A Manifesto for European Change(After European Parliament election) By Tony Blair

"Interpreting election results, especially when turnout is not high, is always a risky business. And, in the case of the recent European Parliament election, the results were not uniform. The most spectacular result was in Italy, where a pro-reform, pro-Europe party led by Prime Minister Matteo Renzi won more than 40% of the vote. Chancellor Angela Merkel’s Christian Democrats won in Germany and there was a strong vote for the Social Democrats there also. In some cases, the vote simply tracked domestic politics.

But the victories of the United Kingdom Independence Party (UKIP) and the National Front in France and the success of explicitly anti-status quo parties across the continent cannot be ignored. They point to a deep anxiety, distrust, and alienation from Europe’s institutions and core philosophy.

So now the EU must think carefully about where it goes from here, how it reconnects with its citizens’ concerns, and how it can better realize its ideals in a changing world. Complacency about the far right’s showing, on the grounds that there remains a pro-European majority, is dangerous. Even ardent supporters of Europe think there must be change.

Many factors have combined to increase the number and complexity of challenges facing Europe, along with uncertainty and unpredictability about Europe’s ability to meet them. There has been the vast ambition of the single currency, with its intrinsic design flaws; the agony of the financial crisis and its aftermath; and the link between the two in the sovereign debt crisis. There has also been the European Union’s enlargement from 15 member states to 28 in a decade – a decade, moreover, of rapid change in technology, trade, and geopolitics.

Within the eurozone, the EU suddenly went from being merely important to determining, bluntly and in plain view, countries’ future budgets and other economic policies. Indeed, given the pain of deep expenditure cuts without the flexibility of exchange-rate adjustment, the real surprise is that the outcry has not been greater. Even those of us outside the eurozone have been profoundly affected as European institutions have become both more visible and more under attack.

In an increasingly multipolar world, in which GDP and population will increasingly be correlated, the rationale for Europe is stronger than ever. Together, Europe’s peoples can wield genuine influence. Alone, they will over time decline in relative importance. The twenty-first-century world order will be dramatically different from that of the twentieth century. The rationale for Europe today is not peace; it is power.

If we are to realize the EU’s potential, and avoid a retreat by Britain to its sidelines, the balance between the EU and its member states will have to be re-addressed from first principles, with European institutions redesigned to make them truly more accountable and closer to those that they govern.

Understandably, fragile national governments struggling against economic malaise – and under intense political pressure to succeed – have no desire at the moment for such a root-and-branch debate. So we must distinguish between long-term and immediate action. The immediate challenge is to obtain the most change possible within the existing framework of European institutions and treaties. Meeting it requires a new approach and a new agenda.

The new approach should begin with the European Council asserting its responsibility to give Europe direction by setting a clear, focused, and convincing platform of change that connects with European citizens’ concerns and transforms the view of what Europe can actively, not reactively, achieve. The Council must match the EU’s policy ambitions with a set of concrete proposals to realize them, and then task the incoming European Commission in specific terms with implementing the platform.

The European Parliament will debate the necessary measures and will have to legislate accordingly. Here, the Council and the Commission must work in unison, adopting a method of engagement with the Parliament that does not leave individual Commissioners swinging in the wind when they come under attack.

The agenda for reform should address the overarching issues that the EU’s member states are unable to advance in their interests. Within the eurozone, this means an explicit arrangement by which, in exchange for member states’ continuation and deepening of structural reform, there will be greater fiscal flexibility and monetary-policy action to allow stronger growth and avoid deflation.

Selling reform to each EU country will be easier if it is part of a grand bargain in which pain and gain are seen to be fairly balanced. For the Union as a whole, progress on consolidating the single market is needed, especially in the service sector; and policymakers should make a big push for the Transatlantic Trade and Investment Partnership. Moreover, the best ideas concerning infrastructure and a European jobs program should be incorporated into the agenda for change. Efforts on these fronts should be directed toward showing how the jobs and industry of the future can be created by concerted European action.

Likewise, energy policy is now of vital importance, not only for Europe’s competitiveness, but also as a result of events in Eastern Europe and Ukraine. The EU has never pursued a common energy policy with the vigor that it requires; yet its impact would be transformative. A common energy policy and integrated energy markets would benefit businesses and consumers (not least in the UK) and reduce Europe’s dependence on foreign supplies.

Finally, if Europe wants to exercise power commensurate with its economic weight, it must have the capacity to play its part both in military operations and in the essential role of security-sector building in potential partners emerging from turmoil or conflict. This is not just about spending. It is also about synergies. Recent experience from North and Sub-Saharan Africa shows how such a capability could be used.

Of course, one central part of this agenda would be a program of subsidiarity, along the lines for which the British government and others are agitating. Again, there is a wealth of suggestions on how such a program would work. The mood and timing is right, and action in this area would address an element of European governance that causes anger across the political spectrum.

I want to be clear about what I mean about this reform agenda for Europe. I do not mean the normal Council conclusions put together at the last minute of a packed and routine meeting. I mean a proper and precise program – call it a manifesto for change – that tells the Commission exactly what it is supposed to do and gives the Commissioners the support they need to do it".

   Source: Project-Syndicate

Hong Kong: As vote looms on $36 bln CITIC deal, critics fret about strategy

Minority shareholders of Hong Kong-listed CITIC Pacific Ltd  are gathering on Tuesday to vote on a landmark deal to acquire $36 billion of assets from its state-owned parent CITIC Group Corp, China's biggest and oldest financial conglomerate.

They are expected to give the go-ahead to the deal to buy practically all of the conglomerate's assets. In doing so, they will be endorsing not just China's ambition to reform its state-owned enterprises. They will also be backing a plan to give CITIC Pacific direct exposure to the mainland's banking sector - and along with that, the country's bad loans problems.

