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Alternative Latin Investor Issue 6 September/October

Alternative Latin Investor Issue 6 September/October 2010 click here for a free issue

Issue 6 Content Index

  • Infrastructure Municipal Bonds in Latin America
  • Emerging Markets Let the World See Your Wares in the Right Light
  • Investment Flows and Stock Market Returns p
  • Agribusiness Beekeeping in Latin America
  • Art Pinta: The Contemporary and Modern Latin American Art Show
  • Commodities The BP Oil Spill
  • Sowing Pools: Alternative Financing
  • Funds Latin America’s Favorite Sport: For Sale
  • Philanthropy Ashoka: Inspiring and Supporting Tomorrow’s Leaders
  • Regulation Due Diligence: You Bought the Company, Now What?
  • Renewable Energy Opportunities in Argentine Biodiesel
  • Ventures Real Estate Colombia: Founder Chad Smalley
  • Economist Emerging Market Forecaster
  • Wine Stocking up for World Cup 2014
  • Hedge Funds The Spectrum of Investors for Latin American Hedge Funds by Merlin Securities

Source: Alternative Latin Investor 22.09.2010

Filed under: Argentina, Banking, Brazil, Chile, Colombia, Latin America, Mexico, News, Services, Wealth Management, , , , , , , , , , , , , , , , , , , , , , , ,

Chinese Gov’t urged to stop corn-based ethanol production

China’s industrial experts are advising the government to halt projects making ethanol bio-fuel with corn, as the projects are pushing up corn prices and sparking food security concerns. Zhao Youshan, director of the Commercial Petroleum Flow Committee (CPFC) under the China General Chamber of Commerce (CGCC), a national industrial organization, told Xinhua Tuesday he has informed the State Council, China’s Cabinet, of his views.

Zhao said livestock breeders in China are facing feed shortages as ethanol fuel makers- prompted by government subsidies of roughly 1,900 yuan (279 U.S. dollars) per tonne of ethanol they can produce – have rushed to buy corn. Makers of ethanol fuel also enjoy tax exemptions according to a policy approved by the government in 2004 designed to boost the bio-fuel industry’s development, Zhao said. The subsidies and preferential policies gave companies the incentive to buy corn, leading to price hikes and shortages of supply, he said. Higher corn prices at home also lead to more imports of the raw material.

Zhang Jianbo, a CGCC analyst, said China became a net importer of corn for the first time in the first half of the year. He said corn imports outweighed exports by 78 million tonnes. “The average corn price in July in northeastern China surged 15.7 percent year on year to 1,845 yuan per tonne,” Zhang said, adding that livestock breeders cannot afford the high prices.

“These projects pose a great risk for grain supply in China,” he added.  Zhao said China’s annual 10 million tonnes of ethanol fuel production could potentially consume 30 million tonnes of corn per year. In an interview with the Shanghai Securities Journal in July, Zhao said production costs for one tonne of ethanol range between 8,000 yuan and 9,000 yuan, adding the same amount of money could buy two tonnes of refined oil.

He suggested using other materials, such as cassava and wheat straw, to produce  ethanol. Zhao told Xinhua Tuesday in a telephone interview the proposal was presented to the State Council in June and is at present being reviewed by the National Development

and Reform Commission, China’s top economic planner.and Reform Commission, China’s top economic planner.

 

 

 

Source: CITIC Newedge, 11.08.2010 Mr. Liang Haisan

Filed under: China, Energy & Environment, News, Risk Management, , , , , , , ,

BlackRock Bob Dolls: 10 prediction for the next 10 years

“10 Predictions for the Next 10 Years” by BlackRock’s Bob Doll and what it means to investors:

  1. U.S. equities experience high single-digit percentage total returns after the worst decade since the 1930s.
  2. Recessions occur more frequently during this decade than only once a decade as occurred in the last 20 years.
  3. Healthcare, information technology and energy alternatives are leading growth areas for the U.S.
  4. The U.S. dollar continues to be less dominant as the decade progresses.
  5. Interest rates move irregularly higher in the developing world.
  6. Country self-interest leads to more trade and political conflicts.
  7. An aging and declining population gives Europe some of Japan’s problems.
  8. World growth is led by emerging market consumers.
  9. Emerging markets weighting in global indices rises significantly.
  10. China’s economic and political ascent continues.

Read Bob Doll’s full report  10 Predictions for the next Decade

Source:BlackRock / Carral Sierra, 02.08.2010

Filed under: Banking, Brazil, China, Energy & Environment, Japan, Korea, Mexico, News, Risk Management, Wealth Management, , , , , , , , , , , , , , , , , , , , , , ,

Risk Management – Solar Storms: Protecting Your Operations Against the Sun’s ‘Dark Side’

Recent scientific information indicates that an extreme solar storm cycle activity producing Geomagnetically-Induced Currents (GIC) is predicted to peak again in 2012. Some scientists are warning that the GIC from sunspots and solar flares could cause significant damage to the electrical grid, telecommunication and other devices.

Compared to disruption of the electrical grid from natural hazards and other sources, GIC related damage and disruption to the power distribution grid has the potential to have a very broad footprint across a large region for an extended period with possible cascading societal and economic impact.

On the other hand, this 2012 prediction could be a rather benign “non-event” similar to Y2K. Even if 2012 is a non-event, the threat of solar storms and associated space weather risks are rare but real and should not be ignored. Such an event does not have any precedence for comparison for the potential severity of impact. It can be considered an unrecognized catastrophic risk due to our increased reliance on technology today.

This paper provides background on the hazards associated with solar storms based on a review of available information from a variety of reliable resources and explores potential loss scenarios from Geomagnetically-Induced Currents (GIC) associated with solar storms activity.

Read full article here: Zurich 2010 – Protecting your Operations from Solar Storm

Read Full article here: Swiss Re 2000 – Space Weather Hazard to the Earth

Source: Zurich Service Corporation, 08.04.2010 by  A.V. Riswadkar and Buddy Dobbins, Risk Engineering,     Swiss Re, 2000 by Rene Favre, Risto Pirjola, Frank Jansen


Filed under: Energy & Environment, Risk Management, , , , , , , , , , ,

Jim Rogers’ Crystal Ball on Latin America and China

The legendary investment guru and long-time commodities booster shares his views on the global economy, the commodity bull market and how Mexico, Brazil, Colombia and other Latin American economies will hold up in 2010 and beyond.

Ian McCluskey, Miami, Kroll – Tendencias January 2010

Alabama-raised Jim Rogers is perhaps best known as co-founder, with George Soros, of the Quantum Fund, which made him a wealthy man by his mid-30’s. But that was 30 years ago. Since then, he has circumnavigated the globe on a motorcycle and in a souped-up yellow Mercedes, written several best-selling books, and made countless millions more investing and dishing out advice in his customary blunt, yet southern gentlemanly manner.

A regular face on financial news networks and at investment summits the world over, Rogers – his timing impeccable — pulled up stakes in Manhattan in late 2007, selling his Riverside Drive mansion for a record $15 million just as the real estate market began to sour. He now makes his home in Singapore, while running his business out of a law office in downtown Miami. Rogers spoke with Kroll Tendencias in late December during a brief stopover.

Like other soothsayers, Rogers is bullish on much of South America. He foresees a great future for Colombia, but is not smitten by Brazil’s long-term prospects. Rogers, whose Rogers’ International Commodities Index (RICI) provides a compass for investment funds worldwide, predicts that the commodity bull market has another 10 years or so to run its course. He expects gold to hit $2,000 an ounce and oil to reach $200 a barrel sometime this decade.

Here are some excerpts from our conversation.

The Global Economy At least in the first half of 2010, he global economy will be better than in 2008 or 2009, but I would worry about 2011 and 2012, because governments are printing and spending so much money. We’re still in an ongoing economic problem that started in 2000 or 2001. We’ll see it get better for a little while, but over the next couple of years, things will not be better than they were in 2007, and perhaps never will be, in some countries.

Commodity Prices If the world economy gets better, commodity prices will go up because of shortages and, if the economy does not get better, commodities will still go up because governments are printing so much money. Will commodities go up in 2010?  I have no idea. If there is some big surprise – if the U.K. goes bankrupt, if America invades Iran — everything will go down for a while. But whatever happens, I expect commodities to be among the best places to be in 2010.

Crises on the Horizon I don’t foresee any critical events that will impact commodities in 2010. I would expect there to be a currency crisis or semi-crisis in the next year or two. I don’t think many people expect it, except me.

Bubbles in the Making Some emerging markets may be over-priced, but that does not mean a bubble. That’s just being expensive. Every market gets over-priced one time or another in any given year. The only bubble I see developing anywhere in the world is in the U.S. bond market, the long-term government bond market. I cannot conceive of lending to the U.S. government for 30 years in U.S. dollars at 3, 4, 5 or even 6% interest. It’s just mind-boggling to me.

Outlook for Latin America I am much more optimistic about most of Latin America, especially South America, than I am about North America, with the exception of Canada. I am more optimistic about parts of Latin America than I am about much of Europe. And that’s partly because of all the natural resources. South America is a commodity story.

