Thursday, October 22, 2015

Chile holds firm as copper market corrects

As the world’s leading producer of copper, there are grave concerns in Chile about China’s economic slowdown. The Oilholic doesn’t often touch on base metals on this blog, but being in Chile, one decided to break from tradition.

Over the last decade, China has displayed a voracious appetite for copper, with much of it coming from Chile. Clear indications point to a slowdown and even Beijing admits the country’s growth would be nowhere the double digit percentages it has posted in recent years that made the commodities world grow accustomed to the party.

No party lasts forever, and what the Oilholic finds here in Santiago de Chile is that no one need teach the Chileans that lesson. Policymakers, while anxious about it, saw China’s slowdown coming and are in confident mood they’ll weather the storm. The Chilean government can’t ignore the fact that the Chinese consume just shy of 50% of the world's refined copper, and as such Beijing is both directly and indirectly a major trading partner.

However, local economists’ thoughts and financial journals here in Chile appear to suggest one of the world’s leading copper producers is gearing up for a compound annual growth rate in Chinese copper demand in the range 2.5-3.5%; that’s less than half of the near 8% demand noted between 2010 and 2014.

If anything local forecasts are towards the lower end of Wall Street predictions and those put out by major European investment banks including Societe Generale, Barclays and Deutsche Bank. Droughts in Chile and other disruptions have tempered market sentiment on the oversupply front.

Disruptions in PNG and Zambia have also helped as have cuts announced by Glencore. To this effect, local analysts feel while the copper market is heading for leaner times, the effect would be less pronounced than say in the case of nickel or zinc. Supply/demand imbalances will persist but not to the extent feared both in Chile and beyond.

However, there is one thing though. As with oil, given the extent to which commodities have become an asset class, it is worth examining what the punters think. For the few this blogger has had a chance to interact with here in Chile, the copper market remains net short, using the COMEX copper (not LME three-month futures) contract as a benchmark.

The positioning might be net short, but it isn’t as bad as what local analysts noted over the first quarter of this year, especially mid-February to late-March. So right now, smaller end of life miners in Chile appear to be in trouble, but others including the majors operating in the country appear to be holding firm on their cautious outlook.

Finally, past crises have taught most regional governments a thing or two about managing the situation in troubling times. Some like Venezuela consciously choose not to learn, while others like Chile do learn and manage their exposure to volatility better.

There’s no reason to believe why 2015 would be any different. President Michelle Bachelet who oversaw the 2008-09 downturn during her previous stint in office, remains a steady hand, despite declining domestic poll ratings. That’s all for the moment folks as one heads to Buenos Aires for a short pre-election hop. In the meantime, this blogger leaves you with an amazing view from Cerro San Cristobal. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo I: Flag of Chile in Santiago. Photo II: Cerro San Cristobal - Santiago, Chile © Gaurav Sharma, October 2015

Wednesday, October 21, 2015

Curious case of the Pisco Sour

Following a weekend in Lima, the Oilholic has crossed over to Santiago de Chile. However, before one gets down to commodities related matters, there is the not so little matter of ‘not settling’ where the splendid regional cocktail Pisco Sour originates, a subject of much disquiet between Peru and Chile.

But first the recipe – you’ll need 25ml Lemon Juice, one egg white, 50ml Pisco (either Chilean or Peruvian), 20ml simple syrup. Give it an almighty shake with ice cubes, pour from shaker and add a dash of bitters. The end result is that delicious stuff in the photo on the left. That dear readers is the national drink of both Peru and Chile!

The origin of the main liquor base – Pisco, a colourless to yellow amber grape brandy made from distilling grape wine into a high proof spirit (below right) – is hotly contested. First known production dates back to the 16th century. Peruvians claim the name and first production site originates from the town of Pisco, while the Chileans claim the word “pisco”, a derivative of a term for a common bird, was used all along the Pacific Coastline of South America since the early days of Spanish settlers.

Going one step further, should names of towns matter, the Chileans renamed the town of La Unión in 1936 as Pisco Elqui so as to reinforce their claims over the name Pisco. Chile’s Pisco production volume dwarfs Peru’s by a ratio of 10 bottles to one. However, on the international stage Peruvians have the bragging rights as the “finer pisco” (at least in their opinion) is exported 3.5 times more than the Chilean produce.