How CITIC Pacific plans to chart a safe and rewarding journey through China's banking sector remains unclear. Some analysts are also concerned about CITIC Pacific's ability to manage a diversified conglomerate that would include financial services alongside its current steel and property businesses.

The deal centres on the acquisition of CITIC Ltd, the chief operating arm of CITIC Group  CITIC Ltd has a number of businesses, ranging from real estate and natural resources to manufacturing and engineering. But it derives its income mainly from financial services, which accounted for 87.3 percent of total pre-tax profit in 2013.

Driving the bulk of the segment's earnings is China CITIC Bank Corp . While CITIC Bank is profitable, the bank, like other Chinese lenders, is exposed to a rising tide of souring loans as China's economy slows.

"Investors may take a cautious note on their increased exposure to China's banking sector amid prevailing concerns about the slowing Chinese economy and potential increase in bad debts," said Ben Kwong, KGI Asia's head of research. "This will be a real challenge for CITIC Pacific, and only time will tell whether they could navigate out of this situation successfully."

CITIC Ltd, as a whole, has also expanded into riskier, higher-yielding offerings including wealth management products. Its so-called "maximum loss exposure" to higher-yielding investments jumped 36 times to 322 billion yuan ($51.5 billion) at the end of 2013 from 8.97 billion yuan in 2011, according to a disclosure by CITIC Pacific to its shareholders in April.

Sell rating

Analysts say CITIC Pacific has to show it has the management prowess to sail through all this with confidence. Four of the seven analysts covering CITIC Pacific have a sell rating on the stock, two have a hold rating, while Jefferies is the only stock broker with a buy rating, according to Thomson Reuters data.

Confidence is a scarcer commodity these days after the company miscalculated the huge cost of developing a mine in Western Australia in recent years. CITIC Pacific said inexperience was one of the factors for busting its budget. The company has also made wrong-way bets on the Australian dollar while hedging currency risks linked to its mining investment.

"The company has a disappointing track record, which is a big worry when investors look at the current situation," KGI Asia's Kwong said. "The key challenge is to hire top quality managers and make them responsible for their actions."

CITIC Pacific has attracted the attention of short sellers, with the shares currently ranking No.1 on the short-selling list in Hong Kong. Nearly 72 percent of CITIC Pacific shares that can be borrowed by short-sellers are out on loan, the most among the companies listed on the bourse, according to financial data company Markit. Short-sellers sell borrowed stock with the intention of buying back the shares at a cheaper price.


THE NEW CITIC

The sense of caution is countered by the prospect of improving financials. The combined CITIC entity is estimated to be more profitable, with return of equity (ROE) forecast to rise four basis points to 13 percent, Jefferies estimates.

In comparison, Hong Kong tycoon Li Ka-shing's conglomerate Hutchison Whampoa Ltd <0013.HK> generates 7.6 percent ROE, while Swire Pacific Ltd <0019.HK> has 6.2 percent ROE, according to Thomson Reuters data.

"We continue to view the "New Citic" to be a good proxy for the Chinese economy," Jefferies analyst Christie Ju wrote in a note. "We expect minority shareholders to support the acquisition, and expect "New Citic" to become the largest (in revenue, asset and market cap) and potentially the most profitable Chinese conglomerate in the Hong Kong market."

The deal, first unveiled in March, was hailed as the biggest SOE reform in China. It would change CITIC Pacific's business mix considerably, with financial services set to bring in more than a third of the new CITIC Pacific's revenue and resource and energy accounting for just over a fifth, according to Jefferies.

"It is positive from a credit point of view as now the company is one level closer to government, owns more assets and its strategic importance is enhanced with the inclusion of an asset like CITIC Bank," said Moody's analyst Gary Lau, who has put the company's Ba2 rating on review for an upgrade.

Its bonds due 2020 have rallied 15 points to trade at 110 cents on the dollar since the announcement, with the yield dropping 240 basis points to 4.6 percent. Its bonds maturing in 2023 and 2018 have also rallied, indicating investors' increasing comfort from the strong support of CITIC Group, which is wholly owned by the Chinese State Council, or Cabinet.

Source: Reuters

Abe's Japan reform plan draft leaves tough questions unanswered

 A draft plan to boost Japanese growth promises to overhaul corporate governance, promote technology and attract private investment, but it leaves many of the toughest questions unanswered as the country seeks to claw its way out of a crippling cycle of deflation.

The 60-page draft outline of Prime Minister Shinzo Abe's growth strategy reviewed by Reuters, which has not been made public, gives no details of how and whether the government would cut the corporate tax rate.

Nor does it detail plans to overhaul the nation's public pension fund, known as GPIF, another of the most closely watched policy measures for investors in Japan's stock market.

Other unanswered questions include whether corporations will be allowed to own farmland and whether companies will get reforms of the labour arbitration process to make it easier to dismiss workers.

Both of those controversial issues are marked as pending in the still-evolving policy draft.

The document does not mention whether Abe's government will push for legalizing casino gambling in Japan, a step that proponents say could drive up tourism and tax revenues in Tokyo and elsewhere.

The draft plan was compiled by government ministries and will form the basis of Abe's "third arrow" reform update due to be announced later this month.

Abe's growth plan is aimed at lifting the potential output of an economy that has been mired in deflation since the late 1990s, coupled with an aggressive program of quantitative easing by the Bank of Japan and an earlier round of fiscal stimulus.

But Abe's coming structural reform announcement also has a more immediate target: lifting investor sentiment at a time when confidence in "Abenomics" has been fading and the Nikkei stock average is down 8 percent since the start of the year.

The Abe policy draft entitled "Japan Industrial Revival Plan" paints a vision of an innovative Japanese economy that would also be more transparent, more open to women in the workplace and friendlier to foreign investors.

Most of the policy commitments are broad and lack detail on funding or related legislation, however.

