by demanding the insurance cannot be sold until at least seven days after a loan has been granted and borrowers need to be informed the insurance was an extra. The banks had been complaining to the high court that it was unfair for these rules to be introduced retrospectively but their arguments were turned down in April. It now seems that they are unlikely to ask for leave to appeal and are to abandon the legal fight on what they regarded as a point of principle.
China's rising wages propel prices
Shai Oster - The Wall Street Journal - 9th May 2011
Wages are rising in China, heralding the possible end of an era of cheap goods.
For the past 30 years, customers would ask William Fung, the managing director of one of the world's biggest manufacturing-outsourcing companies, to make his products -- whether T-shirts, jeans or dishes -- cheaper. Thanks to China's seemingly limitless labour force, he usually could.
Now, the head of Li & Fung Ltd says the times are changing. Wages for the tens of thousands of workers his Hong Kong-based firm indirectly employs are surging: He predicts overall, China's wages will increase 80 per cent over the next five years. That means prices for Li & Fung's goods will have to rise, too.
"What we will have for the next 30 years is inflation," Mr Fung said. "A lot of Western managers have never coped with inflation"
The issue is likely to hover behind talks this week between Chinese and US leaders in Washington at their annual Strategic Economic Dialogue. Currency and debt issues are expected to dominate the agenda. But there are signs that the low labour costs --and cheap currency -- that led to China's huge trade surplus with the US could be reaching a tipping point. This comes amid pressure from rising wages as China's working-age population begins to decline.
For decades, plentiful Chinese labour kept down costs of a range of goods bought by Americans. Even as politicians in Washington accused China of hollowing out the American manufacturing sector, cheap DVD players, sweaters and barbecue sets were a silver lining for consumers who grew accustomed to ever-lower prices. China also kept down the value of its currency, giving domestic exporters a competitive edge.
"Inflation has been damped pretty dramatically in the US because it exported work to China and other places at 20 per cent or 30 per cent of the cost," said Hal Sirkin, a consultant at Boston Consulting Group. The years of dramatic reductions in costs are over, the firm says.
Li & Fung traces the start of rising wages to the "Foxconn Effect".
Foxconn is the trade name of Hon Hai Precision Industry Co, maker of iPads for Apple, and computers for Hewlett-Packard, among others. After a string of worker suicides last year at one of its China plants spurred Foxconn to defend its treatment of employees, the company raised wages 30 per cent or more in a bid to improve worker conditions. That raise came as workers at other factories, including staff at a Honda Motor parts plant, went on strike for higher pay.
Since then, the Chinese government has supported higher wages in part to address labour unrest, but also as way to boost domestic consumption and reduce reliance on exports to expand the economy. The rising wages affect both foreign and domestic companies.
Other factors beside rising wages are pushing up the price of goods. Chinese workers, for one, are starting to buy more with their higher salaries. That's contributing to higher prices for commodities such as cotton and oil, which are already climbing in part because of a weaker US dollar. Rising living standards in developing economies like China will keep prices of natural resources high as demand outpaces supply.
China's move to let the yuan slowly appreciate in value -- something eagerly sought by its Western trading partners -- adds fuel to the fire. A stronger yuan makes it cheaper for China to import the raw materials it needs, such as iron and soybeans, helping tame domestic inflation. But it makes its exported goods more expensive for other countries to buy.
"This idea that we have moved from an era of easy deflationary environment to one of inflation is correct," Jeffrey Sachs, economist and director of the Earth Institute at Columbia University.
During China's 30 years of economic growth, hundreds of millions of factory and urban jobs soaked up surplus rural farm labour. In the past three or four years, he says, that extra labour has been exhausted.
Many analysts predict that China's vast labour force will begin declining in the next year or two, the result of family-planning policies. Others say there's already a shortage of the most active members of the factory floor, workers aged 15 to 34. That group has been steadily declining since 2007, according to Jun Ma, Deutsche Bank's chief economist for Greater China. A shrinking work force will need higher salaries to support an expanding population of elderly.