Gushing over Colombia It looks like there will be real peace in Colombia and, if so, that would be one of the phenomenal opportunities of our time, because they have it all. Colombia’s been at war for, what, 30 years, 40 years? Any time you can get to a country shortly after a war ends, there are usually enormous opportunities because everything is so cheap. There’s not much energy, not much capital, not much optimism, still a lot of malaise. I’ve seen it happen over and over again. And Colombia has natural resources – coal, oil, agriculture – and, of course, it could become a tourist destination again. Terrific country. (Note: Last summer, after Sri Lanka declared an end to its long-running civil war, Rogers paid a visit to look around. “I didn’t buy anything yet,” he says.)

Not Sold on Brazil Whenever commodities have done well, Brazil has done extremely well. People get excited about Brazil, they start talking about the new Brazil, but then the bear market comes back to commodities, and the same old thing happens – [Brazil] prints money, inflation, military problems, military coups – and I suspect that will happen again, perhaps in 20 years or so. Right now, of course, things are great. Brazil’s economy is commodity-based and commodities are going through the roof. Do not get me wrong; I’m just suggesting that I have heard this story before about the great new Brazil.

Brazil’s President Lula The country is run by a socialist, but nobody really wants to be a socialist any more, and the ones that do want to be rich socialists. [Lula] came in in 2002 just as the bull market was gathering steam, so he looks like a genius.

More Attractive South America
Chile is doing well, even Uruguay. I’m still optimistic about Peru, too. It’s got a lot of natural resources and a reasonably good government. It, too, had a long war. Look around South America and, other than Venezuela and perhaps Ecuador, there are better things happening than before. But, again, whenever there’s a boom in commodities, if you’re a commodity country, you look better, you feel better. There’s nothing like having lots of money in the bank, lots of income, to make countries feel better and more attractive.

Waiting for the Other Shoe to Drop in Argentina (Note: In a November 2000 article in AmericaEconomia magazine, Rogers famously announced that, after driving around Argentina for several weeks, he was liquidating his remaining investments in the country and encouraged everyone else to do the same.)  The good on the horizon in Argentina is that things have gotten so much worse over the last seven years or so, that we are getting closer to a bottom. I’m not putting a single peso back into Argentina and have not done so since the [the 2001 debt default] because their governments – I don’t know how they do it – it’s astonishing how bad they can be. I’m still waiting for the other shoe to drop — another default, another debt crisis or whatever it might be. Argentina is a great agricultural nation, but they tell their farmers “You can’t export your stuff.” What they desperately need is foreign exchange and yet they say “We’re not going to earn any foreign exchange.” It’s stupefying how hopeless they can be at times.

Wary about Mexico Mexico has some huge problems. Forty percent of its income comes from oil but the oil is depleting at a very rapid rate. And of the country’s 100 million people, they are mainly young people.  I suspect you’ll see serious problems in Mexico over the next decade because young people get agitated pretty easily. If the government faces serious economic problems because they don’t have any money any more, Mexico could boil over.

China’s LatAm Connection China sees huge shortages of raw materials developing. The Chinese are not just going to Latin America. They are all over Central Asia, Africa. They are buying up everything in sight, because they know what’s coming. They are going where the commodities are and are willing to pay proper prices. And, in most countries the Chinese don’t tell the locals what to do. They say “Here’s your money, now let’s develop those mines, or grow those cops.” Most countries seem to be welcoming the Chinese with open arms.

Commodities Trading in China (Note: China’s Dalian Commodities Exchange recently invited Rogers to become its first foreign advisor.)  The main problem with doing anything with the Chinese as far as exchanges are concerned, is that their currency is blocked. You cannot trade the currency. It’s illegal for me to buy and sell commodities in China because I am not Chinese. Even if a foreigner could invest on the commodities exchange in China, the currency is still blocked. Not many people are going to take their money to China if they can’t get it out. Some companies, like Cargill, have licenses to trade but there aren’t many. If and when China does open up to foreign investors, I suspect China would become the largest commodities trading exchange in Asia, perhaps even in the world.

Hugo Chavez’ Perennial Threat to Stop Selling Oil to the U.S. and Sell Instead to China Chavez could conceivably do it, but oil is oil. It’s not like we’re talking about Picassos. Even if Chavez told the U.S. “We’re not going to sell you oil any more,” who cares? We’ll buy it somewhere else. There would be a temporary dislocation in the market. Some refineries would suffer, some ships would suffer, but it would all be re-jiggered. Chavez has to sell his oil somewhere; he can’t simply stop selling. So that oil is still in the market. If he sells it to China instead of America, those who were selling to China would now sell to the America. Oil’s a fungible product.

The author: Ian McCluskey ( imccluskey@kroll.com ) is Editor of Kroll Tendencias, a monthly online thought leadership platform that focuses on business trends and business challenges in Latin America and the Caribbean. Articles are produced by Kroll consultants and other thought leaders in the region.

Source: Kroll – Tendencias January 2010

Filed under: Argentina, Asia, Brazil, Central America, Chile, China, Colombia, Latin America, Mexico, Peru, Venezuela, , , , , , , , , , , , , , , , , , ,

China Latin America: The decade of the Panda?

Before China can deliver on its promise of massive investments in Latin America, Chinese companies need to overcome their fear of Latin American volatility and political risk.  And Latin America needs to prepare more cross-border suitors to bridge the cultural divide.

John Price, Shanghai -  Kroll Tendencias, January 2010

When President Hu Jintao toured Latin American capitals in November 2004, he predicted that trade and investment flows between China and Latin America would both surpass $100 billion within a decade.  His forecasts turned out to be too conservative on trade but naively ambitious regarding the flow of Chinese investment to Latin America.  Two-way trade topped $140 billion in 2008 but, according to Shanghai’s SinoLatin Capital Analysis, accumulated Chinese investment in the region at the end of 2008 stood at a meager $12 billion, considerably less than the foreign direct investment into Latin America from the U.S. state of Michigan.

What the booming trade figures underscore is the growing dependency between China and resource-rich Latin America and the compelling logic of partnership.  The disappointing investment flow levels, on the other hand, reflect the many challenges in bringing together two utterly different cultural, political, business and legal systems, in spite of the economic imperative to do so.   The missing actor, whose absence has prevented the marriage of the Latin American suitor and the Chinese bride, is the proverbial marriage broker — the bi-cultural professional class of bankers, lawyers, and consultants that can construct and maintain cross-border investments.

It takes time to develop effective marriage brokers in global business, but progress is being made.  As his company’s name would suggest, Erik Bethel, principal of private equity firm Sino-Latin Capital in Shanghai, is one such cross-border broker.  Bethel recognizes the potential of Latin America to Chinese investors and is gambling his professional career on that promise.  Born in Miami to Cuban parents, educated in the Ivy League of U.S. colleges, Bethel honed his investment banking skills in Latin America, then decided to pursue the China dream and moved to Shanghai seven years ago.  At that time, Shanghai was still a would-be financial center, littered with cranes and covered in construction dust.

Since then Shanghai as boomed as a financial hub and Bethel has learned Mandarin.  More importantly, after searching high and low, Bethel has identified some of the elusive cast of dealmakers among China’s state-owned enterprises (SOEs), whom he must woo into investing in Latin America. “Unlike the traditional global financial centers of Wall Street or the City of London where big investors walk with the swagger of pseudo-celebrities,” Bethel explains, “the guy writing the check in China is likely to be a humble bureaucrat working diligently behind a non-descript desk.  He doesn’t frequent fancy clubs or high profile conferences.  Finding him is half the battle.”

Bethel and other pioneers like him may be the key to China making good on Hu Jintao’s investment forecast.  “My job,” says Bethel, “is to find that SOE investor, who by and large has a rudimentary, if not distorted, perception of Latin America, educate him on the opportunities and realities of doing business in the region, and hopefully convince him to get on a plane and go kick the tires on the great potential that exists for Chinese companies.  I realize that this is both a frightening and exciting prospect for someone, who may never have left China other than to go to Hong Kong, and who speaks only a smattering of English and no Spanish or Portuguese, but the opportunities are just too great to ignore.  Not to put too fine a point on it, but without someone like us undertaking this great effort, how on earth is Chinese money ever going to find its way to Latin America?”

Indeed, the challenge of bringing together Chinese capital and Latin American resources requires many more foot soldiers like Bethel in China.  From the Chinese investor’s perspective, Latin America still seems more distant and exotic than the many investment opportunities at home or within China’s continental sphere.  Nothing less than a full-press educational and public relations effort is needed inside China by all those with an interest in attracting Chinese capital to Latin America, be they diplomats, multi-latinas or the professional service firms bent on catching the wave of investment.

China, the new source of global investment capital

While many Chinese investors have yet to discover Latin America, no one now doubts the tectonic shift of capital flow coming out of China.  For the last 15 years, China has absorbed more direct investment than it exported as the global Fortune 1000 bet their futures on the Middle Kingdom.  When the year-end numbers are in, however, 2009 is expected to mark the first year of positive net outflow of investment capital for China, with over $100 billion in the form of direct foreign investment overseas.