The draft growth plan offers a range of "key performance indicators" to measure whether the plan is succeeding in lifting Japan's potential growth rate, but many are set for 2020 or beyond. The next general election is due by December 2016.


WATERED DOWN?

On corporate governance, an area where offshore investors have urged Japan to reform, the draft plan being readied for Abe pulls back from some of the more aggressive steps backed by members of his Liberal Democratic Party.

The plan says the Tokyo Stock Exchange would compile by mid-2015 a "corporate governance code", or a set of guidelines to bring oversight of the country's public companies in line with international standards.

Most developed economies require listed firms to select a majority of their board members from outside the company, and corporate governance experts say one or two directors on a board of more than 10 are not enough.

By contrast, the only detail in the draft plan reviewed by Reuters calls for banks to have at least one outside director.

Abe has been pushing for improved governance in an effort to boost foreign investment.

The draft plan sets a target for doubling annual foreign direct investment to nearly $345 billion by 2020. Japan's inbound direct investment is the lowest among OECD countries at around 3.5 percent relative to GDP.

With Japanese public finances under increasing strain, Abe also wants to encourage more private investment in public projects. The draft plan sets a target of opening up about $30 billion in deals for investors to manage infrastructure projects such as airports.

U.S. property investor Fortress Investment Group LLC and Australian investment bank Macquarie Group Ltd are taking stakes in Japan's infrastructure sector.

Goldman Sachs Group Inc has also said it was considering investing in operating rights for Osaka's new Kansai International Airport when those are put up for sale.

Further reforms are aimed at helping Japanese women succeed in a male-dominated corporate culture. The proportion of women in managerial posts should jump from last year's 7.5 percent to 30 percent, the plan suggests.

All listed companies would be required to disclose the ratio of women in management posts in reports to investors.


ELECTRICITY SHAKE-UP

The draft plan also sees a big role for the increased use of robotics in boosting productivity at a time when Japan's population is declining.

It promises to create a forum on the "robotic revolution." By 2020 Abe wants to see a 20-fold increase in use of robots in agriculture and a two-fold jump in manufacturing.

The draft plan included a pledge to create a new world-class research centre and to provide support for Silicon Valley-style start-ups, an area where Japan has been hobbled by the lack of active venture capital investors.

On energy policy, the draft growth plan pledges to complete a reform of the country's electricity market by 2020 that would break up regional monopolies that have been held by utilities led by Tokyo Electric Power <9501.T>.

It says Japan will promote imports of liquefied natural gas from the United States and reiterates Abe's plans to restart nuclear power plants that have passed tougher safety checks imposed after the 2011 Fukushima disaster.

In a potential boost for Toyota Motor Corp <7203.T> and others, the draft plan promises to loosen regulations on hydrogen fuelling stations.

Toyota is preparing to launch a hydrogen-powered car in the United States, Japan and Europe in 2015, a major bet on fuel-cell technology by Japan's top automaker.

Gaming companies including Las Vegas Sands Corp, MGM Resorts International, Wynn Resorts Ltd and Malaysia's Genting Bhd have expressed an interest in investing in casino projects in Japan.

Proponents of legalizing casinos in markets like Tokyo have not yet submitted legislation to start the process.

Source: Reuters

How the EPA’s Plan Will Impact the U.S. Electricity, Coal and Natural Gas Markets

The EPA announced a plan for curbing carbon emissions from power plants, which analysts say has the potential to sway electricity, coal and natural gas markets for decades.

Investors  found the rules tough to play as much will depend on state-by-state regulations rolled out over a period of years.

“All we know is the headline. What will matter is the state level targets which we don’t know yet,” said Jonathan Arnold, a utilities and power-sector analyst at Deutsche Bank Securities in New York.

Here’s a look at how investors are viewing the impact on those markets currently:

Coal

Investors see coal as a sure loser, even at this early stage. The target of cutting emissions 30% by 2030 from the level set in 2005 would cut coal consumption in the power sector by 267 to 285 million tons between 2013 and 2030, according to FBR Capital Markets.

Shares of Walter Energy, Inc., Alpha Natural Resources Inc.and Arch Coal Inc. all fell more than 3% Monday. The damage was limited because investors have spent years bracing for coal’s downfall, selling out in favor of the cheaper, cleaner gas that’s been taking coal’s market share.

Utilities

Exposure to coal is the biggest risk for utilities, putting companies like American Electric Power Co. Inc., FirstEnergy Corp. and NRG Energy Inc. at the biggest risk, according to UBS Securities LLC. Utilities were hardly hit by the EPA’s announcement Monday. American Electric Power actually gained 0.2%, while other utilities’ declines were less than 1%.

Natural Gas

Gas, with half the emissions of coal, is likely to get the biggest immediate bump, gaining share from coal in the U.S. power mix. The power sector’s use of gas should grow by as much as 3.29 billion cubic feet a day by 2020 with these rules in place,  according to FBR Capital Markets. That growth would then taper off as renewable energy gains more traction and greater efficiency limits demand, FBR Capital Markets added.

Gas futures rose 7 cents, or 1.5%, to $4.612 a million British thermal units on the New York Mercantile Exchange Monday.

Teri Viswanath, a natural-gas strategist at BNP Paribas, warned that the market shouldn’t overreact to the EPA’s announcement.

Source: WSJ

WSJ: Rising Rate Tide May Not Lift Bank Boats

Rising interest rates, whenever they materialize, may not help banks as much as many investors expect.

Conventional wisdom has it that rising rates and a steeper yield curve will reverse the trend that has squeezed banks’ net interest margins—the difference between what they earn on investments and their cost of funding—to their thinnest in 24 years.

But a new paper from researchers at the Chicago Fed indicates that this effect might be much smaller than many think—especially for large banks. Even a very sharply steepening yield curve has a small effect on bank profits, the report says.

