Bankers will blink first in LNG buyer vs supplier showdown: By Clyde Russell

"Who blinks first?" was the question asked by the International Energy Agency (IEA) of the price showdown between Asian buyers of liquefied natural gas (LNG) and their global suppliers.

The IEA was seeking an answer to which group has the most power: the buyers who want lower LNG pricing as well as flexibility and diversity of supply, or the producers who need guaranteed high prices for long-term contracts to justify the capital investment in building new plants.

While the IEA's Medium-term Gas Market Report, released on Tuesday, is probably correct in saying the issue has yet to be decisively settled, the answer is already largely known.

The buyers are likely to win in the short to medium term as the wave of new LNG supply, largely from Australia and the United States, comes to market, thus easing the current tightness and boosting competition among producers.

But buyers are equally likely to lose in the longer term, beyond 2020, as new LNG projects are going to struggle to obtain the necessary financing and simply won't get built.

However, it's neither buyers or suppliers of LNG that will blink first, rather it's bankers and they are already treading cautiously and are unlikely to lend the billions of dollars needed for new projects, unless a high price is guaranteed.

The IEA expects natural gas demand growth in the next five years to be led by Asia, with the region consuming an additional 250 billion cubic metres (bcm) by 2019.

This will be led by China, where demand is expected to double to 315 bcm.

While increased domestic output and pipeline from Russia and central Asia will bolster Chinese supplies, the IEA still expects LNG to make a significant contribution.

About 100 bcm of additional LNG demand will come from Asia in the next five years, a gain equivalent to about a third of the total LNG market of 322 bcm in 2013.

The 100 bcm of additional LNG required can be mostly met from the plants that are already under construction.

Australia's seven LNG projects currently being built will deliver 61.8 million tonnes per annum, equivalent to about 84 bcm, while Cheniere's Sabine Pass, the only U.S. project being built, will add 24.4 bcm.

Other new projects in Russia and Africa will ensure that the LNG market will at worst be balanced and most likely will have a small surplus in the next five years.


NEW APPROVALS NEEDED

However, as the IEA points out in its report, LNG demand won't suddenly stop growing in 2020, and given the lead time of at least five years, projects will have to get approval soon in order to start up from 2020 onwards.

Since the wave of approvals in Australia for current plants, there has been a dearth of new final investment decisions, with the IEA pointing only to Yamal LNG in Russia.

Australian LNG producers have been arguing in recent months that the country will miss out on the next round of approvals unless costs can be cut.

Even if labour and regulatory costs do come down, it's still questionable as to whether greenfield LNG projects can get a green light, and not just in Australia.

The $400 billion deal between Russia and China to supply 38 bcm of natural gas a year has been widely interpreted as setting a new benchmark for what the Asian market can pay for gas.

Although the price wasn't disclosed, sources have put it at around $10 per million British thermal units (mmBtu), close to what Russia receives for supplies sent to Europe.

However, this is well below the LNG price in Asia, with spot currently at $13.10 per mmBtu, a level likely close to the seasonal low. The peak so far in 2014 was $20.50 and an average of around $16-$17 for the year seems likely.

If LNG buyers insist on prices more closely aligned to the Russia-China deal, or to U.S. Henry Hub, they may well be successful in driving costs down as producers compete to sell spot cargoes.

However, any success in lowering LNG costs will merely ensure that new projects don't get built, as a delivered to China price closer to $10 per mmBtu would likely render even the planned plants in the United States uneconomic, despite the lower cost of their shale gas feedstock.

While all LNG buyers say they want lower prices, it may turn out that in the longer term the smart buyers are those that are still prepared to pay more for secure multi-year contracts, especially for deliveries after 2020.

Source: Reuters

U.S. fracking giant goes to China: By John Kemp

 State-of-the-art American fracking technology is coming to China's vast shale deposits as a result of a joint venture between FTS International and Sinopec <600028.SS> announced on Tuesday.

SinoFTS, as the joint venture will be called, marks an important milestone on the road to exporting the North American shale revolution around the world. [ID:nL2N0OR0XC]

FTSI, formerly known as Frac Tech, was one of the first providers more than a decade ago of hydraulic fracturing equipment and services in the Texas Barnett shale, the first shale basin to be developed in the United States.

Since then, the company has grown into the largest supplier of well completion services in U.S. shale formations, including pressure pumping, wireline logging and water management.

FTSI has started to export its expertise around the world through a series of strategic alliances. Since 2012, it has concluded joint ventures with local partners in Brazil as well as Saudi Arabia and Oman.

Other specialist shale drilling and fracking firms are also taking their first steps overseas.

In March, Helmerich & Payne, one of the largest drillers in North America, announced it will transfer 10 of its modern FlexRigs to exploit Argentina’s Vaca Muerta shale under a five-year contract with state-owned YPF, which has teamed up with Chevron (Platts Energy Economist, May 1).