China’s sudden emergence as the new FDI source on the world stage is explained in large part by its export-driven economic growth model. In order to maintain an undervalued currency and, with it, full employment — a political imperative — China must export $250 billion of capital each year to balance its excess trade and tourism surpluses.  For several years now, the easy solution was for the Central Bank of China to buy U.S. Treasury bills, thus helping to stoke the engine of U.S. consumerism (and Chinese exports) with record low U.S. interest rates.  That formula looks less attractive thanks to undisciplined U.S. monetary and fiscal management which represses U.S. interest rates and weakens the dollar, as the prospect of much higher U.S. inflation looms ahead.

The one-trick pony model of exporting to the over-indebted U.S. middle class is now passé.  China must look to other markets for its exports and simultaneously speed the rise of its internal consumer base. Middle income emerging markets like most of Latin America, South and North Africa, SouthEast Asia and Central Asia are in many ways more natural markets than the U.S. for China’s portfolio of mass-produced consumer goods.  Building bridges both politically and commercially in those markets requires outbound Chinese direct foreign investment. 

Garrigues, Spain’s largest commercial law firm, whose transactional practice follows closely the global flows of capital, set up an office in China in 2005, when Spanish firms had caught the China bug and were pouring in capital.  Francisco Soler Caballero, head of the Shanghai office, explains, however, that the firm’s business, like the international capital flows, has reversed course.  “We came to China to help Spanish companies enter the Chinese market,” says Soler. “We continue to help Spanish companies expand in China but the economic crisis in Spain has curbed the appetite of Spanish companies for costly Chinese acquisitions. Today, we find more cross-border opportunities with Chinese companies who want to expand abroad.  Having helped countless Spanish companies enter Latin America, we are now doing the same for Chinese SOEs.  It is a welcome but unpredicted turn of events for our China practice.”

Internally, China has all it needs to develop its economy save one important element, natural resources.  There is a growing sense of concern among Chinese economic planners that medium-term growth is threatened by an uncertain supply of raw materials, which presently China must import from foreign controlled firms.  When Japan and South Korea reached a similar impasse during their rise to developed-nation status, they chose to negotiate long-term supply contracts with oil, gas and mineral producers, carefully selecting downturn years to lock in attractive pricing over 10-30 years.  With their strengthening currencies and relatively low commodity prices, such a strategy made sense for Japan and Korea in the late 80s and 90s. Given China’s obsession with maintaining its cheap currency, its resulting excess liquidity and the likelihood of continued elevated pricing with commodities, it makes far more sense for China to venture out and buy operational control of its raw material supply.  

In 2008, China had 19.6 billion barrels of proven oil reserves and 2.3 trillion cubic meters of proven natural gas reserves (14th and 16th largest reserves in the world, respectively).  But given China’s vast energy demands, China still had to import 55% of its crude oil consumption in 2008, according to the China National Information Center.

By 2020, Chinese natural gas production is expected to fall short of consumption by 50-100 billion cubic meters, which explains why PetroChina went on a recent shopping trip to Australia in search of gas production assets.

Even more dramatic are China’s shortages of metals and minerals. According to the U.S. Geological Survey, Chinese reserves of copper, manganese, and nickel are 5.4%, 8%, and 2.5% of the world’s total, while China accounts for 27%, 48% and 22% of the world’s total consumption of these metals.

Even in the politically sensitive terrain of food supply where China spends billions subsidizing its agricultural base, the country cannot avoid a reliance on imports.  Soybean is a good example.  China currently imports over 60% of its annual 50 million tons of consumption.  In terms of forestry, China is one of the largest importers of wood pulp and industrial round wood (7.4 million tons and 38.6 million tons in 2007, respectively) not only to satisfy the domestic market but also the export-driven demand of its paper and furniture industries.

Chinas Risk Adversity

Latin America has the good fortune of having many of the top producers of the resources that China so badly needs.  And there is clearly no shortage of capital in China.

New suburban homes in the Pudong district of Shanghai are sold before they are built, at a cost of $3-$5 million for a 3,000 square foot, two-floor home in a gated community.  China’s own economic stimulus package includes vast, and some say, opulent infrastructure projects.  The 30 kilometers of high speed rail track from central Pudong to Shanghai’s airport carries its passengers up to 430 km/hr for a total of 8 minutes at a construction cost of almost $2 billion.  If Chinese money can find its way into such questionable investments, why can’t Latin America attract more Yuan to its compelling array of resource companies and infrastructure opportunities?

The small and nascent talent pool of service professionals that can bridge the regions may be the most important reason for the disconnect thus far, but equally important are Latin America’s lingering perception problems.

Predictability, which the Chinese value above all else, is not a traditional Latin American virtue.  Chinese investors are disheartened by Latin America’s history of volatility.  Rather than seeing currency fluctuation as an opportunity like many savvy Latin American investors do, the Chinese loath the uncertainty that it adds to their forecasts.  Many Latin American economies have made tremendous strides to curb currency volatility and build international reserves through floating currency regimes and fiscal discipline.  Chinese investors need to be enlightened about this change and to become better versed in the science of currency hedging.  They also need to learn how to navigate and mitigate the legal and political risks of doing business in Latin America.

At home, large Chinese SOEs can rely on the rule of law or their own political power to manipulate the rule of law to ensure legal and regulatory certainty.  When the same companies look abroad, they tend to prefer one of three models; a sound legal environment, like Australia, Canada, the U.S. or Europe, where their investments are defendable through the courts; or small, undemocratic economies like the Sudan and Burma, where they can exercise political influence to their liking; or satellite economies like Hong Kong, Macao, and Taiwan where they enjoy political sway and legal protections.

The perception in China of Latin America is that the region offers neither the protections of a transparent legal system nor the ability to exercise unperturbed political influence.  Some of the largest mergers and acquisitions to date in the region have been via the purchase of foreign-listed companies, such as Corriente Resources (copper mining) and EnCana (oil and gas), both Canadian companies with significant investments in Latin America.  In this respect, it is the legal community that must lead the effort to illustrate the defendable legal rights of foreign investors in Latin America’s more advanced economies and differentiate those from the list of countries in the region where legal risk remains a serious obstacle.

Related to legal risk is the acute Chinese sensibility to political risk.  Latin America’s political dynamic is frankly too fluid and complex for most Chinese investors to grasp.  The need to campaign from the left and govern from the right, which is Latin America’s political hallmark, can prove both alarming and confounding to Chinese investors.  The relatively decentralized governance of most Latin American countries adds another source of anxiety to Chinese investors, who must get used to idea that in Latin America they are as vulnerable to the vagaries of local politics and local political players like labor unions, NGOs, and indigenous advocates, as they are to the whims of the executive branches or national legislatures.  China learned this lesson when Chinese copper giant Zijin faced violent labor conflict with its Rio Blanco mine investment in Peru.

When it comes to political risk, the Chinese need to alter their thinking, not just to deal with Latin America, but with most countries in which they wish to invest.  China’s lack of understanding of political risk cost them dearly in the U.S. when in 2005 the China National Offshore Oil Company (CNOOC) was denied by the U.S. government in its bid to purchase Unocal, subsequently gobbled up by Chevron.  China miscalculated again when telecom equipment maker Huawei was turned down in its quest of 3Com.

Perhaps Latin America’s most difficult image problem is that of physical insecurity. In a country like China where physical violence toward the business class is unheard of, where guns cannot be owned by its citizens, Latin America is the wild west by comparison.

It is one thing for a company to visit Latin America to sell goods or buy raw materials.  In either case, the risk of physical violence intruding on the negotiations is minimal.  But in the case of Chinese foreign investment, which typically relies on securing Chinese managerial control through the transfer of dozens, if not hundreds of employees from China to the foreign operation, the risk is considerably greater.  The internationally readied managerial labor pool in China is very thin, such that sending people to an “unsafe” environment is not an easy internal sell for many Chinese firms.  Overcoming the security hurdle requires a dual effort.  Latin Americans need to more openly address their security shortcomings when presenting their countries, regions and companies as investment destinations.  Meanwhile, Chinese investors need to embrace security risk by better understanding it and learning how to mitigate such risks through preventive measures and insurance products.

In November 2008, the economic imperative of Chinese natural resource investment in Latin America received a boost from China’s Ministry of Foreign Affairs when it published in its Latin American regional policy paper a centerpiece mandate titled “Go Outward” (走出去).  In China, government directives still matter because it is the government controlled SOEs (typically 70% government, 30% private ownership) that naturally lead the charge of outbound foreign direct investment.  These vast oligarchy-like enterprises have the capital (or privileged access to it) and the need to invest in their supply base.

High-level policy embracement of a “Buy Latin America” strategy was slow in developing in part because China always considered it an untouchable zone of influence of the U.S.  That fear has evidently subsided or been usurped by the sheer economic imperative of securing natural resource supplies.  The recent push by the government has prompted a new sense of urgency to invest in Latin American resource companies and resource related infrastructure projects.

The onus now lies upon vested interests to build the bridges that will bind this vital, though still awkward, partnership.  Latin Americans, with the help of service professionals, especially investment bankers, private equity funds, law firms, risk consultants and insurance firms, must step up their efforts to educate their future Chinese partners on how to evaluate, navigate the opportunities and mitigate the risks of investing in  Latin America.