A 1 percentage point increase in the spread between 3-month and 10-year Treasuries—which would be a large move by historical standards—is associated with just 0.008 percentage points of additional net interest margin at banks with assets of $10 billion dollars or more.

Rising rates don’t help much either. A 1 percentage point rise in short-term rates generates an extra 0.003 percentage points in the average net interest margin of banks with $10 billion or more, researchers found.

What really juices profits, according to the paper, may shock you: economic strength.

Source: The WSJ

EU Energy Chief: Ukraine, Russia Make Progress In Resolving Gas Dispute.

BRUSSELS--Ukraine and Russia came closer to a truce in their long-running feud over natural gas prices after agreeing to fresh proposals to break the deadlock, theEuropean Union's energy chief, Gunther Oettinger, said.

The two sides agreed to consider a new proposed price for natural gas and will re-convene by the middle of next week for further talks, he said.

It will now be up to Russian gas giant OAO Gazprom and Ukraine state energy firm Naftogaz to analyze the proposals before giving a verdict. If they agree, it would mark the end of a dispute that deepened after the ouster of Ukraine's former President Viktor Yanukovych, a Russian ally, in February.

Gazprom scrapped earlier discounts on April 1 and ramped up the price of gas to $485.50 per 1,000 cubic meters, up from of $268.5 per 1,000 cubic meters.

Ukraine described the new price as "politically motivated," while Gazprom threatened to move to a pre-payment system for future gas supplies unless it received payment for debts of around $3.5 billion. It also said it could cut off supplies of gas to Ukraine, the main transit route for gas imports into the EU.

Source: Dow Jones Newswires

China Keeps Tiananmen Chatter Under Wraps Ahead of Anniversary

China's leadership is leaving little to chance ahead of this week's 25th anniversary of the bloody quashing of the Tiananmen Square protests, having embarked on a widespread clampdown on dissent that has targeted lawyers, rights activists and journalists, among others.

Rights groups say dozens have been detained, questioned or put under house arrest to try to make sure no commemorations are held. The group Chinese Human Rights Defenders puts the number at 50 "detained, disappeared or summoned."

The capital's already tight security has been bolstered ahead of the June 3-4 anniversary, and following terrorist violence in other parts of the country.

"They're grabbing people everywhere," said Liu Shihui, a rights lawyer who was detained for more than 10 days by authorities in Shanghai and sent back to his hometown in Inner Mongolia last month. Mr. Liu said this was the biggest roundup of activists in China since the sweeping crackdown launched to prevent any spillover from the democracy demonstrations in the Middle East known as the Arab Spring in 2011.

The government rarely comments on activities linked to the Tiananmen anniversary, and has declined to comment on the detention of activists or the blocking of some media and Internet services.

Chinese authorities began broadly disrupting use of Google, from basic searches to Gmail, ahead of the anniversary, according to GreatFire.org, an organization that monitors Chinese censorship. Such disruptions of Google and other Internet services are common in China around sensitive anniversaries. A report on usage traffic that Google posted on its website shows a drop China's use of services starting Sunday.

Authorities are also more readily using criminal charges to detain dissidents and activists, human-rights activists say, raising concerns they could face prison sentences rather than be released after the anniversary as has happened in the past.

"It's a reaction to the fact that the authorities are aware there is a volatile, tense atmosphere" in China, said Eva Pils, an expert on Chinese law and human rights at the Chinese University of Hong Kong. She said the use of criminal law was a way of more demonstratively saying dissent won't be tolerated.

The latest crackdown on dissent, which appears to be more forceful than in recent years, fits with overall tighter grip the Communist Party has tried to place on society, officials, the Internet and other areas since Xi Jinping ascended to the No. 1 leadership post 18 months ago.

Beijing has intensified its control over information, with foreign media coming under greater scrutiny. The Foreign Correspondents' Club of China, a journalism industry group based in Beijing, has criticized the government's "increasing harassment and intimidation" ahead of the anniversary after police discouraged some reporters from covering the anniversary and warned about the consequences of disobeying the government.

Xin Jian, a Chinese national who was working for a Japanese news organization, Nihon Keizai Shimbun, has been detained by authorities in southwest China, but the news agency but provided few details of the circumstances.

The Chinese-language websites of some international media, including The Wall Street Journal, have been blocked in the mainland, though authorities have given no reason. A spokeswoman for Dow Jones & Co., publisher of the Journal, confirmed the site has been blocked since Saturday, but declined to elaborate.

The Tiananmen protests, which called for democracy and other political change, ebbed and flowed in Beijing for six weeks in 1989. Party leaders saw them as a threat to their authority and ordered the military to put a stop to them. Several hundred students and others were killed, according to some estimates, as the military pushed into central Beijing on the night of June 3 and the morning of June 4.

In many ways, Beijing today differs vastly from what it was in 1989. Where bicycles once dominated the city, luxury cars now clog its roadways. Well-heeled residents dress in international designer brands and the city has become a major destination for global commerce despite a slowing Chinese economy. But the government still struggles with many of the most serious issues raised during the Tiananmen protests--among them rampant official corruption.

President Xi has promised to stamp out corruption, but has so far failed to enact political reforms that would enhance transparency and the rule of law, which are widely thought to be necessary for the campaign to be effective.

Underscoring the leadership's intolerance of dissent was the detention last month of rights lawyer Pu Zhiqiang and four others who attended a private commemoration in Beijing of the June 4 crackdown.

Mr. Pu hasn't been formally charged with a crime, though his detention order cites "picking quarrels." He couldn't be reached to comment. Rights groups and others are demanding his release.

Mr. Liu, the rights lawyer who was detained in Shanghai, said he wasn't bothered by authorities during the 20th anniversary of the crackdown in 2009 despite attending a similar commemoration gathering of about 20 people at the time. "Now, it's impossible to hold such activities. The controls are much tighter."