Royal Dutch Shell is developing plans with local partners to produce shale gas from beneath South Africa’s Karoo semi-desert wilderness.

But this is the first time that a specialist hydraulic fracturing firm from North America has entered the Chinese market.


TECHNOLOGY TRANSFER

“SinoFTS will serve both Sinopec and other exploration and production companies throughout China,” FTSI announced.

The joint venture will initially concentrate on Sichuan, China’s most promising shale play, with operations expected to commence there in 2015, but it expects eventually to deploy its fleet of pressure pumping equipment to sedimentary basins throughout China.

The joint venture will be based in Beijing and managed by a team of experts drawn from both countries. It is an important piece of technology and know-how transfer.

“SinoFTS will use new equipment that FTSI will custom-manufacture in the United States, featuring the latest innovations and adapted to the specific requirements of the Chinese environment,” FTSI said in a press release.

“FTSI will leverage insight from its own vertically integrated U.S. operations to evaluate a similar vertical integration model at SinoFTS.”


ENORMOUS GAS POTENTIAL

China has the largest technically recoverable shale resources in the world, according to updated estimates published by the U.S. Energy Information Administration and Advanced Resources International in 2013.

China’s shale gas resources are half as much again as Argentina or Algeria and double the United States. (“Technically recoverable shale oil and shale gas resources: an assessment of 137 shale formations in 41 countries outside the United States” June 2013).

“China has abundant shale gas and shale oil potential in seven prospective basins,” Advanced Resources explains.

More than half the technically recoverable resources lie in the Sichuan basin beneath Sichuan province and the neighbouring provincial-level city of Chongqing in southwestern China.

Sichuan has been producing natural gas from conventional fields for more than 2,000 years and the area has been the heart of China’s small onshore gas industry.

The region has plenty of water for fracking, pipelines to transport the gas away, and well-developed gas markets.

The basin contains at least three separate shale layers which are thought to be prospective for gas at various depths, ranging from the relatively shallow Permian-period Changxing-Longtan formations to the Longmaxi and the ultra-deep Qiongzhusi.

In theory, drillers could target all three layers in the sort of stacked three-for-one play now common in Texas and North Dakota.

Like North Dakota’s Bakken, Sichuan’s shale formations were all deposited on the floor of ancient seas, rather than lakes, which makes them more attractive.

Sichuan’s “marine-deposited, quartz-rich, black shales of Cambrian and Silurian age ... are roughly comparable to North American analogs,” according to Advanced Resources.

All the formations are thermally mature or over-mature, which means the hydrocarbons have been cooked beyond the oil stage and are now likely to yield mostly gas and condensates.

The total organic content is a bit lower than in the most productive North American plays, ranging from 3-4 percent, but coupled with the thermal maturity, there should be plenty of gas locked in the formations. Low clay content makes them good for fracking.


GEOLOGICAL CHALLENGES

Sichuan’s shale formations lie thousands of feet below the surface (up to three miles in some parts of the play) which makes them harder but not impossible to tap.

The real problem is the geology in Sichuan, which is much more complex than in North Dakota’s Bakken or the Eagle Ford and Permian in Texas.

The basin is heavily faulted and in parts seismically active, both which make it much more complex to drill and frack.

The Sichuan earthquake, which occurred on the northwest margin of the basin in 2008, had a magnitude of about 8.0 and killed almost 70,000 people.

Much of the basin has been ruled out for fracking because it is too faulted, too mountainous or contains too much deadly hydrogen sulfide gas (which would be too expensive to remove). In 2003, a sour gas well in a conventional field blew out and killed 223 villagers.

Only the southwest corner is thought to meet the standard criteria for shale development. Even here, drilling and fracking is proving a challenge.

“The Sichuan basin’s considerable structural complexity, with extensive folding and faulting, appears to be a significant risk for shale development,” according to PetroChina.

PetroChina’s first horizontal shale well took 11 months to drill (compared with two weeks in the mature North American plays) and produced a disappointing flow rate.

Shell tested a more successful well nearby but noted the horizontal part kept wandering out of the target formation because of complex faulting.

“Considerable work is needed to define the geological sweet spots, develop the service sector’s capacity to effectively and economically drill and stimulate modern horizontal shale wells, and install the surface infrastructure”, Advanced Resources concluded (“World shale oil and shale gas resources assessment” June 2013).


AMERICAN SHALE EXPERTISE

China’s shale plays are difficult to develop but not hopeless.

Not every shale play is successful, even in the United States. Of the 20 or so potential shale plays which have been explored in the United States, almost all of the oil and gas has come from around half a dozen. It is unlikely that all of China’s seven shale gas basins will be developed successfully in the medium term.

Every shale play presents unique geological challenges that have to be overcome. But that can only be done with a mixture of persistence and experimentation.

It took almost 20 years to perfect the combination of horizontal drilling and hydraulic fracturing that unlocked gas from the Barnett shale and then spread to other North American plays.