Source: Kroll- Tendencias January 2010

Filed under: Argentina, Brazil, Central America, Chile, China, Colombia, Energy & Environment, Latin America, Library, Mexico, News, Peru, Risk Management, Venezuela, , , , , , , , , , , , , , , ,

China:Wind Power Dilemma: Money Blows Away

Rapid, government-subsidized expansion of China’s wind power industry has led to excess capacity and investment waste.

(Caijing Magazine) A cold front swept across northern China’s Inner Mongolia region in early November, forcing a wind energy farm at Xilin Gol to curtail operations – even as a brisk breeze whistled through idle turbine blades.

“When that much wind is moving through, the generators can’t make electricity,” explained Ma Zhanxiang, vice president of the Inner Mongolia Electric Power Industry Association (EPIA). “Money just blows by.”

The turbines were forced to shut down not because the Mongolian wind was too strong, or for mechanical reasons, but because the system for distributing power from Xilin Gol and other wind farms built in recent years in northern China is simply too weak.

When cold weather arrives, wind farms have to compete for transmission space on a power distribution grid buzzing with electricity generated by the region’s coal-fired thermal heating plants, which fire up in winter to supply heating for local residents as well as electricity.

According to EPIA, Inner Mongolia’s installed wind power capacity approaches 3.5 gigawatts, and currently nearly one-third of that is sitting idle. The remaining two-thirds capacity is supplied by turbines that run erratically, shutting off and on according to demand.

“Wind power is too concentrated” in certain regions of China including Inner Mongolia, Ma said. “When there is wind, wind power plants need to generate electricity. But power grids get overwhelmed.” And that wastes money. Nationwide, some 5 million gigawatts of wind power generating capacity never made it to the grid during the first half of 2009. Since wind farm construction costs some 10,000 yuan per kilowatt, the total idle investment is worth about 50 billion yuan.

“The winter wind blows hard, but things aren’t easy for wind power,” Ma told Caijing.

Outside Inner Mongolia, wind power capacity is unevenly spread across sections of Gansu Province in the northwest, Heilongjiang and Jilin provinces in the northeast, and coastal areas such as Jiangsu Province.

With the exception of Jiangsu wind farms, most of the nation’s wind energy operators concentrate power generation at a grid terminus or in areas with high concentrations of thermal plant capacity. And factors such as local market demand, power grid links, wind farm expansions and capacity peaks contribute to the fact that equivalent full load hours (EFLH) are relatively rare for wind farms. An EFLH is equal to an annual power load divided by installed capacity.

Various experts have started weighing in with suggestions for reducing overcapacity and streamlining wind energy in China, which is government subsidized. For example, State Council researchers recently called for a “systematic” approach to promoting healthy development of the industry.

“Overcapacity in areas of high wind power concentration cannot be ignored,” a China Electricity Council (CEC) expert told Caijing.

Idle Power

Production restrictions at wind farms have become all too common. In the first half of the year, for example, nearly 150 million kilowatt hours of generated power went unused in the Guazhou and Yumen areas of Gansu because the grid could not absorb the power they produced. This represented 27 percent of Guazhou’s and 33 percent Yumen’s actual wind power production.

To better understand problems with power capacity loss and grid restrictions, a joint study was launched in June by the Society of Electrical Engineering’s Wind Power Committee and Tidal Power Committee. Investigators found power restrictions affecting 48 wind farms operated by the country’s seven largest wind power developers, which supply 50 percent of the nation’s wind power.

Installed capacity at affected wind farms totaled 4.4 million kw at the end of 2008, or more than 70 percent of the 6 million kw installed capacity at all plants operated by the seven companies. Grid restrictions cost 370 million kwh in lost power in 2008, which is an amount equal to 103 EFLHs.

Since these seven largest wind power developers supply 50 percent of the nation’s wind-generated electricity, grid restrictions could mean wind power losses in 2008 were as high as 740 million kwh nationwide, or close to 6 percent of the national wind power generating capacity of 12.8 billion kw. In the first five months of 2009, losses were about 620 million kwh – an EFLH of 140 hours, or more than 200 hours on an annual basis. As a result, electricity use restrictions through 2009 were expected to be even more pronounced, and could result in losses of more than 2 billion kwh for the full year.

National Development and Reform Commission (NDRC) data illustrates the seriousness of idle wind power capacity. From January to September 2009, NDRC said, wind farms with generating capacity of at least 6 megawatts produced 18.2 billion kwh of electricity nationwide – up 117 percent over the same period 2008. But that was only about 0.45 percent of all the electricity churned out by China’s major power plants, and was significantly less than wind power’s proportion of total installed capacity, which is 1.15 percent.

SOE Factor

Why is China suffering from imbalanced wind power capacity? Some point a finger at the state-owned enterprises (SOEs) that build and operate wind farms.

“Most wind power projects are owned by SOEs, while wind power equipment makers are mostly private and foreign-funded enterprises,” a CEC expert told Caijing. “This is an interesting phenomenon, and to a certain extent reflects the problems of wind power.”

CEC research said nearly all of China’s wind power producers are state-owned. In the seven provinces with major wind power development projects, central SOEs comprise 73 percent of the 92 wind power companies and control 81 percent of total installed capacity.

China began large-scale wind farm construction in 2005, and this year NDRC began arranging bids for wind power concessions. So far, bids have been completed for 15 projects, with each slated to provide more than 10 gigawatts.

Wind power is considered a crucial path for power industry SOEs seeking to expand installed capacity. And it’s a path encouraged by the government. For example, a worker at state-owned China Power Investment Corp. (CPI) told Caijing the government plans to more strictly control additional, large-scale thermal energy projects over the next two years. And the government has refused to approve any new major hydropower projects for the past two years.

“State-owned power generation companies are now striving to expand installed capacity through wind power,” the CPI worker said.

Moreover, wind power is the biggest recipient of 4.5 billion yuan in renewable energy subsidies that the government finances by adding an extra 0.002 yuan charge to each kilowatt of electricity sold nationwide.

The National Energy Board announced plans early this year to raise the wind power generation goal to 20 million kw next year and 100 million kw by 2020. The board also ordered the construction of wind power bases exceeding 10 megawatts in Gansu, Inner Mongolia, Jiangsu and Hebei Provinces within 10 years in accord with a government policy calls “build large bases, integrate with the grid.”

Meanwhile, turbine manufacturers are seizing opportunities by bumping up production capacity. According to statistics from Li Junfeng, deputy director of NDRC’s Energy Office, China today has more than 70 wind power equipment manufacturers, up from six in 2004. Installed capacity has also grown 25-fold, from 468,000 kilowatts in 2002 to 1.2 gigawatts at the end of 2008.

Too Much

But all that capacity is not necessarily indicative of a healthy industry. A glut of built turbine manufacturing plants and wind farms means too much wind power capacity for the demands of the grid.

Inner Mongolia’s situation is a clear example. Its installed capacity – 50 gigawatts — is the country’s largest, but the excess at wind farms has reached a crisis level. EPIA counts some 10 gigawatts in the region, including 3.49 gigawatts of wind power, as excess installed capacity.

Nevertheless, more power is on the way in Inner Mongolia: Projects representing hundreds of thousands of kilowatts in additional capacity are currently under construction.

Thermal power units provide much of the electricity that powers Inner Mongolia, raising unique challenges for its wind farms. For example, power grid scheduling is difficult, since the regional grid lacks the hydropower and natural gas power plants that help grid operators adjust power feeds when necessary to counteract the relative instability of wind power supplies. Rather, according to a wind power plant staffer in the region, grids can only rely on thermal power.

Additionally, field operations of wind power technology are not as simple as they look. Even China’s leading wind generator enterprise Goldwind (SZSE: 002202) cannot guarantee, from a technical perspective, that its turbines can operate in all weather.

New Ideas

China’s fast-growing renewable energy industry experienced a “policy braking” in August, when a State Council executive meeting chaired by Premier Wen Jiabao concluded the industry “tended toward excess” and needed a little cold water. A few days later, the 2009 List of Encouraged Imported Technologies and Technology Products was released by NDRC along with the ministries of commerce and finance. It removed import subsidies for polysilicon and wind turbines exceeding 2 megawatts.

On the sidelines of a recent hydropower development forum, National Energy Secretary and NDRC Vice Chairman Zhang Guobao was asked by Caijing to express his views on overcapacity in the alternative energy industry. Zhang evaded the question but said, “The State Council already has policies aimed at the overcapacity issue.”

At a State Council Information Office press conference in late September, Zhang said excess capacity was restricted to wind power equipment and did not extend to the wind power generation industry. “No one is sending out the message that China has too much wind power and needs to cut back,” he said.

Although a large amount of wind power never makes it to the grid, many local governments and enterprises are pushing ahead with zealous wind energy plans while SOEs turn to wind power for expanding installed capacity.

The government’s subsidies for alternative energy make this “equivalent to the state footing the bill for local governments and enterprises” to develop wind projects, said Fan Bi, deputy director of the Research Office of the State Council. Therefore, he said, existing subsidies and financial resources are relatively adequate for wind power development.

Fan has suggested China seek new ways to develop wind power. For starters, he thinks subsidy transparency should be improved, with monetary sources clarified, to prevent blind development. Second, concession bidding should be continued to distribute subsidies effectively and reduce on-grid wind power prices through competition. Eventually, the state could reduce subsidies and support for wind power.