Mr. Liu said authorities have confiscated his government identity card, making it difficult to travel, and told him they wouldn't return it until after the June 4. "The only way the government can feel relaxed is if we're in jail or confined to our hometowns," he said.

 Dow Jones Newswires

IEA Expects Greater Reliance on Middle East Oil. As current U.S. Boom wanes by 2020

LONDON--A top energy watchdog said the world will need more Middle Eastern oil in the next decade, as the current U.S. boom wanes. But the International Energy Agency warned that Persian Gulf producers may still fail to fill the gap, risking higher oil prices.

In its first update to the agency's energy investment outlook in more than a decade, the IEA--which represents some of the world's largest consumer nations--said it sees "growth in oil demand [becoming] steadily more reliant on investment in the Middle East."

Surging American production from tight oil--extracted from shale formations in places like Texas and North Dakota--has led the agency and other oil-market analysts to predict the U.S. could leapfrog the world's largest oil producers, Saudi Arabia and Russia, by 2020. That has triggered debate in Washington about easing a long-standing ban on most crude exports from American shores. It has also engendered hope of more energy security for the U.S., as well as worry that if American reliance on Mideast oil lessens, so might its military and diplomatic engagement in the region.

In its report, a summary of which was released early Tuesday in London, the IEA predicts that "output from North America plateaus [from around 2020] and then falls back from the mid-2020s onwards." That forecast is broadly consistent with studies by the Organization of the Petroleum Exporting Countries, a cartel of some of the world's largest producers.

While most of the oil found in the Middle East is cheap and easy to extract, tight oil requires intensive drilling as discoveries tend to deplete rapidly. When it comes to tight oil, "we are in a sweet spot," said Gary Ross, chief executive of U.S. market research firm PIRA Energy Group. "But it's like a treadmill, after a while you get exhausted."

To fill any gap, the Middle East will "need to invest today if not yesterday" because projects typically take seven years to develop, the IEA's Chief Economist Fatih Birol said. He said the region will need to spend an annual $90 billion through 2025 to meet global needs for its oil.

Yet, the agency warned the Middle East may fail to fill the gap because of high political risk and social spending. "We see a risk of not enough oil coming from the Middle East," Mr. Birol said, citing the fact those countries pour a quarter of their $800 billion in annual oil revenue into energy subsidies. The Arab Spring, meanwhile, has forced many governments in the region to increase social spending. Iraq is still facing oil-output disruptions tied to political tensions, while Iran remains under tight international restrictions on its oil sales.

If the Middle East doesn't cover the predicted shortfall created by declining U.S. output, the average cost of a barrel of oil could climb $15 by 2025, the IEA said.

The agency, which is charged with safeguarding energy security for the world's most developed economies, often sounds the alarm on what it says is underspending by producers.

Overall, global oil and natural-gas exploration and production spending will rise by some 25% between now and 2035, reaching more than $850 billion a year, the IEA said. That figure will be part of $2 trillion in annual energy needs in the next two decades, up from about $1.6 trillion last year.

The IEA, which will release the full version of the report later Tuesday, had not fully updated its investment outlook since 2003.

Source: Dow Jones Newswires

Russia grants gas respite but seeks U.N. vote on Ukraine

 Russia accused Ukrainian authorities on Monday of escalating violence against civilians in the rebel-held east of the country, even as it offered Kiev a brief respite in a dispute over billions of dollars' worth of unpaid gas bills.

In the latest fighting, Ukrainian border guards said a pro-Russian militia had attacked one of their posts with automatic weapons and grenade launchers in the early hours, triggering a battle that was still raging many hours later. 

Ukraine and its Western allies accuse Moscow of fuelling the pro-Russian uprising that threatens to break up the former Soviet republic of 45 million people. Russia denies orchestrating the unrest, and says Ukraine's attempts to end it by military force are making the situation worse.

Russian Foreign Minister Sergei Lavrov said Moscow would submit a draft resolution to the United Nations Security Council later on Monday, calling for an immediate end to the violence and the creation of humanitarian corridors to help civilians escape the fighting.

In pointed comments aimed at newly elected Ukrainian president Petro Poroshenko, Lavrov said that Western nations had assured Russia the situation in Ukraine would improve after the May 25 election that brought him to power. Instead of that, he said, "everything is happening in exactly the opposite way".

"People are dying every day. Peaceful civilians are suffering more and more - the army, military aviation and heavy weapons continue to be used against them," Lavrov told reporters in Moscow.

Poroshenko and Ukraine's pro-Western government have defied Moscow's repeated calls for an end to what Kiev calls its

'anti-terrorist' operation against armed separatists in the eastern Donetsk and Luhansk regions, who want to follow the example of Crimea by splitting from Ukraine and joining Russia.

The annexation of Crimea prompted the European Union and the United States to impose sanctions on some Russian firms and individuals in the worst standoff between Moscow and the West since the Cold War ended.


GAS DISPUTE

On the opposite side of the continent, Poroshenko and Russian President Vladimir Putin will both attend a series of events in France this week to mark the 70th anniversary of the D-Day landings that opened the Western front against Nazi Germany in World War Two.

While no formal meeting between the two is scheduled, even a handshake would be significant. Moscow refused for months to recognise the Ukrainian leadership that replaced its ally, Viktor Yanukovich, when he was toppled by protests in February.

Poroshenko is due to be inaugurated on Saturday and will immediately face an array of crises, including a new deadline in Ukraine's long-running dispute with Russia over gas prices.

On Monday, Russia's Gazprom gave Ukraine an extension into next week to resolve the price question. It had previously said it would switch off the gas on Tuesday unless Kiev agreed to start paying in advance - a step that might also have hit supplies to European countries via Ukraine.

