Big risks seen in Putin's idea to beef up Gazprom

- President Vladimir Putin's idea of a massive boost to Gazprom's share capital has taken bankers and the energy industry by surprise, with some fearing it could further strain Russia's sanctions-hit economy and undermine the rouble.

Putin floated the unexpected suggestion on Wednesday, hinting that a recapitalisation of the state gas giant could be funded from Russia's gold and foreign currency reserves. Since then, sources have suggested the money could come from a 'rainy day' fund meant to cover the state pension deficit.

On Friday he elaborated on the idea, saying the state could buy into a possible Gazprom share issue with the reserves, but adding that it was just one of several options.

The Kremlin has declined to give details of the plan, and analysts are questioning not only how it would be implemented, but whether Gazprom actually needs the extra funds at all.

"The Gazprom story is rouble-negative. The use of forex reserves to recapitalise Gazprom will decrease the safety cushion held by the central bank," said Tatiana Orlova, strategist at RBS in London.

Russia's gold and forex reserves, the world's fourth largest, have shrunk by $42 billion since last year to $466.9 billion, mostly due to central bank intervention to curb the rouble's fall since the crisis over Ukraine erupted.

"Reserves are needed to support the rouble. We should not forget about 2008 when oil prices more than halved... I think this is a very tricky path," said Sergei Zhavoronkov of the Moscow-based Gaidar Institute for Economic Policy.

It was against that background that Putin told an energy industry conference that a recapitalisation could help Gazprom pay for the required infrastructure.

Analysts, business and government sources asked by Reuters about the Gazprom idea said a recapitalisation could be carried out via loans from state entities or by government purchases of new shares.

Putin mentioned a possible share issue on Friday.

"If the construction costs roughly $55 billion, maybe more, this is a fail-safe option for investing money," he told journalists when asked about the possible recapitalisation during a visit to France for D-Day commemorations.

But he added: "This is just one of the possible options. There are others."

Under current law, the central bank cannot invest its reserves in equity.

Several sources told Reuters the cash could come from one of Russia's 'rainy day funds' that have amassed windfall oil revenue.

"There is an understanding that either the Reserve Fund or the National Wealth Fund" will be used, said a government source. Both are managed by the Finance Ministry and their foreign currency holdings are part of the central bank's reserves.

But by law, the Reserve Fund can only be used to cover budget deficit or repay national debt - so unless there is a change in legislature, the Wealth Fund seems the more likely option. As of June 1, the fund stood at $87 billion, or 4 percent of Russia's gross domestic product.

The fund, which would have little left if Gazprom received all $55 billion, is essential to finance the Pension Fund deficit, which came to $27 billion last year. The need for state support is expected only to grow as Russia's 143-million population is ageing, and 40 million are pensioners already.

Other analysts, however, pointed to the relative low debt of Gazprom, a company often referred to as Russia's "national heritage", and the lack of apparent obstacles to raise new debt.

Putin suggested this was an option. "There's no doubt that with such a long-term ... contract, Gazprom can easily raise money on the market," he said on Friday.

Furthermore, Russia and China have agreed in principle that Beijing will make a $25 billion pre-payment under their gas deal, according to Alexander Medvedev, chief executive of Gazprom Export, which could be used for new infrastructure.

Putin mentioned this as well, saying that it would "in essence make the project substantially less costly."

"Gazprom could manage without recapitalisation," said Ivan Mazalov, a director at Prosperity Capital Management, a Gazprom shareholder. "There are no grounds for share issue. They have good cash flow and debt is at adequate level."

A banking source told Reuters that Gazprom may do a "small" borrowing operation in Chinese yuan this autumn to test Asian appetite for possible bigger deals.

"It has $20 billion of cash and cash equivalents on its balance sheet, generates $55 billion in operating cash flow and has a 0.9 debt/EBITDA ratio. So the company has enough cash to finance its Eastern programme, we believe," VTB Capital said in a note.

Amid the doubts, confusion and lack of further detail from the government, Merrill Lynch analysts suggested the whole idea may be quietly buried.

Source: Reuters

Downturn in Europe's energy markets sharpest since 2008 crisis

Europe's power, gas and coal markets are in their sharpest downturn since the financial crisis of 2008 and traders say subdued demand and increasing capacity hurt chances of a big rebound any time soon.

The power and coal futures markets are down by around 40 percent since peaking after Japan's Fukushima nuclear meltdown in March 2011 pushed up global energy prices.

Prospects for economic recovery and the closure of unprofitable capacity offer some hope, but analysts say overcapacity continues to weigh on Europe's power market along with weak demand.

"European economic growth should continue to recover in 2014, but the recovery will be uneven and overall electricity consumption growth – if any – looks to be modest," analysts at French Bank Societe Generale said in a research note.

Coal prices have fallen as new supply comes to market from exporters such as Australia, Indonesia, South Africa and Colombia, while demand growth has generally slowed in industrialised and emerging markets.

"Excess supply from producing countries exacerbated by weakened Asian demand have continued to affect current international coal trade price behaviour," Societe Generale said, although it expected prices to pick up next year helped by Chinese and Indian demand.

India's coal demand growth has slowed over the past year as utilities slashed new orders due to weaker industry output and a fall in the rupee currency which made dollar-traded imports more expensive. 

RENEWABLES GROWTH

Another important factor for power, gas and coal price trends is growing renewable energy supply which is being spurred subsidies aimed at making Europe's electricity sector cleaner.

"As renewable energy penetration has got to a more advanced level in the past couple of years, this is having a systematic downward impact on electricity prices, not just daily fluctuations," said Jacopo Moccia of the European Wind Energy Association (EWEA).