There was dismay in Santiago, when Lima won a significant battle by being recognised as the original home of Pisco by the European Union in 2013. Yet, Chile’s usage of the word Pisco to describe its brandy cannot be curtailed, given its commonality. So much so for the liquor, but the tussle doesn’t end here! The cocktail is just as hotly disputed. According to bartenders in Lima’s Larcomar area, the cocktail originated in the city and was invented by an American named Victor Morris in the 1920s. 

When Morris, who had been living in Peru since 1903, opened Morris' Bar in Lima, the cocktail became his specialty. However, the recipe underwent several changes until Mario Bruiget, a Peruvian employee of Morris, added Angostura bitters and egg whites to the mix, thus creating the cocktail mix that has stood the test of time since 1926.

However, in Santiago de Chile, the story is widely dismissed. On the contrary, bartenders in the Chilean capital’s Providencia area say it was an English sailor Elliot Stubb who came up with the idea in 1872. Stubb, they say, mixed Key lime juice, syrup, and ice cubes to create the cocktail well known in Chile, some 50 years before the modern Peruvian version was even around.

Rubbish, no proof – retort the Peruvians again, while adding that the Chileans pinched the idea when Morris advertised the drink in 1924 in a local newspaper in the port of Valparaíso, Chile. Guess that doesn’t settle this one then. All the Oilholic can say is – whether sipped in Peru or Chile – it’s a splendid beverage! Cheers! That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo I: Pisco Sour in Lima, Peru. Photo II: Pisco on rocks, Santigo, Chile. Photo III: Enojoying Pisco Sour in Santiago, Chile © Gaurav Sharma, October 2015

Tuesday, October 20, 2015

Crude conjecture: The IMF & a view from Peru

The Oilholic is just about to wrap-up a touristy weekend in Lima, Peru, before heading over to Santiago de Chile. One arrives barely a week after International Monetary Fund annual meetings held here from October 5 to 12.

The IMF’s decision to choose Lima as the venue had a ‘crude’ subtext; ok perhaps a ‘natural resource’ centric subtext. In March 2014, the fund’s Survey Magazine: Countries & Regions had predicted that commodity exporting countries of the Andean region, including Peru, could achieve sustainable economic growth levels and match the output rates of industrialised economies in percentage terms.

Extractive industries – chiefly oil, gas and mining – would play a growing role, it added. Of course, that was before the oil price started slumping from July 2014 onwards. By the time the first day of the Lima meet arrived this month, the IMF was predicting that should headline regional growth touch 1% over 2015, we’d be lucky. It also confirmed that Latin America would see its fifth successive year of economic output deceleration.

There is clear evidence of the oil price decline hurting Peru. However, as the Oilholic wrote on Forbes.com, the political climate in the run up to the April 2016 presidential election, is also spooking investors. President Ollanta Humala had to appoint his seventh Prime Minister in less than four years earlier this year and is in a tussle with Congress over the state’s role in oil and gas exploration.

All the while, the stars aren’t quite aligning, crudely speaking and are unlikely to do so for a while yet. Both benchmarks are currently languishing below $50 per barrel, and even the Oilholic’s $60 medium term equilibrium projection won’t quite cut it for Peru, where production has been declining since the mid-1990s (though proven reserves have been revised upwards to 740 million barrels).

Soundings over the past week have been anything but positive Latin American oil and gas producers in general, and we’re not just talking about the IMF here. The International Energy Agency said last week that the global economic outlook was “more pessimistic” and expected a marked slowdown in oil demand growth, with the commodities downturn hurting economic activity of exporting nations.

“Oil at $50 a barrel is a powerful driver in rebalancing the global oil market...But a projected marked slowdown in demand growth next year, and the anticipated arrival of additional Iranian barrels will keep the market oversupplied through 2016,” it added. In near tandem with the IEA, several brokers and rating agency Moody’s also revised their respective oil price assumptions “on oversupply and weakening demand.”

Moody's lowered its oil price assumption in 2016 for Brent to $53 from $57 per barrel and for the WTI to $48 from $52 per barrel. The rating agency expects both prices to rise by $7 per barrel in 2017, or a $5 per barrel reduction from its prior forecast.

Steve Wood, a Moody's senior analyst, said, "Oil prices will remain lower for a longer period, as large built-up inventories and oversupply cause oil prices to increase at a slower rate. Although supply should begin to drop as capital spending declines, increased Iranian exports could place additional pressure on oil prices in 2016."