Europe gets a third of its gas needs from Russia, and almost half of these supplies are sent via Ukraine. [ID:nL6N0OJ1XP]

Since Yanukovich's overthrow, Russia has demanded a sharp increase in the price Ukraine pays for gas. Kiev says it cannot afford it and wants to pay a discounted price which it negotiated in the past.

While the dispute has dragged on, Gazprom has continued billing Kiev at the higher rate. It says Ukraine already owes it more than $5 billion in unpaid bills and is running up more debt at a rate of more than $1 billion per month.

But after Kiev paid off $786 million of its gas debt, Gazprom announced a six-day extension of the deadline until June 9. Gazprom also said that it would not sue Ukraine's gas supplier Naftogaz over unpaid bills during the coming week.

Talks between the Russian gas exporter and Ukraine were resuming on Monday in Brussels, under the auspices of the European Union.


RISING VIOLENCE

Despite a pullback of some of the tens of thousands of Russian troops on the border with Ukraine, violence increased in the east of the country at the start of last week, with dozens of pro-Moscow rebel fighters killed in a government assault. Many were Russians, whose bodies were sent back across the border.

In Monday's fighting, security sources said a force of separatists had occupied the upper floors of an apartment block and were shooting into the border post on the southern edge of Luhansk, a city very close to the frontier with Russia.

"Shooting is continuing. There has been no let-up in firing for seven hours now," border post spokesman Oleh Slobodin said.

"We have eight or nine wounded. The attackers have five dead and eight wounded."

In Geneva, a spokesman for the U.N. Office for the Coordination of Humanitarian Affairs (OCHA) reacted cautiously to Russia's proposal to create humanitarian corridors for civilians, saying a crucial question was who would secure them.

"How is it going to be policed? That would be a key question for us," spokesman Jens Laerke said.

"Because once you say here’s a corridor, once people start moving on that, if there’s no one to protect them, then it’s very dangerous."

Source: Reuters

German inflation is lowest in years, adds to case for ECB action

 Annual inflation in Europe's largest economy slowed to its weakest in years in May, data showed on Monday, probably pushing down the euro zone rate and cementing expectations the European Central Bank will ease monetary policy this week.

Consumer prices harmonised to compare with other European Union countries - the ECB's preferred measure - showed a rise of 0.6 percent, far less than the 1.0 percent expected in a Reuters poll. It was the lowest reading since February 2010.

Commerzbank economist Johannes Werner said the data suggested the broader euro zone rate, due out on Tuesday, fell sharply from April's reading of 0.7 percent, which was already well below the ECB target of just under 2 percent.

"Consumer prices in other euro zone countries also generally had surprising falls in May so the euro zone inflation rate, due out tomorrow, will probably fall to 0.5 percent," he said.

A Reuters poll conducted before the German data for May was published had shown economists expected it to hold steady.

Economists said Monday's data suggested the ECB would take action at its rate-setting meeting on Thursday.

"We think the numbers substantiate expectations that the ECB will loosen monetary policy this week," said Ralf Umlauf, economist at Helaba.

Based on the national statistical measure, German consumer prices increased by 0.9 percent on the year in May, the preliminary Federal Statistics Office data showed.

That was the weakest reading since June 2010 and came as the cost of energy fell and food prices had their smallest rise in more than four years.

Economists polled by Reuters had expected the annual reading to slow to 1.1 percent from 1.3 percent in April.

On a monthly basis, German consumer prices fell 0.1 percent compared with a drop of 0.2 percent in April.

Final German price data for May are due to be released on June 13, the office said.

Last week ECB Vice President Vitor Constancio said the ECB was not complacent about the risks from a protracted period of low euro zone inflation and would act if necessary while Governing Council member Ignazio Visco said excessively low inflation in the euro zone should be dealt with as firmly as high inflation.

Source: Reuters

Japan's Dai-ichi Life in talks on $5 bln deal to buy U.S. insurer Protective Life

 Japanese insurer Dai-ichi Life Co <8750.T> is in advanced talks to buy U.S. peer Protective Life Corp in a deal that could be worth over $5 billion, extending a drive to buy assets abroad as an antidote to a weak domestic outlook.

The deal would be the biggest so far in a string of overseas acquisitions by Japan's insurers. They're snapping up businesses in markets from the United States to Southeast Asia as a path to future growth while the rapid ageing and eventual shrinkage of Japan's population clouds long-term earnings prospects at home.

Dai-ichi Life, Japan's second-largest private-sector life insurer, plans to buy 100 percent of Protective Life, said a source with direct knowledge of the matter. The 107-year-old U.S. company, based in Birmingham, Alabama, has a market capitalisation of $4 billion and posted a net profit of $393.5 million in 2013 from operations that span the country.

"For top (Japanese) insurers with large market share like Dai-ichi Life, it would be very difficult to secure growth when the overall domestic life insurance market starts shrinking," said Teruki Morinaga, insurance sector analyst at Fitch Ratings in Tokyo. "So, it has to go overseas," he said, adding he was commenting based on media reports and hadn't independently verified their accuracy.

In a statement to the Tokyo Stock Exchange, Dai-ichi Life said, "It is true that we are considering an acquisition of a U.S. life insurance company. But nothing has been decided." A spokesman declined to comment further.

Eva Robertson, vice-president of investor relations at Protective Life, said in an email to Reuters that the company declined to comment, citing company policy on media reports.

The source, who was not authorised to discuss the matter, said Dai-ichi Life, worth close to $15 billion by market value, is planning to fund half of the acquisition cost from existing reserves if the deal goes through. The remainder would be sought externally, the source said, including a possible share issue, along with loans.

As investors fretted over the potential for a dilutive impact on their holdings from a deal, Dai-ichi Life's shares sank 5 percent by the close in Tokyo in heavy trading, compared with a gain of 2.1 percent gain in the broader market. In a separate statement, the company confirmed it is considering fund-raising options including the issue of new shares.

