Economic aftershocks of Japan quake roil Asia

By ERIKA KINETZ
AP Business Writer

Economic aftershocks of the devastation in Japan are rolling through Asia. It is here, among Japan's neighbors, that the reverberations of the catastrophe are being felt hardest.

Automakers in Thailand are slowing production. South Korean electronics manufacturers face shortages of critical parts. Thousands of Japanese have canceled trips to Taiwan. Panic buying has driven up prices of Japanese cameras in China, while Indian policymakers brace for higher oil prices.

The 9.0-magnitude quake and tsunami that laid waste to Japan's industrial northeast on March 11 and triggered an unfolding crisis at a crippled nuclear power plant has exacted a terrible human toll with estimates of more than 10,000 dead and hundreds of thousands homeless. It might also undermine Japan _ and China _ as manufacturing bastions as the catastrophe gives global companies further reason to spread suppliers over more countries to avoid reliance on a handful of production powerhouses.

" Even before the Japan disaster, there was a sense that many multinationals had become too dependent on a single source of production," said Frederic Neumann, HBSC's co-head of Asian economics research. " The broad trend to diversify production will not just affect Japan, it will affect China. China's production has become very concentrated."

South Korea, a manufacturing force in its own right, has been among the first to shudder as Japanese suppliers grappled with damaged factories and power shortages.

SUV and luxury sedan maker Ssangyong Motor Co. is facing production constraints because of shortages of Japanese parts, said its chairman Pawan Goenka. " Most of the parts sourced from any given country are developed over time," he said. " It's not possible in most cases to switch sources. By the time you're able to switch sources the crisis will be over."

Samsung Electronics Co. and Hynix Semiconductor Inc. buy 50 to 60 percent of the wafers they use to make computer chips from Japan's Shin-Etsu Chemical Co., which shut two factories damaged in the quake. Operations at other plants have been affected by rolling blackouts, the Japanese company said on its website.

Samsung Heavy Industries Co. gets 30 to 40 percent of the large metal plates it uses for shipbuilding from Japan. " If the disaster in Japan lasts and affects our supplies, we would have to consider ordering more from our South Korean and Chinese suppliers," said public relations manager In-chun Hwang.

Profits at Taiwanese electronics firms will likely slump in the second quarter due to shortages of Japanese components, said Alex Huang, an analyst at Taipei's Mega Securities Corp.

In mainland China, businesses have already started looking for replacement markets for the some $100 billion of exports they ship to Japan annually.

Chongqing Kinglong Fine Strontium Chemical Co., in the southern megacity of Chongqing, sells more than 80 percent of the strontium carbonate it produces to Japan, where it is used to make LCD monitors. " We may have to expand our domestic market to deal with the impact," a company spokesperson told the Chongqing Times newspaper.

Many Chinese manufacturers that use imported components are still able to run on inventory, but companies that rely on high end Japanese electronics and auto parts are bracing for shortfalls and rising prices, said Wang Shaopu, director of the Center for Pan-Pacific Studies at Shanghai's Jiaotong University.

Though disruption to supply chains and production is being felt across Asia, most economists say the impact of the Japanese disaster on regional economic growth will not be severe. The quiet message behind that belief is that Japan, which lost its spot as the world's No. 2 economy to China last year, doesn't have as much clout as it used to.

" Japan is still important but it's a much smaller piece of the global economic pie and much less important to the global supply chain than it has been historically," said Moody's Analytics chief economist Mark Zandi.

Japan's contribution to Asia's growth has been near zero for the last five years, says Moody's. China accounts for over 20 percent of global growth, and U.S. consumers alone are about twice as important for global growth as Japan's entire economy, according to UBS.

Even in its mainstay electronics component manufacturing, Japan's power has waned. In 1990, Japanese companies were responsible for a third of global electronics components exports. By 2008, their share had halved, as producers in South Korea, China, Taiwan, Thailand, Singapore, the Philippines and Indonesia picked up market share.

What companies are reluctant to discuss is how they could benefit from Japan's tragedy.

In Taiwan, shares of steel, plastic and chemical firms have all risen since March 11.

" Japanese steel and chemical output may be reduced by up to 40 percent after the quake and prices have already soared," Huang said. " Taiwanese firms will further benefit from Japan's reconstruction needs."

Potential beneficiaries in China are iron and steel producers and food producers, who could step up exports to Japan as fears mount of radiation contamination from the crippled Fukushima nuclear plant, he said. That, however, would exacerbate already rising food prices in China.

So far, speculators have been the clearest winners.

Shoppers in China stripped salt from supermarket shelves, panicked by the unlikely possibility that the salt supply would be contaminated by radioactive fallout or in the false belief that table salt protects against radiation illness.

Some then sold the salt in store parking lots for ten times the original price.

____

Kinetz reported from Mumbai, India. Associated Press writers Kay Seok in Seoul, South Korea and Annie Huang in Taipei, Taiwan and researcher Yu Bing in Beijing contributed.

Financial Crises and Sovereign Risk

The Global financial community calls for redefining sovereign risk

The traditional definition of sovereign risk needs to be broadened in order to better understand and address the current financial challenges, concluded an International Monetary Fund (IMF) high-level conference in Washington Friday.

Sovereign risk, broadly, the probability that a Country may not pay its debts, “has been shown to be too narrow by the Global financial crisis,” according to a statement released by the IMF.

“Developments since mid-2008 have exposed very complex interactions between fiscal balances, public and private debt, and the financial sector.”