There's some debate about the impact and extent of these wage increases on foreign markets. The pace of inflation for US imports is running about 7 per cent this year, but it doesn't account for a big enough portion of spending to significantly affect overall low inflation rates of about 1.6 per cent, Morgan Stanley's China strategist Jonathan Garner said. Still, with real wages stagnant for decades, many Americans who have grown dependent on cheap imported goods such as polo shirts or power tools could see their purchasing power decrease.
China still has cheap labour in its interior, away from its developed coastal cities, and productivity gains could mitigate higher wage costs. For example, Foxconn announced it was expanding operations to inland areas near Chengdu, Wuhan, and Zhengzhou, away from its coastal base. Li & Fung is encouraging its suppliers to invest more in their factories to increase worker productivity and raise the quality of goods.
There are limits to what those measures will achieve. Some analysts say that the wage increases will sharply outpace any productivity gains. Moving inland means lower wages, but higher transportation costs on China's crowded highways and railroads. Furthermore, locating the factories in China's hinterland puts them in a better position to service China's growing domestic consumer market instead of exporting to consumers in the US and elsewhere.
Faced with rising wages within China, some companies are shifting resources elsewhere to keep costs down. Yue Yuen Industrial (Holdings) Ltd, the world's biggest shoe maker, has started moving manufacturing of low-cost shoes from China to countries such as Bangladesh and Cambodia. Li & Fung has been hired a prominent Chinese sneaker brand, Li Ning Co, to help it search for cheap production outside China.
But the wage gap between China and other developing countries will shrink, said Mr Fung, echoing views shared by Boston Consulting Group, because "China was the thing that kept the price low," he says. "China was the benchmark. With the China price rising, everyone else wants to raise prices."
As factories relocate to other countries, local wages will rise faster than they did in China because the potential pools of surplus labour are smaller. In addition, because no other country can replicate the massive scale of China, logistics will become a larger part of costs as companies are forced to slice up their manufacturing over several countries, analysts say.
"Things will be more expensive and people will buy less," Mr Fung warns.
That means that the West will have to adopt new consumption trends.
How anchoring can set you adrift
Nathan Bell - The Age - 9th May 2011
Sharemarket investors and boat-owners, you might be surprised to learn, have something in common (other than an unfortunate tendency to buy dud investments). Over time, each becomes accustomed to anchoring.
For the boat-owners, anchoring is something to be mastered (the rest of us might find that The Complete Book of Anchoring and Mooring could cure insomnia). But for the investor, anchoring is a common psychological bias which one should strive to avoid.
Quite simply, anchoring is the tendency to focus on irrelevant information (that is, we “anchor”, or attach ourselves, to it). We then use this information, incorrectly, to help make decisions. A recent example might help.
Your columnist was recently asked a question that ran something like this: “I bought Macquarie Group at $47 a share and am sitting on a loss of $15,000. Should I sell?” The questioner was attached (anchored) to the price she had paid for the stock.
It might sound surprising, but the price you paid is always irrelevant to any decision to sell (we'll get to what you should focus on shortly).
We anchor to the price we pay for stocks because it has relevance to us. Over time, your investment results will depend on the prices you buy and sell at.
Crucially, though, these prices are irrelevant to the individual decision to sell. How so?
James Montier in Behavioural Investing explained anchoring thus: “When faced with uncertainty, we have a tendency to grab on to the irrelevant as a crutch. The incorporation of the irrelevant often happens without any conscious acknowledgement at all”.
Human beings are attracted to certainty and precision. We therefore become fixated on numbers like purchase prices, price-to-earnings ratios (PERs), profit forecasts, or oh-so-precise discounted cashflow valuations.
These numbers help paint a picture but placing emphasis on too few of them over-simplifies the story.
It's an insidious bias we should all work to overcome.
So what should you focus on?