"The acquisition itself is positive for the company in the long term, but the market is wondering how the company will finance it," said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management. "Dilution fears from a possible share offering plan hit investor sentiment."


POPULATION RISK

Japan is the world's second-largest life insurance market after the United States by premium revenue. For now players enjoy relatively stable income, but the ageing, and ultimately dwindling population represents a risk for insurers - and many companies whose business model is based on selling goods and services in the country.

From a peak of about 128 million in recent years, Japan's population is forecast to fall 14 percent to close to 110 million by 2035.

Japanese companies are accelerating overseas acquisitions as one strategy for shoring up earnings. So far this year, they have spent $27 billion on mergers and acquisitions outside Japan, up from $10.4 billion during the same period a year ago, Thomson Reuters data shows. 

Source: Reuters

How fracking helps America beat German industry

- Nestled in the green hills of southern Germany, chemical giant Wacker Chemie churns out a wide range of products, from an ingredient for chewing gum to the polysilicon crystals in solar cells.

The electricity to produce all that - enough power for more than 700,000 households annually - has become more costly at Wacker’s main factory in Burghausen. It has played a big part in pushing up the firm’s total energy bill by 70 percent over the last five years, to nearly half a billion euros.

It’s a different story across the Atlantic in the U.S. state of Louisiana. There, chemicals maker Huntsman Corp pays 22 percent less for its power than it did just seven years ago.

The tale of those numbers underlines a profound shift underway in two of the world’s biggest industrial powers. Thanks in large part to Germany’s decision to phase out nuclear power and push into green energy, companies there now pay some of the highest prices in the world for power. On average, German industrial companies with large power appetites paid about 0.15 euros ($0.21) per kilowatt hour (kWh) of electricity last year, according to Eurostat, the European Union's statistics agency.

In the United States, electricity prices are falling thanks to natural gas derived from fracking - the hydraulic fracturing of rock. Louisiana now boasts industrial electricity prices of just $0.055 per kWh, according to U.S. Energy Information Administration data.

Peter Huntsman, chief executive of the family firm, calls the United States the new global standard for low-cost manufacturing. Huntsman is spending hundreds of millions of dollars to expand in the United States, and rapidly closing plants in Europe. The company estimates that a large, modern petrochemical plant in the United States is $125 million cheaper to run per year than in Europe. That sum includes cheaper power, waste disposal and myriad other factors, and Huntsman said the contrast is similar for Asian plants.

"It's not a question of whether other countries are competitive or not," Huntsman, brother of former U.S. presidential candidate Jon, said in an interview. "They're not."

Power isn’t the only reason the United States is becoming so attractive to manufacturers again. Average labour costs in China have more than doubled since 2007 to around $2 per hour, while they’ve risen less in the United States to around $18 per hour, with worker productivity far higher in the United States, according to U.S. government statistics. When you factor in the cost of shipping goods from Asia, it’s little wonder that America has re-emerged as one of the most competitive places to build stuff.

That’s a dramatic change from just a few years ago, when Germany was held up as a model of manufacturing prowess. As recently as 2011, politicians in Washington were openly discussing how to copy Germany's success.

"We need to be more like Germany," General Electric Chief Executive Jeffrey Immelt said in an interview that year with Reuters.

Now things are heading the other way. German Chancellor Angela Merkel's energy policies - designed to sharply boost the share of renewables in Germany’s energy mix, tackle climate change and cut Germany’s dependency on foreign gas and oil - are a rising source of concern for the country’s industry, particularly energy-intensive companies like Wacker. According to Germany's Chamber of Commerce and Industry, half of the country's industrial companies believe their global competitiveness is threatened by Germany's energy policy, and a quarter of them are either shifting production abroad or considering doing so. The United States is among the top destinations.

In March, BMW, the world's largest luxury carmaker, said it would invest $1 billion to expand its plant in Spartanburg, South Carolina, making it the German group's biggest production facility by 2016. In all, German companies invested more than 800 billion euros in U.S. expansions between 2008 and 2012, according to the most recent Bundesbank statistics. Germany's Chamber of Commerce and Industry reckons that investments could reach 200 billion euros in 2014, an all-time high.

“In the energy-intensive sectors, such as chemicals, we are facing substantial challenges that will prevail for a longer time,” said Carsten Rolle, head of energy and climate policy at the Federation of German Industries (BDI). “It isn’t sudden but a creeping process with new investment going more often to the United States and other places abroad, where energy costs are much lower.”

A BIG BET

Wacker, which had sales of 4.5 billion euros last year, is one of the German firms making the shift stateside. The company is investing up to $2.4 billion in a new polysilicon plant in the U.S. state of Tennessee. With 650 employees and capacity of at least 20,000 tonnes a year, the plant will boost Wacker's capacity to make the material by nearly 40 percent. While the company remains tight-lipped about its exact power costs in Germany, analysts estimate that it will pay a third less for electricity in Tennessee than in its main plant in Burghausen.

Wacker still employs about three quarters of its 16,800 workers in Germany, but most of its capital spending has shifted outside the country. Six years ago, the company spent 84 percent of its investment budget at home. Last year that dropped to 37 percent.

And as energy prices rise, the group is eager to slash costs to soften the blow.

In Germany, “we’re cutting corners wherever possible,” said Christian Essers, in charge of the firm’s energy purchases. “But at some point the steps to improve efficiency are getting smaller while the effort to take them gets bigger.”

At Huntsman, which had 2013 revenues of $11.08 billion, executives have begun paring down European production of basic chemicals, which typically have small margins. In the last 18 months it has spent $100 million to close several plants and cut more than 600 jobs in Europe.

Huntsman plans to close a Belgian plant this year that makes chemicals used in detergents and soaps, blaming weak profits.