The United States has drilled tens of thousands of shale wells so far, while China has drilled fewer than 100 in total. Hundreds more wells need to be drilled to gain experience and improve techniques.

PetroChina and Sinopec, China’s two major oil and gas producers, are already experimenting in the Sichuan basin. International majors including Shell, Chevron and Conoco are also active.

However, FTSI brings the involvement of a specialist fracking firm that has been present since the creation of the shale revolution, which is why it is a major step forward.

No one knows where or when the next breakthrough will occur. China, Argentina and South Africa are all plausible candidates given their large shale gas resources and involvement of international firms.

The timing is impossible to predict. But it seems more likely than not that one of these countries will emerge as a significant producer within the next five years and the prize, in terms of energy security, is enormous.

Source: Reuters

GoPro's IPO to value wearable camera maker at up to $3 bln

GoPro Inc , a maker of wearable sports cameras and accessories, said it expected its initial public offering to be priced at $21-$24 per share, valuing the company at up to $3 billion.

The San Mateo, California-based company's 17.8 million-share IPO will raise $427.2 million at the top end of the range.

GoPro is selling 8.9 million Class A shares in the IPO, while the rest is being offered by selling stockholders.

The company, founded in 2004, sells its products through specialty retailers who target surf, ski and motorsports enthusiasts.

The company's products are endorsed by Olympic gold medal winning snowboarder Shaun White and 11-time world champion surfer Kelly Slater, as well as entertainers Foo Fighters, Jane's Addiction and Alton Brown.

GoPro, whose cameras are used by the Discovery Channel and ESPN, said JP Morgan, Citigroup and Barclays were its lead underwriters for the offering.

The company reported a rise of 8 percent in revenue to $235.7 million for the three months ended March 31. Net income fell to $11 million from $23 million.

GoPro plans to use the proceeds from the offering for debt repayment and investment purposes. The company had about $110.7 million in debt as of March 31.

GoPro's founder and Chief Executive Nicholas Woodman and his family are the company's biggest stockholders, with a total stake of 49 percent.

Another prominent shareholder is Foxteq Holdings Inc, which is ultimately owned by Taiwanese contract manufacturer Hon Hai Precision Industry Co Ltd <2317.TW>.

GoPro hired Tony Bates, former Microsoft Corp executive vice-president of business development, as its president early this month. The company appointed Jack Lazar, a former Qualcomm Inc executive, as its chief financial officer in February.

GoPro plans to list its common stock on the Nasdaq under the symbol "GPRO".

Source: Reuters

U.S. Betting on boring brings stock outperformance in 2014

 Largely ignored during much of last year's 30 percent rally in the Standard & Poor's 500 Index, the stocks leading the U.S. market this year rank among its usually sleepiest components.

The best sector in 2014 is utilities, including Consolidated Edison , about as staid a group as one can get. They're up 14.5 percent on a total return basis this year, compared with 6.4 percent for the S&P 500 as a whole.

What's happening is the opposite of what ordinarily happens in a moving market. It relates to an investing concept known as

"beta," which refers to the amount of risk a particular stock adds to a portfolio. Stocks that tend to rise or fall with the market – but in a more pronounced way – are called "high beta." They generally outperform in up markets and fall the most in down markets.

Best Buy and Priceline, two discretionary stocks that were among the S&P's strongest in 2013, are good examples because their sales and profits rise along with the economy, and they led the way last year.

This year, those stocks are lagging the more boring "low beta" stocks – those that tend to move less dramatically than the market. It's a signal that investors are worried about earnings growth and U.S. economic demand, and don't want to bet as heavily on the types of stocks that generally qualify as high beta – often cyclical names in the technology, discretionary and energy sectors.

To be sure, this may change if growth picks up, but after U.S. gross domestic product contracted in the first quarter for the first time in three years, investors are cautious.

"You see this all over the place -- people are still scared," said Richard Bernstein, CEO of Richard Bernstein Advisors in New York. "They're still more worried about protecting to the downside than accentuating the upside."

That's helped drive equities' rotation into the more defensive, high-dividend paying names, also typically part of the low-beta camp.

So far this year, the 50 stocks in the S&P 500 <.SPX> with the lowest beta scores - a group that includes ConEd and McDonald's - are up on average by 12 percent. Meanwhile, the 50 highest beta stocks, which include Citigroup and Best Buy , are up an average of 7 percent.

In 2013, the 50 highest-beta S&P 500 stocks rose an average of 51.4 percent, compared with 21.3 percent for the 50 lowest-beta stocks.

Investors who have pursued the high-beta contingent have suffered. Among them are hedge funds, which kept a heavy exposure to momentum-type names and the "beta" strategy.

Hedge funds now have 3.8 times more net cyclical exposure to defensive stocks, said Jon Kinderlerer, a managing director at Credit Suisse. In January, that measure was 4.7 times - bets that went sour as the market corrected through the first quarter.