Some 23 gigawatts (GW) of wind power capacity was installed across the European Union in 2012/2013, according to the EWEA, which is equivalent to adding more than 20 standard European fossil fuel or nuclear power stations.

Solar power capacity is also expanding, as is coal, with at least half a dozen new coal-fired power stations set to connect to the grid in the next two years. 

GAS IS DIFFERENT

Gas prices are also falling, though they held on for longer, buoyed by unrest in gas-rich North Africa and the Middle East Asian demand for liquefied natural gas (LNG) and, more recently, fears over a Russian supply cut to Ukraine, an important transit route for European Union imports. 
This year the gas futures market has shed almost 15 percent of its value.

A mild winter and spring have helped dent heating demand.

"This price slump is more than a seasonal decline as winter turns to spring. It reflects a North West European gas market that is substantially oversupplied," said consultancy Timera Energy.

"Not only are we back to pre-2000 levels of demand, but we now see no chance of the 500 billion cubic metres (bcm) level being attained even in the case of an extremely cold winter," Societe Generale analysts said.

EU efforts to lower dependence on fossil fuels, especially imported ones, could lower European consumption further towards 2020, they added.

Europe's annual gas demand stands at around 480 bcm, down from a peak of almost 525 bcm in the early 2000s.

Adding to this weakness in the gas market is unusually high supply from Qatar, the world's biggest LNG exporter, which generally ships to Asia.

As in Europe, Asian LNG prices have dropped sharply this year.

"It is not in the Qataris' strategic interest to drive a slump in spot prices in their primary market. So surplus LNG is typically sold into Europe," said Timera Energy.

Source: Reuters

Funds cut bullish gold bets to lowest since mid-January -CFTC

June 6 (Reuters) - Hedge funds and money managers cut their bullish bets in gold futures and options in the week to June 3 to their lowest level since mid-January, according to data from the Commodity Futures Trading Commission on Friday.

The group, also known as managed money, also boosted their net short position in silver for a third week and lowered their net long position in copper to its smallest since early May, the CFTC data showed.

The silver short is the highest in at least a year.

Selected categories from the CFTC weekly Commitment of Traders report:

FUTURES + OPTS Managed Swaps Producer

                       Net     Chg       Net     Chg       Net     Chg                                                                                                                                                                                           
Gold               51,064 -17,329   -66,211   15925   -13,727   2,211
Silver            -10,602  -3,605    11,668    4457   -18,418     545
Copper             16,240  -5,075    46,651    2123   -32,119     344

                     Other         NonReport              Open                                                                                                                                                                                                   
                       Net     Chg       Net     Chg  Interest     Chg                                                                                                                                                                                           
Gold               25,831   1,514     3,042  -2,323   604,437  -5,694
Silver              8,278  -1,123     9,075    -271   203,560   7,974
Copper            -25,785    -318    -4,988   2,925   152,241  -1,740
=====================================================================


FUTURES ONLY      Managed             Swaps          Producer
                       Net     Chg       Net     Chg       Net     Chg                                                                                                                                                                                           
Gold               38,182 -19,387   -49,079  14,662   -14,365     532
Silver             -7,638  -3,412    10,691   4,308   -20,331     282
Copper             16,149  -5,057    46,692   2,122   -31,957     319

                     Other         NonReport              Open                                                                                                                                                                                                   
                       Net     Chg       Net     Chg  Interest     Chg                                                                                                                                                                                           
Gold               20,969   5,147     5,247   -4272   397,695  -1,676
Silver              8,404    -910     8,874    -268   161,062   4,743
Copper            -25,889    -305    -4,995    2921   151,783   3,153
=====================================================================

Wall St Week Ahead-S&P 500 nearing the 2000 summit

Investors have spent several months deciphering the mixed signals from the U.S. economy, and yet the S&P 500 has kept moving higher, slowly but surely, putting it just shy of the 2,000 mark.

With its Friday close, the S&P would need just a 2.5 percent gain to vault the 2K level - something most did not expect during the depths of the Great Recession.

The move has been anything but frantic. The S&P 500 has not made a 1 percent move in a single session in almost two months, and the CBOE Volatility Index <.VIX>, the market's favored gauge of anxiety, fell below 11 on Friday, for its lowest close since 2007.

"That the market is going up in low volatility is good for investor sentiment," said Doug Coté, chief market strategist at Voya Investment Management in New York.

What's unclear is whether the market is starting to become overvalued. The forward P/E ratio of the index is now 15.8 and would rise above 16 if the index hits 2,000 and earnings estimates remain the same. However, Coté said given current low interest rates, that level would still be low.

Still, the economy notably contracted in the first quarter of this year. As always, hope of a takeoff in growth persists among equity managers, boosted on Friday by employment data showing the economy finally recouped all the jobs lost during the Great Recession. It took 77 months to do so, the longest time needed to regain jobs lost in a recession.
"The jobs report was not only strong, but also not too good, so the overheating fear is not there yet," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

"It suggests we’re headed up to 2,000 (on the S&P 500) in the next weeks."

As the market has rallied, some, including several members of the Federal Reserve, have expressed concern that investors are ignoring risks. The cost to protect against market declines, measured in the options market, has been steadily falling.

Some would call that complacency, but the lack of actual volatility is keeping option prices subdued. Realized volatility for the S&P in the last 10 days has been a bit more than 4 percent, which theoretically makes the VIX expensive, not cheap.

"A lot of people who hedged their bets by buying volatility, many did it in the 13 and 13.5 area (on the VIX), so they don't feel a need to readjust their hedges," said J.J. Kinahan, chief derivatives officer at TD Ameritrade in Chicago.

The round 2,000 print will scare some, while others will have no option but to buy in as they chase performance. Paulsen is expecting a slide in stocks in the second half of the year.