At its Geismar, Louisiana, plant, Huntsman is spending $78 million to boost production capacity of methylene diphenyl diisocyanate (MDI), a chemical used to make insulations and other common consumer goods. When the upgrade is finished early next year, Geismar will be the largest MDI plant in North America.

That’s a far cry from five years ago, when Geismar was the most expensive MDI plant in Huntsman's portfolio, more expensive than peers in the Netherlands and China. At times Huntsman was running the Geismar plant far below its capacity because of the expense.

Cheap natural gas has changed all that.

"This facility can export product around the world to the backyard of our competitors and still the product would be cheaper, even with shipping," said Huntsman.

At Port Neches, Texas, Huntsman is investing $125 million on an expansion that, when finished in 2015, will make it the world's second-largest producer of ethylene oxide, a chemical crucial in the production of carpet, clothing, soap and scores of other consumer goods.

"We're putting a big bet on the table, and in my opinion this company has yet to take full advantage of the North American shale story," Huntsman told employees at its Geismar site during a town hall meeting in April.

Fracking has allowed the global energy industry to access vast new energy supplies. The process involves injecting sand, water and chemicals at high pressures deep underground to break apart shale rock, allowing oil and natural gas to escape. It first became popular in the United States six years ago and has produced a glut of natural gas in the country, pushing down domestic prices for the fuel by about 61 percent in that timeframe. That’s made it more appealing to use in electricity generation. Now roughly a third of U.S. power plants employ it.

Natural gas is also a key ingredient used to make chemicals, akin to flour in a bakery. Automobile tyres, for instance, are made using styrene, a chemical which is derived from natural gas.

Cheap, plentiful natural gas has helped boost manufacturing's contribution to U.S. Gross Domestic Product by 15 percent since 2008, when fracking started to become popular. Natural gas made a $2.08 trillion contribution to the U.S. manufacturing sector last year alone.

Natural gas also helps plants power themselves through a process known as cogeneration, the use of excess heat to generate power.

Huntsman's Port Neches plant, for instance, produces all of its electricity through cogeneration. Most new European plants, by contrast, don't use cogeneration due to regulations and a lack of cheap natural gas to power generators, analysts say.

Huntsman pays about 80 percent more for electricity in Germany than on the U.S. Gulf Coast, executives said.

"Germany is going to see the (negative) effect of its energy policy three to five years down the road," Huntsman said, explaining that companies will gradually begin to move operations out due to high power prices. "You won't see this hurt the job market right away."


ENERGY SHIFT

Germany's high energy costs are rooted in aggressive new energy standards which began during the last decade and are designed to generate up to 60 percent of the nation's electricity from wind turbines, solar panels and other renewable sources by 2035, up from 27 percent now.

The goal is to make Europe's largest economy a leader in tackling climate change, and to prove to other nations that a radical overhaul of power markets can happen without too much financial pain.

The accident at Japan's Fukushima nuclear plant in 2011 emboldened Berlin in its goals, leading Chancellor Merkel to accelerate a phase-out of nuclear power. Before Fukushima, nuclear supplied about a quarter of Germany's power; by 2022 it will supply none.

This transformation, dubbed the "Energiewende" or energy shift, has made Germany among the most expensive places in the world to purchase electricity. The massive rise is not only due to the payments made for solar power, but all other renewable energy sources, most notably offshore and onshore wind parks, biogas and geothermal plants. Costs are also ballooning due to the country’s power taxes, which account for 14 percent of the total.

Some politicians have begun to worry about the increase. Economy Minister Sigmar Gabriel warned in January that the power price imbalance could cause a "dramatic de-industrialisation" in the country. Officials in his ministry say no issue worries him more than Germany’s creeping loss of competitiveness.

"There is this great confidence that Germany is the bulwark of a sick Europe, but now its industry is concerned about maintaining that strength," said Daniel Yergin, vice chairman of consultancy IHS and author of an influential history of the oil industry.

"Germany faces a double whammy of rising energy costs in Germany and falling energy costs in the United States,” he said.

Fracking has been controversial around the world due to the mixture of chemicals and sand injected deep in the earth. It has been blamed in parts of the United States for water contamination, earthquakes and methane leaks, though direct correlations have been hard to establish. Given these concerns, it has received a cool reception in Europe.

Germany has not tapped its shale gas reserves, deterred by its powerful renewable energy lobby, which has warned of the environmental risks linked to fracking.


ECONOMIC LAWS

Generally speaking, power costs are less important than labour in industry. But Wacker's plant in Burghausen, on Germany’s border with Austria, shows what's at stake.

Founded a hundred years ago, the plant is now one of Germany's biggest industrial hubs, employing about 10,000 staff across an area equal to some 460 soccer fields.

Each day, about 250 trucks and 100 train wagons transport goods to and from the plant, where workers turn methanol, silicon, ethylene and rock salt into more than 3,000 different products.

At Burghausen, Wacker makes polysilicon, one of its most important products and one whose manufacturing process is particularly energy-intensive. At one of the plant’s high-security production sites, several cylinder-shaped ovens quietly hum. A lava-like glow emanates from the small windows. Temperatures of more than 1,000 degrees Celsius (1,832 degrees Fahrenheit) are needed over long periods of time to make polysilicon hyper-pure, as clients demand for solar cells.

Wacker Chemie's bigger rival BASF has found an alternative way to protect itself from rising power prices. BASF SE, the world's largest chemical company, generates much of its power in Germany via cogeneration, but it gets the natural gas needed for the plants from its own natural gas division in the North Sea. That gives it a cost advantage.

The company, however, remains the exception, and the burden for Germany's industrial base will get bigger as more and more renewables come online.

For Wacker, it's an ironic twist of fate. It was a small hydro-plant that helped it expand production in Burghausen after

World War One. A hundred years on, green energy sources are forcing the group to look abroad when it thinks about the future.

"It's the law of a free economy to start curbing production where costs are higher," Essers said.

Source: Reuters