The report also recommended China strengthen its wind power development plan, determine a reasonable scale for the industry, and reform the government approval process for wind power projects.

But other experts say wind power adjustments cannot be separated from China’s power industry reform, which is ongoing.

“There is still a fundamental need to deepen power industry reform,” an expert at the State Council Research Office told Caijing. “First, a separate pilot for transmission and distribution should be implemented, and work should be done on allowing grid companies to independently set prices, moving management of distribution network assets to the provincial level.

“In this way,” the expert said, “systematic reforms can be used to eliminate wind power overcapacity.”

Source: Cajing, 12.11.2009 By staff reporter Li Qiyan

Filed under: Asia, China, Energy & Environment, News, Risk Management, , , , , , , , , ,

Energy: Don’t Believe Long-Term Oil Forecasts

On 4 October 2009, The Wall Street Journal ran an article World Need for Oil Expected to Ease (subscription might be required), where the author, Spencer Swartz, wrote:

The International Energy Agency next week will make a “substantial” downward revision to its long-term forecast for global oil demand, a person familiar with the matter said, marking the second year running the group has slashed its view of the world’s thirst for oil.

If demand pessimists are correct, future increases in the price of crude could be damped as weaker consumption stretches world oil supply by billions of barrels. Various analyst estimates maintain that the roughly 2% a year average growth rate in world oil consumption seen earlier this decade — the biggest reason for crude prices hitting a record $147 a barrel last year — may turn out to be an anomaly and that annual growth in the neighborhood of 0.5% to 1% is more the norm.

The reality is that no one knows what the long term future holds. The IEA itself struggles with the Bull versus Bear oil outlook. Ask yourself, how many pundits foresaw the mess we are in now and anticipated the dramatic easing of oil demand?

Sure, one can gather relevant information and make a reasonable guess as to oil demand next year and the year after that. But after five years, the potential paths of demand growth become unwieldy. How will economic growth be sustained over the next five years? Will the OECD countries lag emerging countries? Will China and the rest of Asia power ahead and create substantial demand? If Asian countries do power ahead and create many millions of middle class citizens, will they demand their own vehicles and tickets on jet planes to see the world? Will Brazil and other South American countries enjoy strong economic growth? Will the Middle East be stable over this period? Will Iraq resume its full production capabilities? As you see, one can begin asking any number of questions that are impossible to answer with an accuracy or certainty and that might have a major bearing on demand or supply or both.

What do we know? We know that for a long time, oil prices were usually within $20-$30 real per barrel. Now those prices are laughable. No reasonable person expects the world to return to those prices any time soon. Many major oil fields around the world are in decline. Oil companies are searching in more remote and sometimes more unfriendly regions of the world to develop further existing fields and to discover new fields. And, the rise of oil prices has given new prominence to some national oil companies. A sample list, though incomplete, of companies include: Gazprom OAO (OGZPY.PK), Petróleos de Venezuela, S.A., and Petróleo Brasileiro S.A. – Petrobras (PBR).

If we were to accept the 1% annual growth of oil demand mentioned in the WSJ quote for a long duration, what would that mean or imply? A child born tomorrow will see by her seventieth birthday a doubling of daily world oil production from about 85 million barrels per day to 170 million barrels per day. Moreover, during her seventy years, the world will have produced more during that time than the total cumulative amount prior to her birth. Call me a skeptic, but I am unable to see where we would find that much additional oil to produce at such high rates for such a sustained period.

To be clear, neither the article nor the IEA is suggesting that we endure a 1% growth forever. Rather, I wanted to use this seemingly small innocuous number of only 1% growth to draw attention to its implication. If the long term growth were 2%, then in 35 years the daily world oil production would double to 170 million barrels per day and the oil produced during those 35 years would exceed the prior total cumulative amount of oil produced.

I recommend two excellent sources of information to learn more about oil, oil demand, oil prices and various policy initiatives:

  • Statistical Review of World Energy from BP p.l.c. (BP). I found the link to the Adobe pdf document toward to the bottom on its homepage.
  • Monthly Oil Market Report from the International Energy Agency. The link is to the webpage that hosts the document that is released two weeks after the initial release date. Subscribers receive immediate access through a different link.

Both documents are extremely helpful. I find the BP document provides concise information and historical context. The IEA document provides the agency’s latest thinking and forecasts.

As the world struggles to find new sources of oil, there will be dramatic changes. I have already discussed some questions we should ask ourselves as we contemplate future oil demand growth. Of course, many more questions need to be considered. And I have indicated that some national oil companies have gained strength and prominence with higher oil demand and prices. As investors, we should also think about what long term oil demand growth means for oil sands companies such as Suncor Energy, Inc. (SU) and Canadian Oil Sands Trust (COSWF.PK), and for large multinationals such as ConocoPhillips Company (COP), Chevron Corporation (CVX), and Exxon Mobil Corporation (XOM).

As demand continues to rise, I am curious what will happen. Will scientific breakthroughs help? How will the world cope with the environmental consequences? How will people adapt to possibly much higher prices? How will countries and regions change because of either having or lacking domestic oil supplies? If the world does experience higher prices, what are the implications for global world trade? And do higher prices imply that people will travel less and have less of an understanding of other regions? These questions are just a small sample of what investors should begin considering.

A few years ago, Professor Bartlett gave a compelling lecture, captured in a series of YouTube videos, to some students at the University of Colorado. In his lecture, he discussed oil demand growth. The lecture starts a bit slow; however, when you reach the latter part of the third video, you’ll see how the prior information is relevant to his discussion on oil. In other words, because they are important, don’t skip the initial video segments and jump to the third. I urge you to watch the complete video series.

And after you’ve watched the videos, ask yourself, “What time is it?” This question will make sense once you’ve seen the videos.

When I initially saw the WSJ article, I was drawn by the long term forecasts. My personal bias is that most longer term things in life are difficult, if not impossible, to forecast with any reasonable degree of accuracy. Then as I read the article, I saw the 1% growth number, which by itself seems very innocuous. But if you think about what 1% growth means over a long and sustained period, you quickly realize there are going to be changes. Moreover, the world has already witnessed a significant shift in oil prices over the last decade. We are no longer in our prior historical norm of $20-$30 per barrel. Some might argue that we are now in unchartered territory. As part of that possible unchartered territory, I wanted you to think about some larger questions. The questions mentioned in this article are just off the top of my head without much thought. I am sure you can think of many more. And last, I wanted to draw your attention to Professor Bartlett’s excellent lecture. His lecture will make you think about oil demand (and others) growth differently. I hope this article causes you to further your own research.

Source: Seeking Alpha, 08.11.2009

Filed under: Brazil, China, Energy & Environment, Mexico, News, Risk Management, Venezuela, Vietnam, , , , , , , , , , ,

Solar and Wind Power Pricing in China

Government planners are trying to set a benchmark price for solar power, but the industry is resisting. Will market forces prevail?

(Caijing Magazine) In a bid to drive down solar energy costs, the National Development and Reform Commission (NDRC) is preparing to set a lowball price benchmark for major solar power plants.

A source close to the NDRC, the government’s chief economic planning agency, told Caijing that a draft benchmark price plan for large, on-grid solar plants was completed in early October and would be discussed at the agency’s highest level soon.

Nevertheless, controversies in the industry over benchmark pricing could force additional changes before the plan is formally released.

Pricing is considered a crucial factor for this budding branch of the renewable energy industry as it helps potential investors calculate return expectations while driving power company and industry supplier decisions.

A 1.09 yuan per kilowatt hour price set by the government through a supplier-distributor bidding process in Gansu Province in March may have been too low for many solar power producers to match in the future ( 1 yuan = 0.14 USD)

But according to NDRC’s original plan, the 1.09 yuan price – the lowest in the young industry’s history — would be used to set the future industry benchmark. The price was set for the Dunhuang 10 megawatt photovoltaic (PV) power project. Approved prices for four, earlier solar projects averaged 4 yuan per kwh.

“Policy for on-grid electricity decides the fate of power generation companies,” said a source at a Dunhuang power company. “If 1.09 yuan per kilowatt hour is set as the benchmark price, the majority of photovoltaic enterprises will be unable to achieve profitability.”

Instead of using a lowest bid as a yardstick – a practice that’s proven successful for setting wind power prices — solar energy firms are advocating a system that sets prices according to costs.

NDRC’s latest thinking is that setting a benchmark price of 1.09 yuan would pressure upstream solar producers to cut costs of raw materials needed for a batch of new solar projects. This would work toward achieving the long-term goal of an on-grid solar power price that’s below 1 yuan per kwh, which in turn would affect the entire solar industry.

‘Proper’ Benchmark

Before the Gansu price was determined, NDRC’s Pricing Department was more inclined to set a benchmark based on cost analysis. According to the original department plan, the benchmark price for PV electricity initially would have been set at 1.20 yuan per kwh. Further discussions led to a call for prices between 1.10 and 1.20 yuan.

“The greatest point of controversy lies in how the benchmark price will be decided,” a source close to NDRC told Caijing.

Zhang Guobao, deputy director of NDRC and director of the National Energy Bureau, introduced in 2003 a system for setting wind power prices through competition. The government would pick a relatively large wind-power plant and compile area meteorological data for potential investors, which would then calculate and offer bids.