"Once that trade began to break, that also accelerated a rotation back into more value-oriented names and sectors," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

BIGGER DIVIDENDS, HIGHER VALUATIONS

This year's winners deliver nearly twice the dividend yield than their high-beta counterparts. Stocks with the lowest betas have an average dividend yield of 3.1 percent compared with 1.7 percent for high-beta stocks, Thomson Reuters data shows.

What's unusual is that S&P's high-beta stocks are at some of their cheapest valuations ever relative to the S&P 500, said Bernstein, whose data goes back to 1986.

To Bernstein, that's a positive sign for the market's long-term health as it shows investors aren't overpaying for growth. "Find me a market peak where investors have been scared of beta," he said.

He noted, however, that there are plenty of high-beta names among the broader stock universe like the Russell 2000 with rich valuations - companies like Monster Worldwide - which aren't in the S&P 500.

Among stocks with the highest betas in the S&P 500, Seagate Technology has a P/E of just 10.6, while Hartford Financial Services Group has a P/E of 10.9.

The high beta stocks currently have a median P/E of 15.2 versus a median P/E of 16.4 for all of the S&P 500 stocks with beta scores. The low beta names have a median P/E of 16.1.

Growth sectors have rebounded in recent sessions as the earnings outlook has improved, with calendar year 2014 estimates rising to 9.1 percent as of June 6 from 8.7 percent on April 1, according to Thomson Reuters data.

"Everything is hanging on the estimates for growth in the second half. How that plays out will determine whether higher beta or low beta outperform for the year," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
Source: Reuters

Automotive: Lotus celebrates F1 racing with Exige LF1 special edition

In celebration of the 2014 F1 racing season, Lotus has revealed the Exige LF1 special edition. The hot, race-inspired limited-run car gets new black, gold and red livery, recalling Lotus race cars of generations past.

"A blend of heritage and modernity, the Exige LF1 pays homage to the great Lotus Formula 1 cars of yesteryear yet incorporates the palette and sophistication of today’s E22," Lotus explains.

The heritage is injected into the LF1's appearance. Its exterior and interior are dressed in a black-and-gold livery inspired by Lotus race cars from the 1970s and 80s. The glossy black body is accented with red and gold stripes and trim throughout. The car's 17-in front and 18-in rear cast alloy wheels are also gold. LF1 badges appear around the exterior.

The LF1 interior is finished in black leather offset by gold piping and stitching. The headrests and floor mats have embroidered "LF1" logos, while the seat backs have "Lotus F1 Team" embroidery.

The LF1 is built on the Exige S and uses the 345-hp 3.5-liter supercharged V6 engine to throw its 2,593-lb (1,176-kg) two-seat body around the track at speeds up to 170 mph (274 km/h). It hits 62 mph (100 km/h) in a flat 4 seconds. The LF1 comes standard with the Race Pack, which adds Lotus' four-mode Dynamic Performance Management system with launch control. The model also includes two-piece high performance brake discs and high-performance Pirelli P-Zero Trofeo tires.

Lotus is limiting Exige LF1 production to 81 examples in recognition of the marque's 81 Grand Prix victories. As a bit of a spin on the numbered plaques typical of limited edition sports cars, each model's carbon fiber plaque will include a specific Lotus victory, from car number one and Lotus' first 1960 Grand Prix win to car number 81 and Kimi Räikkönen’s win last year.

In addition to securing a potent, limited edition coupe, each buyer of the £62,900 (approx. US$105,400) LF1 will enjoy a Lotus F1 package. That package gives them behind-the-scenes tours of the Lotus Cars factory and Lotus F1 Team headquarters, as well as Lotus gifts and discounts. Lotus says the LF1 will be offered in all its global markets, excluding the United States.

Source: Lotus

Automotive Hydrogen : Hyundai Tuscon Fuel Cell hits Californian roads with free hydrogen

The hydrogen economy sounds great, and has ever since it was first proposed in the 1970s. The tricky bit is how to get there, because without the necessary infrastructure, a fuel cell car that runs on hydrogen is little more than a conversation piece. As Hyundai delivers its first Tucson Fuel Cell CUV to its new lessee, Timothy Bush, the South Korean carmaker unveiled its plan to jump-start the hydrogen car economy by giving the fuel away to its customers.
Based on the petrol-powered Tucson, also called the ix35 outside the US market, the Tucson Fuel Cell, as it says on the tin, uses a fuel cell instead of an internal combustion engine. The fuel cell creates electricity by combining hydrogen and oxygen across a solid catalyst that triggers an electrochemical reaction instead of combustion.

According to Hyundai, the Tucson Fuel Cell has performance comparable to that of an electric vehicle, including the instant torque of the electric car, the lack of noise, and a similar mechanical simplicity because the fuel cell has no moving parts. The Tucson has a range of 265 mi (426 km), refuels in 10 minutes, and the only emissions it produces is water vapor.