As is evident, sentiment on the supply glut persisting in 2016, is gaining traction. These are particularly worrying times for smaller oil and gas exporters, a club that Peru is a member of. That’s all from Lima folks, as the Oilholic leaves you with a view of the Pacific Ocean from Larcomar. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo I: IMF Meetings Banner at Lima Airport, Peru. Photo II: A view of the Pacific Ocean from Larcomar, Lima, Peru. © Gaurav Sharma, October 2015

Friday, October 16, 2015

Why ‘chiflados’ in Caracas infuriate Colombians

Colombia and Venezuela haven’t always been the best of friends over the last 15 years, since the late Hugo Chavez swept to power. However, here in Bogota, the Oilholic finds relations between the two neighbours at an all time low, largely down to a select bunch of “chiflados oportunistas en Caracas” (loosely translated as opportunistic crackpots in Caracas), who blame everyone but themselves for  the effects their own mad economic policies, say locals.

But first some background – A general election is slated for 6 December in Venezuela with oil nowhere near the three-figure per barrel price the country needs to balance its budget. Regional analysts fear a sovereign default and monthly inflation according to independent forecasts is in double figures as Caracas hasn’t published official data for a while (even the fudged version). Meanwhile, industrial production is in doldrums as the government continues to print money. 

The Venezuelan Bolivar’s official exchange rate to the dollar is VEF6.34, but you’d be lucky if anyone in Bogota or elsewhere in Latin America would be willing to exchange the greenback for VEF635; forget the decimal point! Price controls and availability have played havoc with what Venezuelans can and cannot buy. More often than not, it is no longer a choice in a country that famously ran out of loo rolls last year. So what does President Nicolas Maduro do? Why blame it all on “conspirators” in Colombia! 

Now hear the Oilholic out, as he narrates a tale of farce, as narrated to him by an economics student at the local university, which this blogger has independently verified. With the Venezuelan Bolívar more or less not quite worth the paper its printed on – as explained above – most of the country’s citizens (including Chavistas, and quite a few regional central banks if rumours are to be believed) – turn to DolarToday, or more specifically to the website’s twitter account, to get an unofficial exchange rate based on what rate the Bolívar changes hands in Cucuta, a Colombian town near the border with Venezuela (The website currently puts the Bolivar just shy of VEF800 to the dollar). 

It is where Venezuelans and Colombians meet to exchange cheap price-controlled fuel, among other stuff from the false economy created by Caracas, to smuggle over to Colombia. The preferred currency, is of course, the Colombian peso, as the dollar’s exchange rate to the Bolívar is calculated indirectly from the value of the peso with little choice to do anything else but. 

The final calculation is extremely irregular, as the Colombian peso itself grapples with market volatility, but what the fine folks in Cucata come up with and DolarToday reports is still considered a damn sight better than the official peg, according to most contacts in Colombia and beyond, including the narrator of the story himself. 

So far so much for the story, but what conclusions did President Maduro take? Well in the opinion of the Venezuelan President, DolarToday is a conspiracy by the US, their pals in Colombia and evil bankers to wreck Venezuela’s economy; as if it needs their help! Smuggling across the border and of course food shortages in the country have been promptly blamed on private enterprise players “without scruples” and Colombians, carefully omitting Venezuela’s National Guard personnel, without whose alleged complicity, it is doubtful much would move across the border.

Maduro subsequently closed the border crossing from Tachira, Venezuela to Norte de Santander, Colombia earlier this quarter. He also announced special emergency measures in 13 Venezuelan municipalities in proximity of the Colombian border. The shenanigans prompted an angry response form President Juan Manuel Santos, Maduro’s counterpart in Bogota. Both countries recalled their respective ambassadors in wake of the incident. 

However, in line with the prevalent theme of finding scapegoats, Maduro’s government didn’t stop there. Nearly 2,000 Colombians have been deported from Venezuela, according newspapers here. Another 20,000 have fled back to Colombia, something which President Santos has described as a humanitarian crisis. Santos also chastised Venezuela at the Organisation of American States (OAS) noting that Caracas was blaming its “own economic incompetence on others” (translating literally from Spanish).