The simple answer is the company's value. Value investors analyse the underlying business carefully to develop a valuation range (rather than just one number), which is then compared to the stock price.
Over time, we update this range with new information that comes to light (trying to avoid anchoring to our initial valuation).
Returning to our earlier Macquarie Group example should clarify the point.
Put yourself in the shoes of our trial member, who bought the stock at $47 (it's currently about $35). If you are unsure whether to buy or sell, what should you focus on?
Only two variables count - the current price and the valuation range, which according to our research, is somewhere between $37 and $50.
If you anchor on your purchase price instead of the valuation, you are effectively ignoring the fact that you may own an overpriced stock.
Of course, determining a company's intrinsic value is the difficult bit. But ignoring it in favour of something irrelevant - like your purchase price - is a mistake.
Effort spent worrying about price movements is better spent developing your analytical toolkit.
Next time you catch yourself focused on your purchase price - or the loss it implies - take time to reassess the company's valuation. If it remains the same, take comfort from your analysis.
While anchoring might keep the boat enthusiast's pride and joy firmly in place, it can do plenty of damage to the sharemarket investor's portfolio.
Logging on to find Mr and Mrs Right digitally
Tuo Yannan - China Daily - 9th May 2011
BEIJING - Li Huijuan is a highly-educated woman who was born in Hunan province and works in Beijing. Her family is pushing her to get married because traditionally in China a woman is supposed to find a husband before she reaches 30. However, in big cities, such as Beijing and Shanghai, the average age for marriage has been postponed to 35 or 40 because of the fast pace of life and work.
Like most metropolitan women, because of her busy work schedule, Li doesn't have much time for meeting people and finding a boyfriend. "A few months ago, some of my co-workers encouraged me to register with an online matchmaking website to find a boyfriend," she said.
Although she is accustomed to using the Internet for online shopping and socializing, it was still a new experience for her to find romance on the Web. "I registered at night," Li said. "I was surprised to receive more than 10 messages the following morning."
Nowadays, the number of single men and women is a hot topic in China. The country has 180 million adults who are single and an increasing number of them are going online to find their "Mr or Mrs Right". According to a report released by the All-China Women's Federation and matchmaking website Jiayuan.com, 60 percent of single people have attempted to find a partner online.
The chief executive officer from one of China's three largest matchmaking websites, Gong Haiyan, found her husband through her own company.
When she was 27, Gong registered and became a member of two matchmaking websites. However, she found that the websites didn't provide the services she wanted. Afterward, she spent 1,000 yuan ($182) to register her own website, Jiayuan.com, which in Chinese means "good karma".
Gong graduated from Peking University with a degree in Chinese literature, so she posted a poem on the front page of her website. Her future husband, a member of the website, saw the poetry and was touched by her intelligence. Eventually, they became couple.
After finding her own happiness, Gong's aim now is to help more people to find happiness and love online. Her website has become the largest matchmaking website in China with 32 million subscribers.
Gong says her website is for "serious matchmaking". Every day she helps users solve their romance problems. Although she already has more than 400 employees, she still insists on personally replying to her subscribers' questions.
According to China Internet Network Information Center, China had more than 450 million Internet users as of the end of 2010 - more than any other country. Matchmaking websites see a good opportunity in the huge number.
Tian Fanjiang, CEO of matchmaking website Baihe.com, said in an earlier report that his website had a 100 percent growth rate in sales revenue from the first quarter of 2009 to the same period in 2010. "In 2010, we had 6 million new users, and online sales revenue hit 100 million yuan, up 10 times from the previous year," said Tian.
With an increasing number of Internet users, Li said the number of people who are using the Internet to find a boyfriend or a girlfriend is growing fast.
The annual VIP membership for a matchmaking website costs between 200 yuan to 300 yuan on average, according to Jiayuan.com. With about 15 percent of subscribers willing to pay for a VIP membership, the market has huge monetary potential in the future.