This is all well and good, but the problem with the Tucson Fuel Cell car is that currently faced by every other hydrogen powered vehicle – how do you fill up the tank? At least with an electric car, you can always plug it into the mains overnight, but its a rare house that has a hydrogen pipe installed. So, how to make the transition from petrol engined cars to hydrogen while bypassing the electrics? Hyundai’s solution is a special leasing agreement.

Instead of selling the Tucson Fuel Cell outright, Hyundai is providing the cars under a 36-month term lease agreement with US$2,999 down and $499 per month. The clever bit is that Hyundai picks up the cost of the hydrogen fuel and provides it to its customers free of charge as an inducement while the company develops its refueling network. In addition, the lessees will get Hyundai’s At Your Service Valet Maintenance program, where a faulty vehicle is picked up by a Hyundai dealer, who provides a loaner at no charge while repairs are made.

The Hyundai Tucson Fuel Cell is backed by the California Air Resources Board, and has completed two million test miles since 2000, as well as a series of crash and safety tests. Hyundai began mass production in April in South Korea for the US market. One reason that California was selected for the rollout is that the state government is committed to building 100 hydrogen fueling stations. Toward this end, the state is spending $44.5 million to build 28 stations and one mobile refueler, which will bring the number of stations currently in some stage of development to 50.

"Hydrogen-powered fuel cell vehicles represent the next generation of zero-emission vehicle technology, and we’re thrilled to be a leader in offering the mass-produced Tucson Fuel Cell to our first retail customer," says Dave Zuchowski, president and chief executive officer, Hyundai Motor America. "The range and refueling speed of our new Tucson Fuel Cell compares favorably with gasoline vehicles, making them a seamless transition for our customers from traditional gasoline vehicles. We’re sure that fuel cell technology will increase the adoption of zero-emission vehicles, and that everyone will benefit. The commitment of the State of California and their support in creating a hydrogen fueling infrastructure has been an important part of our decision to offer this fuel cell vehicle to the public."

Source: Hyundai

World Soccer Cup Brasil: São Paulo Subway Workers Decide Not to Strike

Subway workers in this World Cup host city backed down from a threatened strike on the opening day of the soccer tournament, removing a cloud from global event whose preparations have been plagued by delays and protests.

Union members voted Wednesday to continue working despite its threats to walk off the job unless 42 co-workers fired this week were reinstated.

São Paulo Metro workers' union President Altino de Melo Prazeres Júnior said members were worried about a potential public backlash. "What weighed on our decision was fatigue and the fear of some workers that people could view our decision as a move to disturb the World Cup," he said.

The union's retreat defuses a potential public-relations nightmare for Brazil, which has struggled with delayed stadiums, unfinished infrastructure and protesters angry over the tournament's cost.

The Metro is a vital means of transport in this traffic-choked city and a means to shuttle thousands of World Cup visitors to São Paulo's main stadium, about 13 miles from the center. The tournament begins on Thursday and lasts a month.

Even as that strike was called off, municipal airport workers in Rio de Janeiro declared a 24-hour strike for Thursday, demanding higher salaries and a "Cup bonus." But participation in that strike will be limited to 20% of workers, reported newspaper O Globo, citing a union official, so is unlikely to disrupt service.

Abe Looks for Speedy Clearance of Japan Defense Change

            The WSJ reports,"ruling-coalition officials said Mr. Abe wanted his cabinet to change the interpretation of the nation's pacifist constitution by next week, an ambitious timetable that is causing friction with the coalition's junior partner. The change would permit Japan to exercise the right of "collective self-defense," meaning its military, or Self-Defense Forces, could come to the defense of allies like the U.S. even if Japan itself wasn't attacked.

Speaking during parliament's question time Wednesday, the prime minister reiterated his aim of playing a leading regional role in countering China".

Mr. Abe cited Beijing's territorial ambitions in the South China Sea and North Korea's nuclear threat in saying that Japan's military had to enhance deterrence in the face of an "increasingly severe security situation in the Asia-Pacific."

Ruling-party lawmakers crowded into the parliament committee room and cheered Mr. Abe as he raised his voice to hail the patriotism of the nation's soldiers. "Even at this very moment, there are SDF troops in the southwestern seas and airspace who risk their own safety to protect Japanese lives," he said.

His emotional appeal, however, was met with sarcastic chiding from Banri Kaieda, leader of the opposition Democratic Party of Japan, who said the prime minister was "getting drunk on his own speech."

Mr. Kaieda said Mr. Abe was himself "a big risk for Japan's security," pointing to his visit in December to Yasukuni Shrine, the Tokyo site that honors Japan's war dead including some war criminals. The visit drew a rare admonition from Washington and infuriated China and South Korea, which consider the shrine a symbol of Japan's past militarism.

Mr. Abe's strong poll ratings and the dominant position of his ruling Liberal Democratic Party are likely to allow the constitutional reinterpretation to go forward next week if he wants it.

The move to collective self-defense doesn't require parliamentary approval.