"But right now people are more concerned about getting in before it goes up more, rather than waiting for a correction," he said.

Source: Reuters

Streaming Finance Model. Alternative form of mine finance seen boosting tepid M&A.

 A funding technique mostly used to help companies build new mines is moving into the mainstream as a way to pay for acquisitions and could help boost industry deal volumes that have fallen for the past three years.

Stream financing, through which miners get cash upfront in exchange for agreeing to sell a fixed percentage of future production at a discounted set price, was part of Yamana Gold Inc's white-knight bid for a 50 percent stake in fellow Canadian gold miner Osisko Mining Corp in April. Osisko was trying to defend itself against a hostile takeover from gold sector giant Goldcorp Inc .
Yamana's C$930 million ($853 million) bid was partly financed by a C$275 million stream transaction with the Caisse de dépôt et placement du Québec, a large Canadian pension fund. In return for putting up the funds, the Caisse would get 37,500 ounces of gold a year from Osisko's flagship mine at a price equal to 42 percent of the spot gold price.

Although trumped by a higher offer, the bid was one of only a few to use streaming, a decade-old funding concept, as a tool to help pay for acquisitions. At a time when equity and bank funding remains tight for miners after industry profits sank to a decade low last year, streaming companies have big pools of capital that may be tapped to make acquisitions.

In January, Terango Gold Corp , a gold miner listed in Canada and Australia, closed a $135 million stream deal with royalty and streaming company Franco-Nevada Corp to fund the purchase of the rest of a gold property in Senegal that it did not own already, and to repay debt.

"Inevitably, as streaming gains prominence across the sector, it is increasingly being considered as a form of acquisition finance, and will continue to do so," said Lee Downham, the lead partner for Global Mining & Metals Transaction Advisory Services at consulting firm EY.

The volume of mergers and acquisitions in the mining and metals sector globally fell by 30 percent between 2011 and 2013 to 703 deals, according to EY.

Vancouver-based Silver Wheaton, the world's biggest streaming company, is busier on bid financings than it has ever been and has submitted as many as four bids as part of acquisition teams, Chief Executive Officer Randy Smallwood said in an interview.

Smaller streaming company Sandstorm Gold Ltd , also based in Vancouver, is working on "an idea" that would involve a stream being used as acquisition financing, CEO Nolan Watson said.

To be sure, stream-backed acquisition finance will likely remain a niche type of funding mostly for mid-sized miners, which have less access to bank and debt funding than their bigger peers.

Opportunities for large mining companies with credit ratings to use streaming for acquisitions may have been cut after ratings agency Standard & Poor's last year changed how it classifies streaming. That change hasn't been followed by other ratings agencies.

BUCKETS OF CASH

The streaming finance model was developed 10 years ago by Silver Wheaton. Its biggest competitors are Toronto-based Franco-Nevada and Denver-based Royal Gold Inc .

At the end of the first quarter, the trio were sitting on more than $3 billion in capital, built up over a decade-long metals price boom, which ended in 2011.

Streaming companies typically have low operating costs as they often have only have a few dozen employees focused on hunting for financing opportunities.

"We do have significant amounts of capital available to deploy into the marketplace at a time when other capital sources are hard to find," said Royal Gold CEO Tony Jensen.

Shareholders generally want cash to form a "significant" part of an acquisition price and streaming can help to fund this, said John Gravelle, global mining leader at consulting group PwC in Toronto.

Teranga chose to fund its Senegal purchase with a stream as an equity financing to raise cash would have been dilutive to shareholders given the company's depressed share price at the time, said Teranga CEO Richard Young. Taking on more debt could have put its balance sheet at risk.

"The good-housekeeping seal of approval of having a Franco-Nevada do the due diligence and vet your asset... I think is helpful for existing and potential shareholders," Young said.

It's not just buyers who are looking at using streaming finance. Smallwood said large mining companies who want to sell non-core assets have approached Silver Wheaton about adding a stream onto an operation to potentially increase its value for a buyer, and hence its selling price.

Streams are frequently created on by-product metals from a mine, such as silver from a lead-zinc mine, output that investors give little value to. Using this overlooked by-product to secure finance can create value for a potential acquirer.

Streaming also has its critics, who say it is complicated and expensive as forward sales of metals are done at prices that can be 50 percent to 80 percent below spot prices. Unlike debt that can be repaid, streams are long-term arrangements sometimes remaining in place for the life of a mine.

Streaming may not be appropriate to finance all acquisitions, "but clearly it brings certain advantages and in such a difficult M&A market it could be the difference between a deal progressing or not," EY's Downham said.

Source: Reuters

Japan PM pushes GPIF to buy more stocks.

Japanese Prime Minister Shinzo Abe pressed the world's biggest pension fund on Friday to quicken a shift toward investing more in stocks and less in bonds amid market speculation the fund may already have started moving cash into riskier assets.

As Abe seeks to end nearly two decades of deflation, his government is pressing the $1.26 trillion Government Pension Investment Fund to diversify its domestic bond-centric portfolio into assets such as Japanese stocks to generate higher returns for the fast-greying population and boost economic activity.

GPIF's managers will begin an asset-allocation review next week which could easily pump more than $100 billion into the Tokyo stock market - more than the market value of Softbank Corp <9984.T>, Japan's second-largest company by market capitalization.

Global financial markets are keenly watching GPIF's strategy review because the fund - bigger than Mexico's economy

- is a huge investor and a bellwether for other Japanese institutional investors.

"I believe a review in GPIF's allocation must take place as soon as possible," Health Minister Norihisa Tamura told a regular news conference after receiving the instruction from the premier.