When a university degree just isn’t enough
James Bradshaw - Globe and Mail - 9th May 2011
The bachelor of arts was once a distinction that opened the gates to myriad options and rewarding jobs. But the BA’s sheen has worn away, to the point where even many of those who choose to complete one see it only as a stepping stone to the degree they really need.
In the last decade and a half, governments and universities keen on promoting accessibility and boosting enrolment flooded the market with BAs. But as the degree became common, employers grew hungrier for students trained with specific skills and ever-more-advanced degrees.
It meant that to get many desirable jobs, students had to do more than just a BA. Though enrolment in many arts and science programs is still rising, BA graduates are a shrinking portion of the university population. Between 1999 and 2009, full-time undergraduate enrolment increased by 40 per cent, but graduate enrolment expanded by 70 per cent as the popularity of master’s programs exploded.
There is also concern that not enough of these graduates excel at the liberal arts education’s core skills – writing, critical thinking, research ability, social curiosity – for the BA to carry much weight, leaving students feeling obligated to get graduate, professional or college credentials to prove their worth.
“What does a BA get you?” said Ken Coates, dean of arts at the University of Waterloo. “It creates a series of opportunities that would not be there otherwise, and a lot of the students are now coming in with a two-stage process very much in mind.”
The good news for new undergraduates, however, is that the financial benefits of a university degree have only risen.
According to research co-authored by Thomas Lemieux, a labour economist at the University of British Columbia, graduates of all bachelor’s degrees collectively earned 40 per cent to 50 per cent more than high-school graduates in 2005, a gap that widened since 1980. Meanwhile, in two recessionary years leading up to September of 2010, Canada created 280,000 net new jobs needing a university degree, while shedding 260,000 jobs for those without one, according to the Association of Universities and Colleges of Canada.
But BAs earn less than those with applied degrees, such as a bachelor of science, Dr. Lemieux said. And a recent study by the Maritime Provinces Higher Education Commission, tracking the region’s graduates two years later, showed liberal arts students earned the least and were far less likely to have jobs that require a degree. BA students fare better five years after graduation, but surveys suggest many BA holders go back to school long before then.
Hadia Akhtar, 24, has just finished a BA in political science, economics and French at the University of Toronto. She began applying for jobs in February but found the market “pretty rough” and feels lucky to have landed a six-month internship that will take her abroad and pay her just enough to get by.
“I think [the BA] should be less of a stepping stone toward doing other degrees,” she said, adding that she is feeling compelled to apply to graduate programs right away, despite being $35,000 in debt.
The BA, of course, has never been all about employability, but was praised for its inherent value in broadening and challenging young minds. But even that goal has been impacted by large and impersonal lecture-style classes, with little access to busy professors.
“I thought [my degree] would be a lot more than what I was getting from it,” Ms. Akhtar said. “It was very unilateral the way we were learning – that’s not good in an academic setting. The professor is just throwing out information at us.”
Ms. Akhtar considered 80 students a small class for her first three years, a trend she sees “spreading all across Canada.”
At some Ontario universities, more than a third of first- and second-year classes now have more than 100 students, according to government data. Higher Education Strategy Associates, which tracks the number of classmates per class at universities across the country through student surveys, estimates a much larger chunk of first-year classes – between 45 and 75 per cent at most large and mid-size universities – have more than 100 students.
While undergraduate enrolments shot up 40 per cent, faculty levels rose only 25 per cent over the same period. Annual statistics from the Canadian Association of University Teachers show there were 23.1 students per professor in 2007-2008, compared with fewer than 17 in 1990-91.
Universities have allowed these ratios to swell in step with growing costs of salaries, infrastructure and research in order to balance budgets – up to a point, teaching more students with the same faculty members boosts general revenues. Tutorials led by teaching assistants have provided those in large classes with small-group discussions, but Ms. Akhtar said even those sessions are getting scarcer as teaching assistants are replaced with more junior grading assistants.