But the quick timetable is facing resistance from the LDP's pacifist-leaning junior coalition partner, New Komeito, while the public also appears wary of moving ahead now.

New Komeito leaders have said they want to discuss in more detail how the military would participate in overseas conflicts.

They say Japan's constitution, under the current decades-old interpretation, already permits its military to come to the aid of the U.S. forces in the event of an attack in the region.

A poll taken by Japan's national broadcaster NHK over the weekend showed opinion was split evenly on whether Japan should exercise its right to collective self-defense, with many respondents unsure. Even some on the right are skeptical of Mr. Abe's approach, saying it would be better to revise the constitution itself rather than the interpretation of it. That could take years, however.

Since taking office in December 2012, Mr. Abe has tried to step up Japan's role in the region to make Japan a more-equal partner with the U.S.

But China, which was invaded by Japan in the 1930s, has warned that such moves could spell a return of Japan's militarism, and it has said the U.S.-Japan alliance is improperly targeting China.

The recent standoff between China and Vietnam over an oil rig China placed in disputed parts of the South China Sea has in turn fueled worries in Japan about its own territorial feud with Beijing over a tiny group of islands in the East China Sea.

On Wednesday, Defense Minister Itsunori Onodera said Chinese fighter jets flew perilously close to Japanese SDF aircraft in the East China Sea, and he said Tokyo filed an official complaint to Beijing through diplomatic channels. The incident follows similar encounters in May that led each side to protest to the other. As of Wednesday evening, Beijing hadn't released an official response to Japan's latest assertion.

China: 'Targeted moves' will help secure yearly goal

Premier Li Keqiang said China will target "prominent problems" in the economy and precisely and appropriately fine-tune policies in a timely manner to keep it running within a reasonable range.

An optimal combination of policy tools will be used in macroeconomic control, and China will focus more on "targeted adjustment" — instead of big stimulus — to achieve the annual growth target of about 7.5 percent, he said on Tuesday.

"China's economy, after the high-speed expansion of three decades, still has the conditions and the ability to leap over the middle-income trap and keep the economy moving at an intermediate and high speed for a longer period of time," he said.

Li made the remarks when addressing the biennial conference of the country's two top research bodies, the Chinese Academy of Sciences and Chinese Academy of Engineering.

Li said China's economic situation is "generally stable" and major economic indicators are within the reasonable range. "Positive signs are showing in economic restructuring and market expectation is rising."

China must have "firm confidence and composure" to maintain the current macroeconomic stance, using a combination of proactive fiscal policy and prudent monetary policy, he stressed.

Li said the country still has great potential for development and strong resilience, considering the people's longing for a better life, an ever-growing domestic market and industrialization.

Liu Ligang, chief Greater China economist at Australia & New Zealand Banking Group in Hong Kong, told Bloomberg News that the so-called mini-stimulus is helping stabilize the economy.

Lu Ting, head of Greater China economics at Bank of America Corp in Hong Kong, said the government is likely to "step up targeted measures", such as the reserve-ratio cut for qualified banks, while resisting calls for bigger steps including cutting benchmark interest rates and reserve ratios for all banks.

China will increase the strength and frequency of policy fine-tuning to lend more support to rural sector and small firms, Xinhua News Agency reported.

New Lufthansa chief starts with crash landing

Lufthansa’s problems go much deeper than the 2014 revenue miss that just forced the group to issue a profit warning. The German airline’s ambitious medium-term cost-cutting programme “Score” also lies in tatters. So does Lufthansa’s credibility with investors, which sent the share down 14 percent on June 11.

New Chief Executive Carsten Spohr, who took on his job only six weeks ago, could not have had a worse start. He cannot even blame his predecessor Christoph Franz: Spohr was previously the boss of Lufthansa’s passenger business division, which is the main cause of trouble.

The company points to weaker-than-expected revenue on long-haul routes, caused by price pressure and increased competition from Gulf carriers. As a high-cost airline, Lufthansa is undoubtedly challenged. But that hasn’t changed since the group reiterated its 2014 guidance five weeks ago.

Even more unsettling is that the carrier’s margin-rich premium seats are said to be particularly affected. In 2013, Lufthansa invested millions of euros upgrading its business class. It also just launched a premium economy class. Headaches in the premium segment are thus deeply worrying.

In any case, Spohr will now have to double down on cost-cutting. Even the new, 2 billion euro 2015 profit target – down 25 percent from the previous one - is contingent on additional measures.

The airline’s overly ambitious capital expenditure outlook will no doubt need pruning. Lufthansa had grandiose plans to order more than 250 new aircrafts with a combined list price of 32 billion euros – a spending spree it can ill afford. This puts Spohr in a tangle. The long-term strategy hinges on bigger and more fuel-efficient planes. It will need a fundamental rethink if the airline has to skimp on investment.