Tamura, whose Ministry of Health, Labour and Welfare oversees GPIF, would not say when the review will be completed, but market players had already been expecting results by around autumn, earlier than the initial target of March.

In recent weeks, expectations of fresh GPIF buying have helped Tokyo stocks rebound 8 percent to Friday's two-month high.

Some market participants wonder if GPIF may have begun shifting assets ahead of the formal reallocation, selling Japanese government bonds and buying shares.

Trust banks, for example, which manage much of GPIF's stock portfolio, bought an unusually large 246.6 billion yen of Japanese stocks more than they sold in the last week of May and 177.2 billion yen the previous week, Tokyo Stock Exchange data showed.

This brought their May purchases to 687.3 billion yen, the most since March 2009.

It is unclear how much of this money might be from GPIF, but market players view the trust-bank flows as a possible gauge of the giant fund's moves. Trust banks manage 70 percent of GPIF's passively managed stock portfolio.

Some bond traders, conversely, suspect GPIF sold Japanese government bonds (JGBs) last month, when selling was unusually heavy.

"We detected sales totalling about 100-150 billion yen in a week shortly after the Golden Week holiday" in early May, one JGB dealer said. "Such massive sales emerged in several other days in May."

Another bond trader at a Japanese financial institution said there was selling across all bond maturities, which would be consistent with GPIF shrinking its bond portfolio within its currently mandated limits.

GPIF targets 12 percent of its assets in Japanese stocks, 60 percent domestic bonds, 11 percent foreign bonds, 12 percent foreign stocks and 5 percent short-term assets. The fund has wiggle room of 6 percentage points either side of the core target for domestic stocks and 8 points for JGBs.

GPIF said in January it would employ its asset allocations more flexibly, allowing it avoid having to sell into rallies or buy on declines. 

Yasuhiro Yonezawa, the recently appointed head of GPIF's investment committee, told the Nikkei business daily this week that the fund could raise its investment in domestic stocks to 20 percent.

An increase to 20 percent from 12 percent would represent a shift of 10.8 trillion yen ($105.39 billion) into stocks, more than Softbank's 9.35 trillion yen market capitalisation.

Founded in 2001, GPIF conducted the biggest shake-up of its investment strategy a year ago by revising its allocation targets to raise the core weighting for Japanese stocks while lowering that for domestic bonds.

Source: Reuters

Copper falls to one-month low on Chinese investigation

 Copper dropped to a one-month low on Friday and was on track for its biggest weekly fall in nearly three months as an investigation into metal financing in China prompted speculation that a crackdown could hit trade in the metal.

Benchmark copper on the London Metal Exchange (LME) hit a session low of $6,640 - a level last reached on May 8 - before paring losses to close down 1.39 percent at $6,686 a tonne.

It was on track to post a 2.5 percent drop for the week, the biggest weekly fall since mid-March.

Some copper cargoes held at China's Qingdao Port were being shipped to more regulated LME warehouses, industry sources said, as banks and trading houses took precautions over an investigation into metal financing at the world's seventh-busiest port.

Using collateral such as copper is a popular way to raise finance in credit-strapped China, the world's biggest buyer of the metal, and the probe into metals stocks in Qingdao port has evoked memories of a huge March sell-off on worries about contagion in the country's credit markets.

"The ongoing investigation about the China Qingdao port is still impacting the metal. Once the Chinese situation is clear, we expect the rally to continue for the metal, unless there are some big discrepancies," said Naeem Aslam, chief market analyst at Ava Trade.

Trading sources have said port authorities in Qingdao are conducting the investigation but little has been confirmed. There has also been little sign it has spread to other ports.

"We suspect things will ease when investors have a better idea as to how much metal is involved and what steps the authorities are going to take. Already, we are hearing that metal is moving to regulated exchanges," said INTL FCStone analyst Ed Meir in a note.

Limiting losses in copper, U.S. employers kept up a solid pace of hiring in May, returning employment to its pre-recession level and offering confirmation the world's largest economy has snapped back from a winter slump.

Also helping underpin copper, European stocks rose and bond yields tumbled as investors were buoyed by the European Central Bank's (ECB) promise to douse potential deflation with bundles of cash.

"The ECB's new measures have certainly ignited new hopes of growth in Europe, which may bring more demand for the metal in the future," Aslam said.


FINANCING WORRIES

China will cut the reserve requirement ratio (RRR) further for some banks when appropriate, the bank regulator said, only a week after the government lowered the RRR for the second time in two months to bolster economic growth

Some investors speculate that Chinese authorities would further loosen policy to shore up growth, such as reducing the RRR across the board for all banks.

Still, firms holding copper stocks in bonded warehouses in China sold more metal on fears that they would not be able to obtain inventory financing from banks, pushing down premiums nearly 50 percent this week, traders in Shanghai said.

The copper stocks traded at premiums of $70-$80 a tonne over the cash LME pricethis week, versus about $120-$130 last week, they said.

"You're seeing material being sold for two reasons - because those financing deals are being unwound and people who picked up material purely on a speculative basis will take profit now," one Singapore trader said.

Traders in Shanghai said offers to sell bonded copper had been rising since Wednesday as developments at Qingdao stoked fears among some owners of the stocks that it would be hard to obtain financing from banks in the near term.

In other metals, tin closed down 0.30 percent at $23,175 a tonne, while nickel was last bid down 1.05 percent at $18,850 a tonne as investors continued to take profits after bidding the metal up nearly 40 percent this year on Indonesia's ore export ban.