“If we asked to meet with [grading assistants], they would say things like, ‘We're not getting paid to meet you. Just send us an e-mail about what you think is wrong with your assignment,’ ” Ms. Akhtar said.
By contrast, 27-year-old Rylan Kafara said his BA in history at the University of Alberta was “fantastic.” But he, too, found early-year classes impersonal, and is grateful that spending a year first at Red Deer College, in small classes, taught him to connect with his professors. He is now working on an MA in history, and hopes to become a professor, but concedes he originally entered the field to get to law school.
“I wasn’t any good at math, so I couldn’t be an engineer. And I didn’t like seeing people hurt, so I couldn’t be a doctor. I thought maybe I’d like law,” he said.
Having more students attend colleges and universities has become a popular public-policy issue. The Ontario government has promised to fund 60,000 new university and college spaces over five years, citing a burgeoning knowledge economy. The federal Liberals made it a major election campaign promise, with the $1-billion “Learning Passport” that would help ensure if “you get the grades, you get to go.”
But Dr. Coates worries policies like these mean schools are accepting too many students who are not ready. Professors often complain quietly that their students don’t have the literacy or study habits to stay afloat. Heavier teaching loads also force them to assign less writing and more easy-to-grade tests.
“Undergraduate education has become like high school – it’s an entitlement,” Dr. Coates said. “A BA was a way of saying, boy, that student is really motivated and interested in the world. And I don’t think you can necessarily say the same thing now for all the students, so the degree doesn’t carry the same certificate of quality or of character.”
Hoping to curb this effect, schools such as U of T and the University of Guelph have created expensive but successful programs that guarantee some small, first-year seminars. And Waterloo added practicality in what Dr. Coates calls the largest program of co-op arts degrees in the world, as well as an arts and business program, which beefs up arts degrees with a suite of business courses taught “from an arts perspective.”
At Mount Allison University, a school focused on liberal arts and sciences, president Robert Campbell boasts of small classes and “loads of opportunities for writing, for class participation.” But he thinks all universities may have to revisit how many courses they offer, and how many credits students need, to restore some balance.
“Basically, we’re avoiding the hard reality that we’re spending less and less per unit of output,” he said.
Ms. Akhtar wants boosts to government funding to better offset rising enrolment. Dr. Coates thinks schools need to be better at communicating expectations before students arrive, and should offer more career counselling.
Whatever the solution, the BA must change to regain its currency.
“We may be ready for a big, big conversation in universities about how we deliver undergraduate education,” Dr. Campbell said.
Facebook driving more traffic to news sites: Pew study
Economic Times - 9th May 2011
Facebook is driving an increasing amount of traffic to news sites but Google remains the top referring service, according to a study published on Monday.
The study by the Pew Research Center's Project for Excellence in Journalism looked at the behaviour of news consumers online during the first nine months of 2010 using audience statistics from the Nielsen Co.
The study examined the 25 most popular news websites in the United States , looking at how users get to the sites, how long they stay there, how deep they explore a site and where they go when they leave.
An average of 40 percent of the traffic to the top 25 news sites comes from outside referrals, the study found, with Google Search and, to a lesser extent, Google News the single biggest traffic driver .
The Nielsen figures did not break down where the remaining 60 percent of a news site's traffic comes from but the study said much of it stems from direct visits to the home page of a news site.
"Far from obsolete, home pages are usually the most popular page for most of the top news sites," the study said, and were the most viewed part of the site for 21 of the 25 studied.
Google Search was responsible for driving an average of 30 percent of traffic to top news sites with the Drudge Report and Yahoo! also ranking as major traffic drivers.
But social media -- and Facebook in particular -- is "rapidly becoming a competing driver of traffic," the study said.
At five of the top 25 sites, Facebook was the second or third most important driver of traffic.
"If searching for news was the most important development of the last decade, sharing news may be among the most important of the next," the study's authors said.
The website drawing the most traffic from Facebook links was The Huffington Post with eight percent of its visitors landing on the site that way.