The biggest burden is that the latest profit warning confirms once again Lufthansa’s long-standing reputation as over-promising and under-delivering on its targets. The failed Score programme was meant to end that unimpressive track record. After Spohr’s crash landing, Lufthansa needs yet another new start. It won’t be the easiest.
CONTEXT NEWS

- Deutsche Lufthansa AG said on June 11 it was lowering its earnings forecasts, sending shares down more than 14 percent to 17.04 euros. The German airline now expects a 2014 operating profit of 1 billion euros, down from its previous forecast of 1.3 to 1.5 billion.

- Lufthansa also revised its medium-term target of its efficiency programme Score, which was supposed to lift operating profit to 2.65 billion euros next year. It said the new 2 billion euro target is contingent on the implementation of additional cost-cutting measures.

- The carrier said its American and European business has suffered from increased competition, which led to falling prices. “We will therefore noticeably reduce our capacities during the winter timetable period,” Chief Financial Officer Simone Menne said. Strong capacity growth by state-owned Gulf carriers was a major concern, she added.

Source: Reuters

Emerging markets slow even with tide on their side

The tide was against emerging markets last year, and this year their growth is down. And yet much has turned in favour of developing economies. Amid the remarkable global market calm, fresh flows of liquidity are heading their way. Emerging markets' current weak growth therefore bodes ill for the next period of genuine tighter financial conditions.

The overall picture of the global economy is far from brilliant, as the World Bank’s latest global economic outlook makes clear. It is awash with downgrades from the January edition. The forecast for global GDP growth in 2014 has been cut from 3.2 to 2.8 percent. Developing economies' GDP growth was sliced from 5.3 to 4.8 percent. The World Bank expects them to enjoy a 2015 strengthening, to 5.4 percent. That may be too optimistic.

Many factors lie behind the loss of momentum in emerging economies. In East Asia the bank speaks of an end to “the years of credit-fuelled expansion.” But a single word a year ago from Ben Bernanke has certainly been influential. When the then chairman of the U.S. Federal Reserve mentioned tapering of Fed asset purchases, the tide of capital that had been flowing towards emerging economies started heading out. Currencies fell, asset markets tumbled and commodity prices also slid, harming exports.

This year, however, emerging economies have benefitted from the curious ultra-calm in global markets. The MSCI emerging markets equity index has risen to its highest since May 2013. Emerging market bonds have also been on the up. And commodity prices have risen by 9 percent so far in 2014, according to the Thomson Reuters CRB index, bolstering export earnings.

In other words, most of the tightening emerging economies suffered last year has been reversed. And yet growth remains soft.

The expected pickup in developed economies will help. But there is still much for emerging economies to fear. The continuing risk is that global liquidity tightens much more significantly than last year.

A word from Bernanke was bad. Investors are not giving much thought to what might happen when these nations have to face the reality of higher global rates.
Source: Reuters

China to strengthen support for 5G research

China's Ministry of Industry and Information Technology (MIIT) will step up support for research into next-generation mobile telecom networks, or 5G, an official said on Wednesday.

Liu Lihua, vice minister of the MIIT, made the announcement at a global forum on mobile telecommunications in Shanghai.

The ministry will work to create a good environment for firms to invest in, develop and innovate with mobile telecom technologies and support their efforts to boost technological research and increase capital injection, especially in 5G, he added, without giving more details.

Faster and more stable networks brought along by 4G technologies have sped up mobile telecom networks' integration with the sectors of transport, logistics, education and medical services.

There is great demand for mobile telecom technologies in China and the world, pointing to enormous market potential for innovations in mobile telecom technologies, according to Liu.

More than 80 percent of China's netizens surf the Internet through mobile phones, the official added.

Source: Reuters

China's military strongly dissatisfied with U.S. accusations

China's military on Wednesday expressed strong discontent and firm opposition to U.S. accusations about its growing military clout and transparency.

Geng Yansheng, Ministry of National Defense spokesman, said U.S. accusations of China's military threat and lack of transparency were "cliches". He also blamed the United States for "sending wrong signals in territorial disputes" in the Asia-Pacific region, hence stirring up trouble.

Geng was commenting on a U.S. annual report on China's military development and security, which was released last week.

He said the U.S. was using double standards.

The U.S. has spent several times more on its military than China has on its armed forces in recent years, strived to develop state-of-the-art weaponry, organized aggressive forces to engage in cyber attacks and sought to deploy a global network of its anti-missile system, Geng said.

Americans, who still cling to the cold war mentality, pursue unilateral security and have a zero-sum mentality in their view of China's national defense and military modernization, which is a bullying act, he said.

Geng also questioned U.S. sincerity to build a new type of major-country relationship and new model of military-to-military relations. The U.S. has previously pledged to increase dialogue and cooperation with the Chinese military.

U.S. government and military officers have publicly launched accusations against China, and the U.S. Justice Department fabricated information and indicted Chinese military officers, and the U.S. military has spied on China, which has severely undermined mutual trust, the spokesman said.