Refined tin shipments from top exporter Indonesia jumped to 12,778.81 tonnes in May, a trade ministry official said, implying an increase of 145 percent from the previous month and the highest level since December.
Aluminium was last bid up 1.51 percent at $1,878 a tonne, having earlier hit its highest level since late April at $1,875 a tonne, zinc ended up 0.77 percent at $2,104 a tonne, and lead closed little changed, up 0.02 percent at $2,109 a tonne

Source: Reuters

Colombia: Bomb Attack by Guerrillas blamed for shut down of Cano Limon-Covenas oil Pipeline

China gives Africa handy investment lesson

In the last decade nearly a million Chinese citizens have taken up residence in Africa. In his vivid new book, "China's Second Continent," Howard French tells stories of these migrants and the Africans whose lives they affect. The book weaves anecdotes and interviews with historical and geopolitical background to tell a larger tale of the PRC's economic engagement in the continent. The result is an unflattering portrait of China's involvement.

China's push into Africa began in the 1990s when former President Jiang Zemin challenged Chinese enterprises to "go out" in search of opportunity abroad. Since then, the Middle Kingdom's companies have poured into Africa, typically seeking entry into natural resources and related infrastructure development.

Along with the companies came the first wave of Chinese workers, many of whom stayed on. French makes a case that the interactions of these smaller actors will ultimately have a bigger impact on China's future relationship with Africa than Beijing's broader policies.

Many Africans complained to French about poor working conditions in Chinese operations, and about rampant corruption. They clearly believe they are getting the short end of the stick. Putting a human face on these economic forces is a fresh way to explore the consequences of foreign investment. As French shows, however, these individual opinions and experiences are shaped by the actions of larger players.

In recent years, massive resources-for-infrastructure deals have been popping up throughout Africa. In the Democratic Republic of Congo, for example, China negotiated a $6 billion deal that guaranteed it a 20-year supply of copper and cobalt in exchange for building new roads, hospitals, rail lines and more.

The danger is that these transactions can start out, or become, one-sided. Purchasers lock in discounts that protect them from long-term price increases as non-renewable supplies of natural resources are depleted. And Chinese companies often import layers of more senior employees from home, confining Africans to menial jobs and suppressing the spread of knowledge and wealth that might otherwise take place.

To be fair, China's huge enterprises have a tradition of going where Westerners fear to tread – places where political and security risks are high, where investment pays off only in the very long term and, less laudably, where corruption is entrenched. Even if benefits disproportionately go to the Chinese, a portion of the wealth accrues to local economies. There's a more general halo effect, too: A 2011 Organization for Economic Cooperation and Development study suggested that for every 1 percent rise in China's per-capita economic growth, 7.7 million people outside of China were lifted out of poverty.

Beijing's policy of non-intervention in sovereign affairs makes it more welcome than, say, U.S. companies in some countries, while the provision of cash with few humanitarian strings attached leads critics to argue that the Chinese are propping up authoritarian, self-enriching regimes.

French doesn't judge definitively whether China's natural-resource empire-building in Africa is closer to a mutually beneficial model that lifts Africans out of poverty or to an echo of the plunder indulged in by the worst European colonizers of old. What emerges from his compelling book, though, is a picture of African nations desperate for investment, hampered by a lack of options and politically ill-quipped to resist easy money.

The West may now be waking up to Africa's potential – perhaps partly because of China's growing presence there. The African Development Bank, the United Nations and the OECD recently predicted that Africa will receive its highest-ever flow of foreign investment this year. Developed-world companies and investors have suddenly become excited about the possibilities for growth.

For Africans, that's good news. And even if the Chinese investment blueprint leaves a lot to be desired, as French's book suggests, at least it gives governments and businesses a comparison for other offers now that Africa is attracting Western interest too.

Source: Reuters

Facebook is near-universal buyer in virtual world

 In a virtual world, Facebook could justify buying not just WhatsApp but almost every other social networking and chat app on the planet. The company's $160 billion market cap values its 1.3 billion monthly active users at nearly $130 each. Most of its peers look much cheaper. Clamp on an Oculus Rift virtual reality headset – the product of another company just bought by Facebook

– and there's a case for Chief Executive Mark Zuckerberg gobbling them all up.

The acquisitive conglomerates of the past – even Jack Welch's General Electric - used high price-to-earnings multiples to help snap up less generously valued targets whose businesses, with luck, were accorded the higher valuation ratio once rolled up. Web properties like WhatsApp often lack the profit for that numbers game. But value per user offers a way to spin a similar argument.

WhatsApp had about 450 million monthly active users, or MAUs, when Facebook agreed to buy it in February for $19 billion. The price was around $42 per user, a relative steal – and the messaging service is growing at warp speed. On this measure, the WhatsApp price was roughly in line with Instagram, which Zuckerberg bought for $1 billion in 2012 when it had just under 30 million registered users.

The virtual logic could go further. Twitter's $20 billion market cap equates to under $80 per user, while Japan-centric Line – a 200 million registered user business mulling an IPO that could value it at $10 billion or more – looks far cheaper. It's tough to compare Facebook with Tencent <0700.HK>, but with 1.2 billion MAUs between WeChat and its other apps, probably including some double-counting, the $130 billion Chinese giant looks about the only potential match for Zuckerberg's per-user firepower.

The trick, of course, is turning users into profit. In her annual review of internet trends last week, Mary Meeker of Kleiner Perkins Caufield & Byers highlighted the potential, with Google already collecting average revenue per user

(ARPU) of $45 a year against Facebook's $7.24 and Twitter's $3.55 in the first quarter of this year.

But it's far from easy to ratchet revenue up from nothing – essentially the ad-free WhatsApp's starting point – without risking a slowdown in user growth. Facebook's stock gives it a highly valued currency. But in the real world of fickle humans, stiff competition and cash payrolls, Zuckerberg probably knows that turning MAUs into ARPU and then into EPS takes more than virtual math.