Earlier this year, Zhang re-emphasized the importance of this pricing mechanism, saying whether a product’s price is reasonable impacts development of the entire industry linked to the product.

“Practice proves that the wind power pricing mechanism we have been using is correct,” Zhang said. “Whether investors or grids, they all found a fair price.”

Zhang said most wind power is distributed at between 0.5 yuan and 0.6 yuan per kwh. And as the scale of wind power and turbine manufacturing increases, stand-alone costs are decreasing.

On the basis of wind power tenders, the NDRC set moderate prices through bidding in various regions and then set local benchmarks.

Yet in July, NDRC said wind power prices would no longer be set by tender pricing but through a fixed, regional benchmark system. Based on wind levels and construction requirements, NDRC divided the country into four wind energy resource areas with corresponding wind power benchmarks for on-grid pricing of 0.51 yuan, 0.54 yuan, 0.58 yuan and 0.61 yuan per kwh.

In early August, NDRC said measures were being promoted to reform on-grid, retail and other types of prices for electricity. Benchmark prices for renewable energy subsequently drew significant attention. Because of the correlation between wind and solar power, industry insiders sharpened their focus on solar benchmark prices.

“New policies for on-grid energy prices significantly impact the industry,” Han Xiaoping, director of China Energy Network Information, told Caijing. A fixed price for on-grid wind power fixes expectations for investors, Han explained, and PV companies are similarly affected.

Vying for Price Power

Wind power has been the renewable energy focus for major domestic power groups in China. Solar projects have been considered too expensive.

Internationally, government subsidies are being used to spur the solar industry. But Zhang supports the use of market forces to determine prices.

“In the initial stages of development of an industry, the government can use financial subsidies to offset the high price of renewable energy sources,” Zhang said. “But as the scale increases, subsidies are not the only option.

“Market forces should determine the proper price and guide development of the industry.”

China has not ignored the subsidy approach, however. Early this year, the government launched the Solar Roofs Plan, which offers subsidies for solar architecture demonstration projects. China is also considering two plans including the Golden Sun Project to support the use of PV technology.

But officials say China’s subsidy options are limited.

“China’s financial situation makes it difficult to introduce subsidies on a large scale,” said an expert at the China Electricity Council (CEC). “Reducing the cost of solar energy through market price competition may be a more realistic option.”

NDRC’s Pricing Division proposal to use cost analysis for benchmark pricing could be a way to adjust the industry to China’s unique circumstances. Solar power plants would not use the resource classification approach to set prices, but would develop a unified benchmark price in areas with the right resource levels.

An NDRC cost analysis of solar power generation components, design, construction and installation, ancillary facilities and maintenance pointed to a proper benchmark price of 1.20 yuan per kwh. But Bureau of Energy officials said the difference between cost-based electricity and tender prices were too great, prompting a scaling back to the proposed level between 1.10 yuan and 1.20 yuan per kwh.

A source at one of the five power generating groups participating in bidding for the Dunhuang project said the 1.09 yuan price is currently the bottom line for on-grid PV. For most businesses, though, this price is too low. As a result, most PV photovoltaic companies currently prefer cost-based price setting.

Many industry experts say on-grid solar prices are not the most important issue facing the industry. Behind the proposed 1.20 yuan on-grid electricity price is a hefty serving of government support related to a chess game being played between market forces and central planning.

“The government wants to control the pricing of PV power generation services, so they need to redefine pricing from a cost-based perspective,” a CEC expert said.

Source: Cajing, 29.10.2009 by staff reporter Li Qiyan

Filed under: Asia, China, Energy & Environment, News, , , , , ,

ASX to Introduce Renewable Energy Futures Next Month

Oct. 7 (Bloomberg) — The Australian Securities Exchange said trading in renewable-energy futures and options will start next month after lawmakers passed a bill requiring the nation to derive 20 percent of its power from clean fuels.

The exchange, owned by ASX Ltd., said it will list futures and options contracts for renewable energy certificates on Nov. 24. The ASX said trading of certified emission reduction contracts would be introduced in the first quarter of next year.

“This is an extension of the products we’re already providing,” Anthony Collins, the exchange’s general manager of energy and environmental markets, said by phone today. “It will help firms manage risk” posed by fluctuating prices and to “invest with certainty.”

Australia, the world’s biggest coal exporter, must source 20 percent of its power from renewable energy by 2020 under the new law. Broader emission-reduction legislation proposed in Australia may be resubmitted in November after being defeated by upper-house lawmakers. Prime Minister Kevin Rudd wants carbon trading to start in 2011.

The ASX also said it plans to list futures and options on carbon emission permits if the government’s pollution reduction plan is passed. A futures contract is an agreement to buy or sell a specific amount of a commodity or security at a specific price and time. Options grant the right, but not the obligation, to buy or sell at a set price.

The introduction of futures and options contracts on renewable energy certificates supports the Australian government’s new target, the Australian Securities Exchange said. Each REC is equal to one megawatt-hour of renewable energy generation.

“All of these markets are small to start with,” Collins said. “They will take several years to mature.”

Source: Bloomberg,07.10.2009

Filed under: Asia, Australia, Energy & Environment, Exchanges, News, Risk Management, , , , , , , , , ,

The Demise of the Dollar, Robert Frisk

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

By Robert Fisk

October 06, 2009 “The Independent” — – In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China’s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China’s growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China’s reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America’s trading partners have been left to cope with the impact of Washington’s control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

“These plans will change the face of international financial transactions,” one Chinese banker said. “America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate.”

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Source: The Independent, 06.10.2009

Filed under: Asia, Brazil, China, Energy & Environment, India, Japan, Latin America, News, Risk Management, , , , , , , , , , , , , , , , , , , ,

Is Carbon Trading Un-Ethical? A Guide

07.09.2009 by Oscar Reyes – Carbon trading is allowing industrialised countries and companies to avoid their emissions reduction targets. It takes two main forms: “cap and trade” and “carbon offsetting.”

What is cap and trade?
Under cap and trade schemes, governments or intergovernmenal bodies set an overall legal limit of carbon emissions in a certain time period (“a cap”) and then grant industries a certain number of licenses to pollute (“carbon permits”). Companies that do not meet their cap can buy permits from others that have a surplus  – typically, because they have been given an overly generous allowance in the first place. They can also purchase “offsets.”

What are carbon offsets?
Carbon trading runs in parallel with a system of carbon offsets. Instead of cutting emissions themselves, companies, and sometimes international financial institutions, governments and individuals, finance “emissions-saving projects” outside the capped area to generate carbon credits which can also be traded within the carbon market. The UN’s Clean Development Mechanism (CDM) is the largest such scheme with almost 1,800 registered projects in developing countries by September 2009, and over 2,600 further projects awaiting approval. Based on current prices, the credits generated by approved schemes will cost around $35 billion by 2012.

Although offsets are often presented as emissions reductions, what these projects do at their hypothetical best is to stabilise emission levels while moving them from one location to another, normally from Northern to Southern countries. In practice, this “best case” scenario is rarely seen, with the result being that offsetting increases emissions whilst also exacerbating social and environmental conflicts.

So what’s wrong with cap and trade?
There are fundamental theoretical flaws in the whole cap and trade scheme even before you look at the actual record of its implementation. This is because the scheme was never set up to directly tackle the key task of a rapid transition away from fossil fuel extraction, over-production and over-consumption, but sought instead to quantifying existing pollution as a means to create a new tradable commodity. Within this framework, traders invariably opt for the cheapest credits available at the time, but what is cheap in the short-term is not the same as what is environmentally effective or socially just.

Some of the key problems with the cap and trade approach are:

The “trade” component does not reduce any emissions. It simply allows companies to choose between cutting their own emissions or buying cheaper “carbon credits,” which are supposed to represent reductions elsewhere

The “cap” has too many holes and sometimes caps nothing. The cap is only as tight as the least stringent part of the whole system. This is because credits are sold by those with a surplus, and the cheapest way to produce a surplus is to be given too many credits in the first place (“hot air” credits as a result of caps being set too high). The aim of trading is to find the cheapest solution for polluting industry, and it is consistently cheaper to buy “hot air” credits than to actually reduce emissions.

Cap setting is a political process that is highly susceptible to corporate lobbying which means that there is invariable over-allocation of pollution permits. In fact, lobbying is encouraged through extensive industry “stakeholder” involvement

Offsets loosen the cap. While cap and trade in theory limits the availability of pollution permits, “offset” projects are a licence to print new ones. When the two systems are brought together, they tend to undermine each other – since one applies a cap and the other lifts it. An offset is essentially a permit to pollute beyond the cap. Most current and proposed “cap and trade” schemes allow offset credits to be traded within them – including the EU Emissions Trading Scheme (EU ETS) and the US cap and trade scheme (proposed in the 2009 American Clean Energy and Security Act, ACES)


Will markets concerned with growth be able to deliver reductions of carbon?
The other problem is that markets are by essence growth-oriented, so look for new sources of accumulation. In carbon markets, this is achieved by increasing their geographical scope and the number of industrial sectors and gases they cover. Yet this contradicts the essence of tackling climate change which is about reducing use of fossil fuels and consumption.

