Saturday, November 14, 2015

Weekend reading links

1. Conventional wisdom would have it that the troubles of commodity producers are due to the slowdown in China. Merryn Webb in FT feels that there is another dynamic at play, the massive capital investment cycle since the turn of the millennium which has left commodity markets flush with excess capacity and supply,
When China started to go nuts for urbanisation and infrastructure, commodity prices rose alongside this frenzy and so did the profits of the big mining companies. Then the spending started: annual mine production rose by 20 per cent a year from 2000 to 2011. Banks doubled and then tripled the size of their commodity teams. New players poured in (small- and medium-sized miners were raising $30bn a year on the equity market by 2011). Mining capital expenditure rose from $30bn a year to $160bn. By 2014, a cumulative $1tn had been invested. Supplies soared — global iron production rose 125 per cent in a decade. And then commodity prices and mining share prices duly collapsed.
The natural end-game for such commodity boom and busts are mine closures, mothballing, and reduced CapEx. Over time, the excess capacity will shrink and prices will rise. The Minsky cycle repeats. 

2. Ashok Gulati draws attention to the very high levels of agriculture subsidies across countries in the form of high output prices, low input prices, direct income support, or crop insurance. Most countries have very high producer support estimates (PSE) which capture the levels of support to farmers as a share of gross farm revenues. He makes the case for sharp increase in agriculture support, mainly as direct income transfers to Indian farmers,
One of the reasons behind China’s spectacular achievement on the agri-front is the level of support given to farmers. China’s PSE level increased from 2 per cent in 1995-97 to 19 per cent in 2012-14. For Indonesia, the PSE has gone up from 4 per cent to 21 per cent over the same period. There are no PSEs available for India, but subsidies on major inputs like fertilisers, power, irrigation, and agri-credit — the main policy instruments through which the government supports farmers — hover between 6-8 per cent of the value of agri-output (2012-14)... The Chinese government has realised the limitations of using pricing policy to provide inputs at cheaper rates. It has begun making direct payments for input subsidies to farmers at a flat rate per unit of land. Overtime, aggregate amount of transfer has increased from 12 billion yuan in 2006 to 107.1 billion yuan in 2014 (about $17bn). The government has also increased the coverage under crop insurance to 73 million yuan per hectare (45 per cent of total planted area in 2013) by providing premium subsidy of 80 per cent.
I am not sure what should be the strategy on this. Unless there are wrinkles within the numbers, it does appear to contradict the arguments of those demanding pruning down of agriculture subsidies in India. Instead, we may need to increase, and sharply at that, the level of subsidies. But the types of subsidies may need to be revisited. Price support, farm power, fertilizer subsidies etc may not be the most efficient means to support farmers. Investment in irrigation infrastructure, massive expansion of extension services including leveraging technology, the creation of linkage infrastructure (godowns and cold storages), and direct income support may be a more effective strategy. 

3. L&T have announced the sale of Kattupalli Port near Chennai to Adani Port and Special Economic Zone Ltd (APSEZ). The deep-water, all-weather port, which started operations in January 2013, has the capacity to handle 1.2 million TEU of container traffic and dry-bulk and break-bulk cargo. This follows, the L&T's sale of Dhamra port in Odisha to APSEZ in May 2014. It appears to signal a trend of segmentation in the ports sector, with construction contractors like L&T building the port and then exiting by selling to port operators like APSEZ, which have greater expertise in attracting cargo and developing an eco-system for a port. Also, as I have blogged earlier, the creeping nature of such acquisitions by one developer raises concerns about monopoly and competition.

4. Vox has a map of countries scaled to the amount of aid received from the US, which underlines the importance of politics in aid financing.
5. Also in Vox a color-coded mapping of Africa's ethnic diversity. Uganda and Liberia are the most ethnically diverse. An interactive version of the map is here
6. China continues its investment-driven growth strategy. Despite a professed commitment to renewable energy sources and declining capacity utilization of thermal power plants, the country has been building coal powered plants unabated. The Times writes about
... a glut of coal-fired power plants — an astounding 155 planned projects received a permit this year alone, with total capacity equal to nearly 40 percent of operational coal power plants in the United States... In the first nine months of this year, state-owned companies received preliminary or full approval to build the 155 coal power plants that have a total capacity of 123 gigawatts, the report said. That capacity is equal to 15 percent of China’s coal-fired power capacity at the end of 2014. .. Greenpeace estimated that if the 155 plants operated at typical levels for new projects, they would emit 560 million metric tons of carbon dioxide annually, equal to Brazil’s total energy emissions.
This raises questions about the country's renewables commitment and the commercial viability of renewable energy sources,
The construction boom — with capital costs estimated by Greenpeace at $74 billion — is a clear sign that China remains entrenched in investment-driven growth, despite promises by leaders to transform the economic model to one based on consumer spending. It also raises questions about whether China is weaning itself from coal as quickly as it can and whether officials are sufficiently supporting nonfossil fuel sources over coal, which is championed by some state-owned enterprises... Renewable-energy interests — wind, solar and hydropower — are pushing back against coal-fired power plants, which have 40-year life spans. They say the rising number of coal plants prevents other energy sources from selling electricity on the grid and attracting more investment. They want the government to move faster with its promised “green dispatch,” giving priority to low-carbon electricity sources.

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