- Facebook, whose stock is worth just over $160 billion, had 1.28 billion monthly active users at the end of March. It agreed to acquire WhatsApp, with some 450 million MAUs, in February for $19 billion.

- Boosting the adoption of WhatsApp in the United States and some other markets is proving difficult, co-founder Brian Acton said on June 4, but he added the company will still create substantial revenue for prospective parent Facebook.

- "Growth in the United States is a challenge for us," Acton said after a talk at StartX, an incubator for young companies affiliated with Stanford University. He also cited Japan and Taiwan as countries where "we could have been more successful with a little bit more effort."

- Line, a mainly Japanese messaging site owned by South Korea's Naver <035420.KS>, is preparing an initial public offering in the United States and Tokyo as soon as November, Bloomberg reported on June 3, citing people familiar with the matter. The app, one of the world's largest with some 450 million users, could command a valuation of more than $10 billion, the sources were cited as saying.

Source- Reuters

U.S. jobs' full circle shows slow pace of upturn

 It's a landmark of sorts. All 8.7 million U.S. jobs lost in the Great Recession have finally been replaced. But America needs about the same number again just to allow for population growth since the last employment peak in early 2008. There are shifts from manufacturing to services, too, but overall it's just a much slower upturn than previous examples.

The employment gain in May of 217,000, reported on Friday, was better than the average 173,000 monthly additions since the nadir in February 2010. However the population aged 16 or over is increasing by nearly 200,000 monthly, requiring almost 120,000 jobs to be added each month simply to keep the same proportion of the population in work. Making that adjustment, May's report only brings the United States half way back from the trough, even assuming no further population growth.

The recovery of jobs lost has been exceptionally slow this time around, requiring 76 months compared with 48 months between 2001 and 2005, 32 months between 1990 and 1993, and 28 months from 1981 to 1983. Sluggish recent productivity increases add to the sense that the 21st-century U.S. economy is showing signs of senescence – although mongers of doom have underestimated human ingenuity and resilience before.

Job creation patterns also raise questions for the future. About 1.5 million U.S. jobs have been lost in construction, while a purported manufacturing renaissance has not prevented the disappearance of 1.6 million jobs in the segment. Finance and retailing have lost positions too, as has the information sector despite Silicon Valley's exuberance. The big gainers have been healthcare and social assistance, adding 2.1 million jobs, leisure and hospitality, professional and business services, and education.

An economy of things is thus shifting toward an economy of services. That isn't a new trend, but at a minimum it makes the economy less predictable and makes it likely that reduced participation in the workforce – another concern since the financial crisis – may persist for lack of new jobs that suit people who have lost old ones. The bigger picture, though, is that it's simply a long, sluggish recovery.

- The U.S. economy added 217,000 nonfarm jobs in May, according to the Bureau of Labor Statistics' establishment survey on June 6. The household survey showed the unemployment rate flat at 6.3 percent.

- May's job gains took total nonfarm jobs to 138.5 million, above the previous peak of 138.4 million in January 2008. The trough for jobs was in February 2010, when total nonfarm payrolls fell to 129.7 million.

- America's civilian, noninstitutional population aged 16 and over was 232.6 million in January 2008. In May, it reached 247.6 million.

Source: Reuters

China's Huawei plans major push into Japan by 2017

 China's Huawei Technologies Co Ltd , the world's second-largest telecommunications equipment provider, said on Friday it is planning a big push into corporate Japan as it targets 2017 sales 15 times higher than last year's.

Huawei said its goal is revenues of 50 billion yen ($487.9 million) from sales of IT equipment to Japanese corporate customers in fiscal 2017, using competitive pricing to win orders from large firms.

Even so, this would still account for a fraction of Huawei's total sales. Revenues for 2013 were 239 billion yuan ($38.2 billion), while net profits were 21 billion yuan.

The Asia-Pacific region, which includes Japan, was Huawei's second-smallest market by revenue and second-slowest growth market after America in 2013. Asia Pacific revenues accounted for 16 percent of Huawei's total sales last year.

Source: Reuters

Time to end commodities as finance tools in China: Clyde Russell

Much-needed, end to the practice of using commodities for credit.


The mad dash by banks and traders to see who owns what metal inventories at China's Qingdao port should help bring a swift, and much-needed, end to the practice of using commodities for credit.

For the past few years one of the known unknowns in China's metals markets has been the use of imports as collateral to secure financing for investments in higher yielding assets, such as construction.

This has been most apparent in copper, with iron ore, gold, soybeans and other commodities also affected, with the consequent building up of so-called dark inventories, which are stocks being held for purposes unrelated to supply and demand fundamentals.

It was revealed this week that banks and trading houses are checking their exposure to metal financing at Qingdao, the world's seventh-largest port, amid concern that single cargoes of metal have been used several times to obtain financing.


This means there are potentially cargoes with more than one owner, raising the possibility of defaults on loans and complex legal actions.

The authorities have yet to confirm they are investigating, but it seems more likely than not that any foul play will convince them to crack down further on the shadow banking system.

For physical commodities, the increasing concern over financing means that Chinese markets may be disrupted in the short term, especially if there is distressed selling of stocks.

This may serve to dampen imports for a few months as the inventory overhang is worked through, but thereafter the market should be more reflective of actual supply and demand.

Iron ore would appear to the commodity currently most vulnerable in the short term, given the high inventories at Chinese ports, the softer economic growth being experienced and the weak spot prices.

Inventories at Chinese ports stood at a record 106.9 million tonnes last week, which is roughly 1.4 times the average of monthly imports between January and April this year.

The Asian spot price <.IO62-CNI=SI> has lifted slightly since reaching a 20-month low of $91.80 a tonne, closing on Thursday at $94.30.