It is therefore not a surprise that introducing carbon as a commodity has resulted in new opportunities for profit and speculation. The carbon market is already developing the way of the financial market with the use of complex financial instruments (futures trading and derivatives) to hedge risk and increase speculative profit. This runs the risk of creating a “carbon bubble.” This is not a surprise, as it was created by many of the same people at the Chicago Climate Exchange who created the derivatives markets that led to the recent financial crash.

What examples have there been of Cap and Trade schemes?
There have been a number of Cap and Trade markets – the EU ETS, the United States Acid Rain Program, the Los Angeles Region Clean Air Markets (RECLAIM), the Chicago Emissions Reduction Market System (ERMS) and the Regional Greenhouse Gas Initiative. The EU ETS, established in January 2005, is the largest cap and trade scheme in operation worldwide and is the best for illustrating how carbon trading has failed in practice.

Why does European Union Emissions Trading Scheme (EU ETS) consistently grant over-allocation of pollution permits?
Most cap and trade markets use projections of historical emissions provided by industry itself to calculate the initial caps. Industry has a clear incentive to overstate its past emissions to gain more credits. As a result, cap and trade markets start out with too many permits. This was true of the EU ETS which consistently awarded major polluters with more free pollution permits (called EUAs, European Union Allowances) than their actual level of carbon emissions. This means it gave them no incentive to reduce emissions, and as a result the price of the permits collapsed – ending 2007 at €0.01. In phase I (2005-2007) as a whole, according to the EU’s own data, major polluters had permits worth 3.4 per cent more than their actual level of emissions.

But didn’t the second phase of the EU ETS (2008-2012) resolve this over-allocation?
The EU claims that it has learned from its mistakes and that the second phase of its scheme is working. Whilst it is true that for the first time in 2008, polluters were awarded fewer permits than their actual level of emissions, there is still over-allocation of permits:

  • The vast majority of factories and economic sectors are still over-allocated – it is only the power sector that needs to purchase credits
  • The impact of the EU-wide recession means that the ETS as a whole will again be over-allocated in 2009
  • Corporations get the same number of credits even if they temporarily close or scale down operations for short-term economic reasons


But isn’t Phase II nevertheless leading to emissions reductions?
The EU claims emissions reductions of 3 per cent, or 50 million tons, in ETS sectors in 2008.  The trouble is that at least 80 million tons of “carbon offsets” in the developing world were bought as part of the ETS in 2009 – more than the level of the cap. So, again, the ETS does not require emissions reductions by companies in the EU.

Moreover there is also evidence that some of the supposed “cuts” are fake. One such example is Lithuania which claimed it would be forced to use coal-powered electricity as a result of the closure of Ignalina, a nuclear power plant. As a result it gained a large surplus of credits, which have been sold on and treated as “emissions reductions” elsewhere.

So who profited from carbon trading?
Companies receive most carbon credits for free. This is equivalent to a subsidy – and with allocations made on the basis of historical emissions, the largest subsidy goes to the dirtiest industry (especially coal-fired power plants).

Windfall profits also arise from an accounting trick around “opportunity costs.”  Power companies choose to do the cheapest thing to meet their ETS target – which is usually buying Clean Development Mechanism (CDM) credits – but passing on costs as if they were doing the most expensive – actually reducing emissions. Even power companies receiving free credits from the ETS have nevertheless passed on the cost of these credits to consumers.   Research by market-analysts Point Carbon and WWF  calculated that the likely “windfall” profits made by power companies in phase II could be between €23 and €71 billion, and that these profits were concentrated in the countries with the highest level of emissions.

ArcelorMittal, the world´s largest steel company, is another typical example. It routinely receives a quarter to a third credits than it would have needed to even begin reducing emissions. The company is likely to have made over €2 billion in profits from the ETS between 2005 and 2008, with over €500 million of this achieved in 2008 alone – yet has needed to make no proactive changes to its emissions to do so

What about phase III of the EU ETS?
EU ETS phase III runs from 2013 to 2020, and the debate in Brussels is focussed on the risk of “carbon leakage.” This relates to industry claims that strict regulations in one part of the world will encourage  outsourcing to locations where regulations are weaker. It is already being used as a blackmail tactic by industry to reduce its targets or obligations within the EU ETS (and other proposed schemes in Australia and the US). Over half of the 258 industrial sectors in Europe being assessed for exposure to carbon leakage under the EU ETS will qualify for free emission allowances from 2013, according to an initial assessment by the European Commission.

So what is the problem with carbon offsetting?
Carbon offsets allow companies and countries to avoid cutting their own emissions by buying their way out of the problem with theoretical reductions elsewhere. There are both inter-government schemes – most famously the UN Clean Development Mechanism (CDM) – as well as voluntary programmes undertaken largely for purchase by individual consumers. Unfortunately both systems are deeply flawed:

Selling stories. Offsetting rests on “additionality” claims about what “would otherwise have happened,” offering polluting companies and financial consultancies the opportunity to turn stories of an unknowable future into bankable carbon credits. The EU admits that at least 40 per cent of these are bogus, while a survey by International Rivers found over 60 per cent of projects to be “non-additional.”


Offsets increase emissions. The net result for the climate is that offsetting tends to increase rather than reduce greenhouse gas emissions, displacing the necessity to act in one location by a theoretical claim to act differently in another. Moreover, it keeps delaying any real domestic action and allows the expansion of more fossil fuel extractions.


Making things the same. The value of CDM projects is premised on constructing a whole series of dubious “equivalences” between very different economic and industrial practices, with the uncertainties of comparison overlooked to ensure that a single commodity can be constructed and exchanged. This does not alter the fact that burning more coal and oil is in no way eliminated (and certainly not in the same time frame) by building more hydro-electric dams, planting more trees or capturing the methane in coal mines.


Carbon offsets have serious negative social and local environmental impacts
The use of “development” rhetoric masks the fundamental injustice of offsetting, which hands a new revenue stream to some of the most highly polluting industries in the South, while simultaneously offering companies and governments in the North a means to delay changing their own industrial practices and energy usage.

In practice, carbon offset projects have most of the times resulted in land grabs, local environmental and social conflicts, the displacement of Indigenous Peoples´ from their territories, as well as the repression of local communities and movements.

Might reforestation programmes such as REDD work?
The inclusion of tree planting and other “sinks” projects in the CDM and cap and trade schemes is also under consideration.

These pose additional measurement problems, as many projects are not additional, are difficult to measure, do not include the upkeep of the trees and assume instant absorption of already released carbon – when in fact it will take thousands of years for the carbon to be absorbed. “Reforestation” also tends to count monoculture plantations as forests, but they are not as they lack biodiversity, and so contribute to soil degradation; and also require intensive synthetic fertilisers, which contribute significantly to climate change, pollute water and damage local peoples´ health.

Schemes for Reducing Emissions from Deforestation and Degradation (REDD) repeat the error of emissions trading by commodifying forests. They presume that deforestation happens because standing forests make less money than forests that are cut down. In fact, the commodification of forests is what drives deforestation. This commodification includes the role of corporate and development bank investment in new infrastructure, mining and oil extraction projects; industrial logging; and land clearance to make way for monoculture plantations for the pulp and paper and palm oil industries. REDD is likely to fuel property speculation and so exacerbate land conflicts, dispossessing Indigenous Peoples and forest communities.

What impact will new trading schemes have on offsetting and forest carbon markets?
The most active buyers of offset credits in 2008 were European companies, which bought 80 million credits from the CDM or Joint Implementation projects (a similar UN scheme, operated in countries which have emissions reduction commitments under the Kyoto Protocol) as either a cheaper alternative to reducing their own emissions (under ETS), or for the purpose of speculation and re-sale. But this market is likely to expand massively if the American Clean Energy and Security Act (ACES) is passed, which proposes to allow US companies to purchase from 1 to 1.5 billion international offsets every year. This would spur on a massive increase in damaging offset projects, putting enormous pressure to reduce the already-inadequate checks on their environmental integrity.

What are sectoral credits?
Sectoral credits would introduce new offsets as part of what are called Nationally Appropriate Mitigation Actions (NAMAs) in the climate policy jargon. This is one of a number of proposals currently being debated for inclusion in a new UN climate treaty.

The basic idea is that developing countries should commit to reducing their greenhouse gas emissions “in an indicative range below business as usual,” as the draft of the G8´s L´Aquila declaration in July 2009 puts it. This deviation from an assumed future trajectory would be counted as a “reduction” (although it need be nothing of the sort) and traded to help industries in developed countries avoid reducing their own emissions. The private money flowing through these carbon markets could also be “double counted” as part of the financial commitment that the industrialised countries agreed to make at the UN Climate Conference in Bali.

But isn’t carbon trading better than nothing?
No. As carbon trading helps to avoid change and even increases emissions while exacerbating local conflicts, it is not a question of alternatives to carbon trading but rather of taking measures that actually tackle climate change.

So what are the alternatives?
Carbon markets should be dismantled, starting with offsets. A clear intention to discontinue carbon markets can fatally undermine them even in advance of legislative action. Alternatives then need to be developed that are properly consulted and developed together with local communities to prevent a repeat of the dispossession and social injustice caused by offsetting schemes.