Twitter, somewhat surprisingly, "barely registers as a referring source," the study found.
Only one website in the top 25 -- the Los Angeles Times with 3.53 percent -- derived more than one percent of its total traffic from Twitter.
Many visitors to top news sites are what the study described as "casual users" people who visit just a few times a month and spend a total of just a few minutes there at a time.
On average, 77 percent of the traffic to the top 25 news sites came from users who visited just one or two times, the study said, with the percentage varying among sites. Yahoo! News, had lowest number of people visiting only once or twice, but it was still more than half at 55 percent.
More loyal and frequent visitors -- what the study called "power users" -- return more than 10 times per month to a particular site and spend over an hour there over that time.
But "power users" make up an average of just seven percent of total users among the top 25 sites, the study said. CNN had the most "power users" -- 18 percent -- while 16 percent of Fox New's audience fell into that category.
Only six sites had "power user" figures in double digits.
"Overall, the findings suggest that there is not one group of news consumers online but several, each of which behaves differently," the study said. "These differences call for news organizations to develop separate strategies to serve and make money from each audience.
"Advertising may help monetize some groups, while subscriptions will work for others."
As for where readers go when they leave a site, Google is a leading destination accounting for up to seven percent of departure links.
The study also noted the divide between Google and Facebook in that Google does not send users to Facebook and vice versa.
"Google and Facebook are increasingly set up as competitors sorting through the material on the Web," it said. "They are two fundamentally different ways to navigate the Web."
The top 25 sites included 11 newspapers: The New York Times, The Washington Post, USA Today, The Wall Street Journal, The Los Angeles Times, the New York Daily News, the New York Post , the Boston Globe , the San Francisco Chronicle, the Chicago Tribune and Britain's Daily Mail.
Six were the websites of broadcast or cable television networks -- MSNBC, CNN, ABC, Fox, CBS and the BBC -- and four were pure news aggregators -- Google News, the Examiner, Topix and Bing News.
Three were "hybrid" sites which mix aggregation of other news sources with original reporting -- Yahoo! News, AOL and The Huffington Post -- and one was a wire service, Reuters.
The World of Coca-Cola
Coke’s success story can be attributed to its ability to cut across racial, cultural and economic lines.
Lim Wey Wen - The Star - 9th May 2011
I have been drinking Coke most of my life, yet it never occurred to me that it could be anything more than a soft drink. However, halfway into the tour of the World of Coca-Cola (WoCC) in Atlanta with two other journalists and Sparkling (Malaysia) marketing manager Weitarsa Hendarto, I was convinced that in the United States, Coke is not only a beverage. It is a part of the American psyche.
Maybe it was the floor-to-ceiling exhibits that covered most of the walls of the 8,547sqm complex (think 32 tennis courts). Or perhaps it was the persistent squeals of excitement coming from the children running around us as we moved from gallery to gallery. Or maybe, it’s because even before I got here, I found it easier to get a Coke instead of plain water the moment I boarded the Atlanta-based Delta Airlines.
Nothing beats having a self-professed avid Coke fan like Steve Dietrich for a tour guide. Because when you have someone talking about the beverage like it is his best friend, it is not too difficult to get the idea.
When we met Dietrich outside the grey-coloured building, the familiar Coke jingle playing on loop and a huge Coke bottle were the only obvious indications that this was indeed the house to 125 years of history surrounding one of the world’s most recognised brands.
From afar, you have to observe closely before you can see past the horizontal shade that divides the building in half and spot the words Coca-Cola scribbled across the walls. It is only when you move closer, that you see a small sign at the entrance that says “World of Coca-Cola”.
But once we skipped the metal detectors and reached the entrance, there is absolutely no way to miss it. Because immediately, huge bottles decorated with the theme of Coca-Cola, designed by artists from all around the world to commemorate the 1996 Summer Olympics in Atlanta, greeted us in the lobby.