However, it is still down almost 30 percent so far this year, which is likely to put pressure on any loans secured by iron ore inventories.


ANY RALLY MAY BE MUTED

The possible unwinding of financing deals, coupled with high port inventories may serve to limit any rebound in iron ore prices that has in past years happened as Chinese steel demand for construction ramps up for the peak building season over summer.

Supply is also increasing, particularly from top exporter Australia, where the capacity additions by major miners BHP Billiton and Rio Tinto are starting to come on stream.

However, further price weakness looks unlikely with both the Singapore Exchange iron ore swaps curve <0#SGXIOS:> and the Dalian Commodity Exchange futures <0#DCIO:> pointing to a steady to slightly bullish outlook.

The backwardation of Dalian futures has eased in the past 10 days, with the second-month contract now at a premium of just 1.7 percent to the six-month, down from a premium of 8.7 percent on May 26.

This has largely been achieved by the shorter-dated future losing value, with the second month contract dropping from 769 yuan ($123.04) a tonne on May 26 to 698 yuan in midday trade on Friday.

The Singapore swaps have moved from mild backwardation on May 26 to extremely mild contango. The six-month swap was at $94.38 a tonne on Friday, a premium of 0.13 percent to the second-month.

While such a tiny premium hardly indicates a rally, the move from backwardation to contango is supportive of the view that prices are near the bottom and may gain in coming weeks.

While market participants tend to focus on possible short-term price moves, the main takeaway from the concern over possible abuses in the shadow banking sector is that the Chinese authorities clarify their position and implement clear regulations.

While the market would be better served by ending the practice altogether, even an unambiguous set of rules and supervision by the authorities would boost confidence among producers, traders and buyers.

Source: Reuters

KKR-led consortium invests in Chinese pork industry

 A private equity consortium led by KKR & Co LP has agreed to pay about $270 million for up to 70 percent of China's COFCO Meat, a source said, targetting consumers willing to pay a premium for high quality, safe pork products.

The deal underscores the trend towards food safety in China, and follows Shuanghui International's <000895.SZ> acquisition last year of U.S. firm Smithfield Foods Inc, the world's largest pork processor, to secure a supply of high quality meat.

The KKR led consortium will aim to grow COFCO Meat's share of China's massive pork market, the source with direct knowledge of the deal said, controlling the production process and promoting its Joyful and Maverick brands as premium products.

The firms announced the deal on Friday without giving financial details. The source could not be named as details of the deal were private.

KKR will invest around $150 million from its second Asia fund in COFCO Meat, a subsidiary of China's state-owned COFCO Group, while Baring Private Equity Asia, Hopu Investments and Boyu Capital will make up the balance, the source said.

Hopu is led by politically connected businessman and ex-Goldman Sachs banker Fang Fenglei, while Boyu was co-founded by Alvin Jiang, the grandson of former China premier Jiang Zemin.

"It is a good thing. It is a kind of trial of mixed ownership, with industry funds participating in the management," said Mao Changqing, chief strategist at CITIC Securities, noting the COFCO Meat had peformed poorly in recent years.

China is the world's top pork producer and consumer, accounting for about 50 pct of global consumption, COFCO Meat said. China's pork consumption is expected to rise to nearly 57 million tonnes by 2020 from 46 mln tonnes in 2012, according to a World Bank report released on Friday.

The high density of pig farms, and poor management associated with small-scale farming has led to food scares in recent years, including the discovery of 16,000 dead pigs in a river in Shanghai.

In response, China has been enforcing stricter standards for hog production, leading to an increase in larger farms.

The KKR-led investment will help COFCO Meat, currently only a small player in the pork industry, build and manage large-scale hog farms and meat processing plants.

The company, established in 2009, currently produces about 900,000 hogs a year, out of the 700 million hogs consumed each year in China, the source said.

It aims to ramp up production by 5 to 6 times in the next 5 to 7 years, focusing on China's eastern seaboard and northern regions, close to dense urban areas where consumers are expected to pay a premium for quality meat, the source added.

Both KKR and Baring had experience in livestock cycles and managing biological assets, said a Hong Kong-based livestock analyst, who declined to be named.

KKR also has previous experience investing in China's food supply chain, through its investment in milk producer China Modern Dairy Holdings Ltd

The investors expect to list COFCO Meat in around five to seven years, the source said.

sOURCE: REUTERS

Jack Ma's Yunfeng to invest in China dairy products company

 Private equity firms Yunfeng Capital, founded by Alibaba Group Holding Ltd's Jack Ma, and CITIC Private Equity Funds Management (CITIC PE) have agreed to invest at least 2 billion yuan ($320 million) in a unit of Inner Mongolia Yili Industrial Group Co Ltd <600887.SS>, the dairy products company said in a statement.

Yunfeng and CITIC PE, a unit of China's CITIC Group Corp [CITIC.UL], will buy 60 percent of Inner Mongolia Yili Livestock Development Co Ltd, Inner Mongolia Yili Industrial said.

The investment is Yunfeng's first in China's food sector, according to S&P's CapitalIQ database. Its past investments are focused in technology, media and telecommunications.

The deal underscores a trend for private equity investors buying into China's food industry as the government works to improve food safety.

Inner Mongolia Yili Industrial is one of China's biggest milk powder makers, and operates in a sector where China has announced moves to support domestic "champions" who will be able to compete against global rivals. 

Milk powder has been a sensitive topic since 2008 when milk tainted with the industrial chemical melamine killed at least six infants and left thousands ill.

CITIC PE is headed by Liu Lefei, the son of politburo member Liu Yunshan.

Yunfeng recently closed a new investment fund after raising $1.1 billion.