The IMF conference, Financial Crises and Sovereign Risk– Implications for Financial Stability, brought together policymakers and regulators from developing and emerging countries, academics, representatives from global banks, and senior Fund staff, at IMF headquarters. They exchanged their ideas of new, multifaceted and more nuanced dynamic of sovereign risk and its implications for financial stability.

“Sovereign risks have been transformed in a number of important ways as a direct consequence of the crisis and major fault lines in the financial sector. As the public sector intervened to support financial institutions, distinctions between sovereign and non-sovereign and private liabilities have been blurred, and public exposure to private risks has increased,” IMF Managing Director Dominique Strauss-Kahn said in his opening remarks.

The IMF noted that the Global crisis has seen unprecedented government support to the real economy and the financial sector. The combined effects of these interventions and the loss in revenues caused by economic slowdown have resulted in worsening fiscal balances, increased public debt, and a general deterioration in countries’ public finances. Substantial and sustained efforts to restore soundness to public balance sheets are necessary.

The size, maturity structure, composition, and ownership of public debt have been altered. Investors’ risk aversion has grown and concerns of contagion among the sovereign, quasi-sovereign, and financial sectors remain at elevated levels.

The Fund said that in this highly uncertain context, the conventional measurements have become too limited and unable to explain the present elevated levels of sovereign risk in some countries, creating an urgent need for proper identification, measurement, and management.

“A wider definition of sovereign risk is warranted, one where core fiscal variables and the macroeconomic context are complemented with elements reflecting broader balance sheet developments, debt portfolio structure, investor base, cross- border linkages, and financial assets of a country,” Strauss-Kahn added.

Paul A. Ebeling, Jnr.

Libya Oil Fields ready to Produce

Libya Oil Fields ready to Produce

Libya’s de facto Oil Minister said in a press conference held Saturday that the Libyan Oil Fields are ready to resume production.

Shukri Ghanem, head of Libya’s National Oil Company, said Libya will honor International deals signed with the World’s Oil companies.

Last week, he said Libya’s Oil production had fallen dramatically due to the departure of foreigners working in Oil fields as unrest and security woes hit the Country.

He called on foreign companies to send back their workers to resume their production.

Libya has the largest proven Oil reserves in Africa and is considered Africa’s 3rd largest Crude Oil producer after Angola and Nigeria.

Crude Oil operation plays a fundamental role in Libyan economic growth, representing 95% of exports and 25% of the country’s Gross Domestic Product (GDP).

Paul A. Ebeling, Jnr.

Quantitative Easing Data

 

When QE-2 ends, then QE-3?

There is just 1 time when the US Fed slowed it’s Quantitative Easing (QE) program, that was last year.

Now, take a look at the data set on what occurred the US Fed let its balance sheet contract by 12% from late April to late August. Over that time frame, below are the number I am seeing

1. The S& P 500 sagged from 1,217 to 1,064.

2, The S& P 600 small caps fell from 394 to 330.

The Best performing equity sectors: telecom services, utilities, consumer staples, and health care,also known as the Defensives.

The Worst performers were financials, tech, energy, and consumer discretionary.

Baa spreads widened +56 bps from 237 bps to 296 bps…

CRB futures dropped from 279 to 267.

Crude Oil went from 84.30 bbl to 75.20 bbl

The VIX rose from 16.6 to 24.5

The trade-weighted US Dollar Index firmed to 76.5 from 75.5.

Gold bucked the trend, and acted as refuge at a time of economic and financial uncertainty, and rose to 1,235 oz from 1,140 on the back of Stable-to-Strong USD.

The yield on the 10 yr US T-Note sunk to 2.66% from 3.84%

The Big Q:

What will happen this time, and is the US economy strong enough to grow on its own without stimulus, or strong enough that the US Fed will be reluctant to continue with QE-3?

Here are some indicators to consider:

1. the folks at Macroeconomic Advisors have reduced their Q-1 GDP projection to 2.5%.

2. Morgan Stanley has dropped theirs from 4.5% less than 6 weeks ago to 2.9% on Friday ( a huge drop).

3. Other Economic forecasters are revising down too.

4. States and local governments are cutting more than 1% of GDP from their budgets.

And that Friends, translates into real-world pressure on the US GDP.

But, the “just get by” scenario is on the horizon going into this Summer IMO, pointing to slower growth. I remember the late ‘70 and early ‘80 clearly, and though it was not hard on my businesses many folks in the US suffered under the Volker “Rules”. I would like not to see that happen again in the USA.

The Big A will likely be:

US Federal Reserve Chairman Bernanke will see the economy slowing down, and will see the need another round of Quantitative Easing (QE-3). This is something I have been noting since last November as I always places a + sign behind the QE-2 US$600B number. Some analysts think this “unthinkable” and now we are seeing the probability of their “unthinkables” on the horizon because if the US Fed sees the US Economy rolling over into a Recession they will mandate reducing unemployment and maintaining stable prices. But that would mean higher inflation in the face of a slow economy (not a bad thing from my POV), and not a bad price to pay to increase employment.

Once again, and for the record I see QE-3 ahead and I much prefer inflation to stagflation, because it means Economic Growth, growth means profits, profits mean EPS, EPS means a rising stock markets and The Bull Charges. And so it goes…

Paul A Ebeling, Jnr.

Asian nations lift Japan LNG supplies

Japan's neighbours pledged to ramp up liquefied natural gas exports to the quake-stricken nation today, helping the world's third-biggest economy to replace the power supply crippled by the disaster.

Crippled: the Fukushima Daiichi nuclear power plant in Japan // Image courtesy of REUTERS

Upstream staff   18 March 2011 13:30 GMT