The Colombian President might well have felt aggrieved but he need not have bothered. The chiflados in Caracas know what they are. For example, when Venezuela was hit by an outbreak of chikungunya (last year), a disease marked by joint pains and bouts of fever according to the WHO website, the government’s response was as removed from reality as it currently is when it comes to DollarToday and smuggling across the Colombia-Venezuela border.

At the time, a group of doctors west of Caracas calling for emergency help saw their leader accused of leading a “terrorist campaign” of misinformation. With a warrant was issued for his arrest, the poor man fled the country. Close to 200,000 were affected according media sources outside of Venezuela but government statistics put the figure below 26,500. 

Each time economists and independent analysts challenge any data published by PDVSA or INE or any Venezuelan government institution, it is dismissed by Caracas as “politically motivated.” And so the story goes with countless such examples, albeit an international spat like the one with Colombia are relatively rare. Maduro is also miffed with neighbouring Guyana at the moment, for allowing ExxonMobil to carry out oil exploration in “disputed waters” which prompted a strong response at the UN from the latter.

Expect more nonsense from Caracas as the Venezuelan election approaches. However, here’s one telling fact from Colombian experts to sign off with – over the past year the Venezuelan Bolívar’s value has plummeted by 93% against the peso in the unofficial market. Now that’s something. 

The Oilholic tried to change pesos for the bolivar officially in the Colombian capital, but found few takers and got lots of strange looks! That’s all from Bogota for the moment folks as one heads to Peru! Back here later in the month, keep reading, keep it ‘crude’!   

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© Gaurav Sharma 2015. Plaza de Bolívar, Bogota, Colombia © Gaurav Sharma, October 2015

Thursday, October 15, 2015

Latin America's commodities downturn problem

The Oilholic finds himself roughly 5,300 miles west of London in Bogota, Colombia wandering around the city’s rustic and charming La Candelaria area. 

It’s the beginning of a journey through South America to find out how the recent commodities downturn is affecting the market mood and investment outlook in what (still) remains a very commodity-exports driven continent. 

One gets a sense of opportunities missed and dismay from those who saw the downturn coming – not just here in Colombia, but looking outside in at Chile, Argentina, Peru and of course that colossal corruption scandal at Petrobas in Brazil. While the sun was shining, and China’s double digit economic growth was fuelling the commodities boom, attempts should have been made at macroeconomic diversification instead of relying on a party that was bound to end sooner or later.

We’re not just talking oil and gas here; take in everything from minerals to soya beans, or copper specifically in the case of Chile. Most Latin American currencies got marginal power boosters during the commodities boom, if not a case of full blown Dutch disease, which resulted in lacklustre performance from non-commodities sectors that became increasingly uncompetitive and to an extent unproductive over the last 10 years.

The International Monetary Fund reckons come the end of 2015, if headline regional growth touches 1% we’d be lucky. In fact, in its latest update the IMF confirmed that Latin America would see its fifth successive year of economic output deceleration. While past commodity busts have triggered regional financial crises, thankfully not many locally as well as internationally, including the IMF, expect a repeat this time around. That’s largely down to the fact LatAm economies, with notable exception of Venezuela, have not indulged in fiscal populism and daft economic policies.

In sync, ratings agencies, while negative on the economic outlook of many countries in the region, but only fear a sovereign default in Venezuela. However, another negative aspect of dependency on the commodities market is that investment – especially on terms prior to the market correction – would be hard to come by.

Just ask Mexico! As the Oilholic noted in a recent column for Forbes, phase I of round one of Mexico’s oil and gas licensing was a damp squib. Hence, with the September 2015 (phase II) bidding round, the Mexicans had to adjust their thinking to attract (and eventually) secure a decent take-up of available blocks.

Peru’s nascent oil and gas market, Colombia’s emerging and hitherto impressive one face similar challenges as will the copper market in Chile. Argentina faces a general election on October 25th while Brazil is in a technical recession with the IMF seeing few improvement prospects for 2016.

Productivity, in all five countries is down with workers spending hours in a day commuting, and traffic jams (the first of which the Oilholic has already experienced) are legendary enough to give Bangkok and Delhi a run for their money. 

Over the coming weeks yours truly will make sense of it all talking to experts, policymakers, fellow analysts and local folks one is likely to meet and greet while having the odd touristy mumble about. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. La Candelaria, Bogota, Colombia © Gaurav Sharma, October, 2015