Like the rest of the service staff in the WoCC, Dietrich was decked out in a red shirt and white trousers, with a name tag that also announces his drink of choice – caffeine-free Diet Coke.
“The original’s still my favourite, but I’ve gotta watch my waistline,” he joked. An unguarded moment, I’m sure, because for the rest of the tour, he was like a walking Coca-Cola encyclopaedia that is living the brand’s latest tagline – live positively. There wasn’t a remotely negative word after that remark.
However, when he opened the door to the first exhibition area – the Coca-Cola Loft, I started to understand the reason he has been doing this for the past 16 years. It is hard to stay sullen in a place where images of happiness are everywhere. Advertisements, banners, billboards, vending machines, and artwork filled with smiling faces and happy slogans hung from the ceiling and decorated the two walls that form the semicircle-shaped room.
Later, in the Happiness Factory Theatre, a hilarious 15-minute “mockumentary” about the ingredients that go into every bottle of Coke is set to entertain visitors and pump them up with anticipation for what awaits on the other side of the door.
Indeed, what lies on the other side does not disappoint.
There is the Hub, where a polar bear, the Coca-Cola winter mascot, is always ready for a picture or two. There is also Coca-Cola conversations, a section where you can pick up the phone and listen to people all around the world telling their stories of how Coca-Cola had touched their lives.
Walk through the Milestones of Refreshment and you’ll get an idea of how the drink had developed from the day pharmacist John Pemberton invented it till today, and stop by the Perfect Pause Theater to reminisce on some of the best of Coca-Cola ads through the years. If you are also interested in how Coca-Cola is represented in the community, visit the Pop Culture Gallery.
And that’s just the slightly boring part.
The best, for me, lies in Bottleworks (Coca-Cola’s slowest bottling line that produces 20 bottles per minute to allow visitors to witness how it is done), the In Search of the Secret Formula 4-D Theater (where we follow scientists on a bumpy ride to look for Coke’s secret formula), and of course, the tasting area, where you can sample more than 60 beverages from around the world.
The main takeaway from all these is: Coca-cola is everywhere.
It mattered little that the product is little more than water, sugar, and caffeine, with a tinge of sweetener. Its marketing had printed the brand on every surface imaginable. From soda fountains to balancing scales to plates, from matchboxes to tea sets, calendars, clocks, placemats, and even saltshakers, the print on the objects has successfully imprinted itself in our minds.
While it all sounded like marketing-style mind-control, it is apparent that Coca-Cola never forgets it is the people their products touched that had made them successful. Because if there is a common theme that links all these exhibits together, it is Coca-Cola’s tribute to all the people – their customers, suppliers, and staff – that had made it a success.
By keeping the drink affordable amidst rising prices of ingredients, and their advertisements straightforward and simple, they have been able to reach out to millions of consumers worldwide.
Even if you can’t remember a single thing your guide said, you’d remember him saying in different variations, these words: that Coca-Cola is refreshing, it is within your arm’s reach, and it is a moment of happiness everybody deserves.
“It’s not like a fancy car or an expensive electronic equipment – some people can have it and some people can’t. Everybody can have a Coke,” says Philip F. Mooney, the vice president of Heritage Communications at the Coca-Cola Company. Now, even when the Coca-Cola Company owns about 500 brands of beverages, Coke remains its flagship product.
“It’s amazing,” says Dietrich. “I mean, Coca-Cola is a drink, of course, and it is a product. But it is one of the very few that people can actually relate to their lives. Especially here in World of Coca-Cola, when I meet guests from all over the world, I get to see how Coca-Cola touches their lives, too. I feel good working for a company which has touched people’s lives in one way or another.”
He would know, as he was one of the many people who called the company to complain about the introduction of the new Coke, a secret new formula that was supposed to replace the original Coke formula in 1985. “I didn’t like it because it tasted too much like all the other stuff,” he says.