Source: Reuters

China regulator says to tighten supervision over shadow banking

 China will further tighten supervision over the shadow banking sector, the country's banking regulator said on Friday, part of an ongoing campaign to control off-balance sheet lending by the country's financial institutions.

However at the same time, the China Banking Regulatory Commission will continue to support buyers of affordable housing, first-time home buyers and small- and medium- sized businesses amid signs of a slowing economy.

"Currently, the economy, broadly speaking, is stable. But downward pressures are relatively significant which is a reflection of ... imperfect financing structures, inefficiencies in finance allocation and use and difficulties with SME (small and medium enterprises) financing," a press release circulated at the CBRC's conference said.

Wang Zhaoxing, a vice president at the China Banking Regulatory Commission, told a news conference that the regulator will improve ways to manage deposit-to-loan ratios, an indicator of a bank's ability to absorb risk, and classify bad loans.

The term shadow banking refers to off-balance sheet lending by banks and any financing provided by a non-bank entity, such as credit guarantee firms, trust companies and other lenders, including pawn shops, for Chinese borrowers.

The government has been trying to rein in the riskiest forms of non-bank credit, which has grown rapidly in China since 2010, afraid that the funds were being used to roll over bad debt and exacerbating asset price bubbles in real estate and industrial ovecapacity.

However, Beijing does not want to eliminate all forms of shadow banking, as they can also play a positive role in allocating and pricing capital, while also helping diversify funding channels in an economy historically over-dependent on bank lending for finance.

Indeed, the growth of total social financing -- a home-grown indicator that measures shadow banking as well as traditional lending -- slowed in April, highlighting the risk that efforts to restrain high-risk lending could have knock-on effects on healthy credit growth if not handled correctly.

The shadow banking sector may be worth up to 27 trillion yuan ($4.32 trillion), a figure accounting for nearly a fifth of the nation's banking sector, according to a recent report by the Chinese Academy of Social Sciences.

The International Monetary Fund said in April that reining in China's shadow banking sector is crucial to global efforts to prevent the risk of a prolonged world slump.

China's central bank pledged in March to improve its monitoring of the shadow banking sector, as part of an effort to make its data on bank credit and interest rates more accurate. 

CBRC will improve credit asset securitization, and plans to maintain steady monetary policy and make minor adjustments as needed, it added. Wang added that the regulator will continue to oversee online financing to ensure it develops in a healthy way.

Source: Reuters

China to boost bank lending power, though IMF says no need

China aims to cut the proportion of cash that commercial banks must keep with the People's Bank of China, the banking regulator said on Friday, signalling further monetary loosening although the IMF and World Bank say the economy is doing fine.

The China Banking Regulator Commission (CBRC) did not say when reductions in banks' reserve requirement ratios would be made, but it is the third time in as many months that Beijing has signalled a cut in RRRs, which would free up more cash for lending needed to shore up growth.

The CBRC did, however, qualify its comments, saying RRR reductions would be available to those banks whose lending to small firms and the farm sector warranted the reward. It did not elaborate.

The central bank also signalled on Friday that it would keep credit supply ample by letting China's main money market rate fall again this week.
Aside from prospects for reductions in banks' RRR, two bankers told Reuters on Friday that the central bank has also lent $16 billion to commercial banks so that they can issue the money to farming projects. [ID:nL3N0ON13U]

Both the IMF and World Bank gave China a thumbs-up in separate reports this week that said the world's second-biggest economy should hit the government's target of around 7.5 percent growth this year, and encouraged the more urgent pursuit of reforms. 

Some economists say the IMF and the World Bank may have been unduly confident about China's near-term growth prospects.

"If the government wants to achieve its 7.5 percent growth target, I don't really agree with the IMF that it can just not do anything," said Julian Evans-Pritchard at Capital Economics in Singapore. "I think the downward pressure on the economy, especially from the property sector, is still quite significant."

Buffeted by unsteady global demand and slowing domestic investment, growth in China's stuttering economy cooled to an 18-month low of 7.4 percent between January and March.

A cool-down in a buoyant property market, which contributes more than 15 percent of China's economic expansion, has fuelled fears that the Chinese economy will face even stronger headwinds in coming months.

That has fed investor speculation that China will take firmer action to boost activity, including lowering the RRR for all banks.

The economy faces relatively big downward pressures even as the growth rate, employment and inflation stayed within reasonable ranges, state radio quoted Premier Li Keqiang as saying.


VIGILANT ABOUT SHADOW BANKS

Banks's RRRs are neither uniform or transparent in China, and members of the ruling Communist Party's politburo have the final say on monetary policy, rather than the central bank or banking regulator.

In April, a week after an announcement by Li, the PBOC reduced the RRR by between 50 and 200 basis points for some banks.

It did not name the banks or detail what their RRRs were after the cut, but the central bank said only some rural banks benefited. Smaller banks tend to have lower RRRs than major banks.

The authorities flagged another cut a week ago, but it is unclear whether that has taken place, though the latest comments from the banking regulator have hardened expectations.

The last time China reduced the RRR for all banks was in May 2012, when a cut of 50 basis points lowered the ratio to a maximum 20 percent for the country's biggest banks.

Authorities have chosen a more nuanced approach this year, opting to selectively relax policy in areas that it believes require assistance, rather than let money seep into speculative or wasteful activities.

The CBRC also said on Friday that it will tighten supervision of the shadow banking sector to crack down on risky lending that occurs outside bank balance sheets. 

The World Bank urged China to speed up fiscal and financial sector reforms to deal with the root cause of its debt problems.

President Xi Jinping said on Friday careful planning of fiscal reforms was needed, the official Xinhua news agency said. 

Source: Reuters