A range of different approaches will be needed but may include:

Recognition of existing climate solutions. The vast range of solutions that already exist – which tend to be distinguished by their sensitivity to the local contexts in which they operate, are overlooked in favour of the accumulation of large-scale “technological fixes” or market-based schemes

Leave fossil fuels in the ground. Proposals to halt new coal power plants and the exploration of new and often “uncoventional” sources of oil extraction are at the frontline of the struggle for climate justice – and should form part of a rapid transition to a post- fossil fuel economy

Rediscovering environmental protection. There are a broad range of environmental policy instruments that have proven to be more effective than market-based approaches – ranging from efficiency standards for electrical appliances and buildings to feed-in tariffs for renewables. The rediscovery of such measures could form part of a solution

New revenues: tax and/or end currency and fuel speculation. Rather than a regressive carbon tax, revenue can be generated by a tax on currency speculation. A heavy tax or an end to speculation on fossil fuel prices would also help as a transitional measure. This should be accompanied by pro-active policy measures to tackle fuel poverty, such as a ban on pre-pay metering

Renewable energy should be supported but not uncritically – with the involvement of local populations and not as basis for sustaining expansions in fossil use or support of unsustainable model of industrial expansion

Public energy research. Private research on energy alternatives and use favours “least cost” false solutions (eg. agrofuels, hydroelectric dams, nuclear power) rather than environmentally effective alternatives, so is less effective than public research. However, this would need to be allied with the democratic transformation of the institutions of “environmental governance,” the agenda for which currently tends to be set by transnational corporations

Re-estimating energy demand. Current models presume limitless growth and overstate future energy demand, which has encouraged oversupply and kept prices low – which is, in turn a key structural driver of over-consumption.

The Transition Towns movement is going some way towards re-estimating demand with its “Energy Descent Action Plans”, but lacks a structural analysis of heavy industry use (or capitalist accumulation) and is often divorced from organising for more equitable distribution of energy

Changing economic calculations. Cost-benefit accounting either fails to take account of environmental or social costs, or is grossly reductionist in its assumptions.

Challenging the “growth” fetish. It is often claimed that continued GDP growth can go hand in hand with reductions in emissions. However, there is no evidence that “advanced” economies are significantly reducing their carbon footprints, or that such a transformation could happen quickly enough to reduce emissions. On the postive side, GDP is a very poor indicator of human-well being, so is not a condition for social improvement or a good life. If the obesession with economic growth is set aside, it becomes easier to see how tackling climate change and maintaining a sustainable and enjoyable life are far from contradictory goals.

Source: Carbon Trade Watch, 07.09.2009

Filed under: Energy & Environment, News, Risk Management, , , , , , , , , , , ,

Brazil: Petrobras and VisaNet under investigation

Petrobras Probe Starts as Gabrielli Faces ‘Crisis’

Aug. 6 (Bloomberg) — Petroleo Brasileiro SA, struggling to meet output targets and finance a $174 billion spending plan, faces a new challenge today as Brazil’s Senate probes claims it evaded taxes and funneled cash to government allies.

The investigation, prompted by opponents of Brazilian President Luiz Inacio Lula da Silva, focuses on allegations Rio de Janeiro-based Petrobras evaded 4.4 billion reais ($2.4 billion) of taxes, overpaid for goods and may have favored the president’s supporters when it made charitable donations. Chief Executive Officer Jose Sergio Gabrielli denies the claims.  Read full article by Bloomberg here

VisaNet Faces Antitrust Probe by Brazilian Justice

Aug. 6 (Bloomberg) — Cia. Brasileira de Meios de Pagamento, the credit-card company known as VisaNet, is being investigated for possible anti-competitive practices by the Brazilian Justice Ministry.

The probe also involves Visa do Brasil Empreendimentos Ltda. and Visa International Service Association, the ministry said in an e-mailed statement today. The ministry, through its Economic Law Department, or SDE in the Brazilian acronym, will assess the exclusive right of VisaNet to accredit businesses to accept cards carrying the Visa logo.

This “practice” is against consumer interests and “substantially” reduces competition in the industry, the ministry said in the statement. Read full article by Bloomberg here

Source: Bloomberg, 06.08.2009

Filed under: Brazil, Latin America, News, Risk Management, , , , , , , , , , ,

Go with wind: China to dramatically boost its wind power capacity, again

China keeps revising its renewable energy target for 2020–so frequently and dramatically that just when you feel you finally managed to track all the target numbers and to put them on paper, the numbers become history. China first announced its 2020 target for renewable energy in 2007, and then revised the numbers in May 2009. With the stimulus package injected into renewable energy investment, China is now reported to be revising the 2020 target plan again, which is even more ambitious (as shown below). It should be noted that China interchangeably uses the terms “alternative energy” and “renewable energy”; its portfolio includes large amounts of hydropower and nuclear power.

. Installed Capacity by the end of 2008 The 2020 Target set in 2007 The 2020 Target revised in May 2009 Proposed plan to revise the 2020 Target
Wind 12.17 gW 30 gW 100 gW 150 gW
Solar 140 mW 1.8 gW 10 gW+ 20 gW
Nuclear 9.1 gW 40 gW 60~75 gW 86 gW
Total power supply 793 gW 1000 gW 1400~1500 gW

In the newly proposed 2020 renewable energy plan, wind power would become dominant, accounting for 10 percent of the total power supply and increasing from an initial 30 gigawatts (gW), which was less than nuclear power (40 gW), to 150 gW. This would be double the nuclear power target of 86 gW. Solar energy capacity would also be significantly increased, from the original 1.8 gW, to 20 gW, 142 times the installed capacity at the end of 2008.

To show it’s not just a numbers game with the renewable energy target, a couple of weeks ago, China began construction on its first 10 gW wind power station in Jiuquan, Gansu province. The installed capacity will be increased to 20 gW by 2020 and eventually reach 40 gW, which would almost double the installed capacity of the gigantic Three Gorges Dam-the world’s largest hydro-electric power station, with a potential total installed capacity at 22.4 gW. Gansu is now boasting “Three Gorges of Wind Farms,” with a total investment predicted to be more than 120 billion yuan ($17.6 billion); the newly estimated total investment in Three Gorges Dam is about 180 billion yuan.

Of the 150 gW target by 2020, 30 gW will come from offshore wind farms. The largest offshore wind power project so far is the Donghai Bridge Wind Farm in Shanghai–the most fascinating wind farm, in my opinion. The Donghai Bridge is about 32.5 kilometers long, the longest in China. Wind turbines are being installed on both sides of the bridge. The total installed power capacity will reach 100 mW.

A Chinese research team has re-evaluated China’s potential wind power resources and significantly increased its onshore wind power potential to 700~1,200 gW from the original forecast of 280 gW, which means wind power resources alone can meet the entire country’s electricity demands. Xinjiang Uygur autonomous region and Inner Mongolia both boast more than 100 gW of wind energy resources. But there remains one big issue, similar to the one confronted by coal and natural gas industries: all the wind power resource–rich areas are thousands of kilometers away from high electricity demand areas. High voltage power lines are needed. In an effort to build a so-called Strong Smart Grid, China invested more in grids than in power generation last year.

China’s total power capacity will be more than 900 gW in 2009, and will soon be close to what the U.S. has now–1,000 gW.

Source: Greenlaw, 29.07.2009

Filed under: Asia, China, Energy & Environment, News, , , , ,

China and Latin America; the new conquistadors – Update 1

When Hugo Chávez first met Barack Obama at the Summit of the Americas in April, the Venezuelan leader could not resist pressing one of his favourite tracts into the US president’s hands. Eduardo Galeano’s Open Veins of Latin America: Five Centuries of the Pillage of a Continent, a staple of student radical literature, tells the story of a continent that has long seen itself as the victim of foreign exploitation. Mr Chávez, though, may have given the book to the wrong leader. It should have been given to the Chinese.

China’s links to the region are deepening fast. Indeed, if the mooted $15bn bid for Repsol YPF’s Argentine oil unit by China’s state-owned energy companies CNOOC and CNPC comes off, South America will also be the recipient of China’s largest outward investment to date. Bilateral trade with the region has risen 10-fold since 2000, reaching $143bn last year. China is now Brazil’s largest trade partner. It takes almost three-quarters of the iron ore produced by Vale, the world’s largest iron ore company. It has been a bigger buyer of Chilean copper than the US, and it is already a major investor in Venezuelan oil – even as Caracas has nationalised several western concerns.

FiNETIK recommends:

    Beijing formalised this heightened level of Latin attention last November. In a policy statement, it talked amicably of “win-win” strategies, and mutual political respect. Deeds followed words, with a renminbi currency swap extended to Argentina worth $10bn, a $1bn pledge to invest in an Ecuadorean hydroelectric plant and, in the Caribbean, loan packages to Jamaica and continued trade credits to Cuba. Meanwhile, Chinese light manufacturers eat their Latin American counterparts for lunch. A few years ago, the most oft-cited economic statistic in Mexico was that more sombreros were made in China than at home.

    Filed under: Argentina, Asia, Brazil, Chile, China, Energy & Environment, Latin America, Mexico, News, Venezuela, , , , , , , , , , , , ,

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