In hindsight, what he did was mild, because many others took to the streets in a protest to make the Coca-Cola Company change back to the old formula. “People were calling us and saying that we were messing with their memories,” Mooney recalls.
It may be hard to believe that a soft drink can elicit such a collective emotional response, but in the two hours it took to tour the WoCC, one can see why Americans can identify with the brand and the values it associates with.
It is a story of optimism: the story of the rise of a relatively unknown brand in the hands of the common people of their time, to the heights of a globally recognised multi-billion dollar business that it is today.
It is a story of a possible common ground: a tale of the possibility of creating something people can share regardless of racial, cultural and economic differences.
And if you believe what Coca-Cola repeats in its advertisements, it is also an ongoing narrative that says happiness is simple: everyone can have a moment of happiness with that sip of Coke.
As I stepped out of the WoCC merchandise store into the sunny, chilly afternoon, I can’t help but feel the temporary nature of Coca-Cola’s feel-good boost. I wondered if I would still feel the same way when I returned to Malaysia. Maybe all I need is another bottle of Coke.
No more space in South Africa's steel industry, says Kumba
Asha Speckman - IOL - 9th May 2011
New entrants vying to compete with ArcelorMittal South Africa in the local steel processing industry could be crowded out due to its dominance, Kumba Iron Ore chief executive Chris Griffith said on Friday.
In an interview following Kumba’s annual general meeting Griffith said: “We ourselves are not seeing significant potential for steel making in South Africa.”
Kumba in March issued a report titled “The South African Iron and Steel Value Chain”, in which it said local demand was not sufficient to sustain large-scale, cost-effective steel mills in South Africa. It said despite an abundance of high-quality iron ore in the country, iron ore was only a small proportion of the total input costs of steel makers and downstream processors.
The local steel market is dominated by ArcelorMittal SA, a subsidiary of ArcelorMittal, the world’s largest steel producer.
Other players in the local steel industry include Anglo American’s Scaw Metals, DAV Steel owned by Cape Gate Holdings, Cisco owned by Murray & Roberts and Evraz Highveld Steel and Vanadium.
Afripalm Resources, run by Lazarus Zim earlier this year signed a R21 billion deal with state-run Steel Authority of India to build a steel mill in South Africa.
Former deputy director-general of minerals and energy Nchaka Moloi is another looming entrant who recently said his company, Cascades Iron Ore is sourcing finance to produce 20 millions tons of ore a year from over 1 billion reserves. He billed Cascades as the “largest project to be discovered after Kumba Resources”.
Griffith said: “We are not concerned about more iron ore companies. There is place… but on the steel side.”
Griffith said the government, however, maintained there was opportunity for new players.
Kurt Benn, an analyst at Cadiz Asset Management, said the odds were heavily against new players. Risk-adjusted returns to build a steel mill were low and it would take at least five to 10 years to construct.
The steel market was cyclical, resulting in higher imports when the rand strengthened, boosting import competition.
Royalty fees, which mining companies had to pay to the state, were an added responsibility. The local market was also oversupplied with steel.
“If the bulk of money (for steel processors) is made within a 500km radius (of the company) why would anyone come in and destroy the pricing structure and expect to get superior returns?” Benn said.
Meanwhile, Kumba chairman Allen Morgan on Friday said Kumba would meet Imperial Crown Trading (ICT) in the Pretoria High Court on August 15 to resolve a mineral rights dispute. Kumba wants to win back preferential mining rights for Sishen Iron Ore Company. The Department of Minerals controversially awarded these rights to ICT, a politically connected company, when ArcelorMittal SA failed to renew its 21.4 percent share.
Kumba and ArcelorMittal SA would hold arbitration talks in May next year to resolve a dispute over ArcelorMittal SA’s refusal to pay market rates for iron ore procured from Kumba. Morgan said the companies would renegotiate an interim pricing agreement soon.
ArcelorMittal SA pays $50 (R334) per ton of iron ore delivered to its Saldanha mill and $70 per ton to its inland mills.
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