Geng urged the U.S to show more sincerity and take practical actions to boost the healthy and steady development of military relations between the two countries.

Source: Xinhua

China ramps up spending to spur economy, c.bank sees stable policy

China's central bank said on Wednesday it will keep monetary policy steady in 2014, even as the finance ministry said fiscal spending had surged nearly 25 percent in May from a year earlier, highlighting government efforts to energise the slowing economy.

Total fiscal spending in May rose to 1.3 trillion yuan ($208.75 billion), quickening sharply from a 9.6 percent rise in the first four months of the year.

China's cabinet also revealed on Wednesday that it was now planning more big infrastructure projects, including highways, train networks and oil and gas distribution and storage facilities, as part of its efforts to keep the economy growing at a stable rate. [ID:nL4N0OS2RU]

The higher spending comes after the world's second-biggest economy got off to a soft start to the year, growing at its slowest pace in 18 months in the first quarter.

The economy has since shown some signs of stabilising, but the recovery appears patchy and analysts do not rule out further stimulus measures, especially if the cooling property market starts to deteriorate rapidly.

Fiscal revenues rose 7.2 percent in May from the same month last year, slowing from a 9.2 percent rise in April. The ministry attributed the slower revenue growth in May to the slowdown in the economy and falling property transactions.

China's central bank has been describing its policy stance as "prudent" in recent years, even when it is clearly loosening or tightening the policy reins. At the moment, for instance, authorities are in a gentle easing mode to counter the cooldown in the economy.

The People's Bank of China said the outlook for external demand was uncertain, capital flows were volatile, and financial risks were weighing on the economy.

The PBOC's pursuit of stable monetary policy contrasts strongly with the finance ministry's mini-stimulus, which saw total fiscal spending rise 24.6 percent to 1.3 trillion yuan ($208.75 billion) in May as it brought forward spending sharply, from growth of 9.6 percent in the first four months of the year.

Stimulus measures taken so far by Beijing include speeding up the construction of railway projects and public housing, as well as orders to local governments to fast-forward their fiscal spending to prime the economy for growth. [ID:nB9N0N005W]

Central government spending rose 15.8 percent in May from a year earlier while local government expenditure soared 26.9 percent, the finance ministry said.

The PBOC said on Monday it would lower the reserve requirement ratio - the level of reserves banks must hold - for those banks that have sizeable loans to the farming sector and small and medium-sized firms. This is the second reduction following a cut in April aimed at rural banks. [ID:nL4N0OQ2SZ]

To re-orient China's economy away from exports and investment and towards domestic consumption, China will also speed up interest rate liberalisation this year and work on introducing deposit insurance.

Two separate programmes that allow foreigners to invest in Chinese capital markets and Chinese investors to invest overseas will also be expanded.

The two schemes are known as qualified foreign institutional investor, or QFII, and qualified domestic institutional investor, or QDII, respectively.

Chinese leaders have ruled out any large stimulus as the country is still nursing the hangover from the 4 trillion yuan ($640 billion) stimulus implemented during the global crisis in 2008-09, which took local governments deep into debt.

Economic data for May released so far indicate the economy remains wobbly, with export growth picking up but imports unexpectedly falling.

Inflation picked up to a four-month high, easing concerns the country was slipping into a deflationary trend but remaining well below the government's comfort zone, giving Beijing ample room to step up policy support if necessary.

The yuan has also appeared to stabilise after a sharp slide earlier in the year, though traders are not sure if the PBOC is comfortable enough with the export recovery to allow the currency to start appreciating again.

Source: Reuters

WSJ: Islamist Insurgents Advance Toward Baghdad

        The WSJ reports,"islamist militants swept out of northern Iraq Wednesday to seize their second city in two days, threatening Baghdad and pushing the country's besieged government to signal it would allow U.S. airstrikes to beat back the advance".

"An alarmed Iraqi government also asked the U.S. to accelerate delivery of pledged military support, particularly Apache helicopters, F-16 fighters and surveillance equipment, to help push back fighters from the Islamic State of Iraq and al-Sham, an al Qaeda offshoot known as ISIS. The U.S. said it has been expediting shipments of military hardware to the Iraqis all year".

Iraqi Foreign Minister Hoshyar Zebari said his country faces a "mortal threat" from the ISIS insurgents.

"Officials declined to say whether the U.S. would consider conducting airstrikes with drones or manned aircraft. The Obama administration is considering a number of options, according to a senior U.S. official who added that no decisions have been made.

"White House National Security Council spokeswoman Bernadette Meehan said the White House won't discuss diplomatic discussions with Baghdad but said the government of Iraq "has made clear that they welcome our support in their effort to confront" ISIS".

ISIS overran Tikrit, the birthplace of former dictator Saddam Hussein, on Wednesday after capturing Iraq's second-largest city, Mosul, a day earlier. The takeover of the city of 250,000 about 85 miles north of Baghdad was confirmed by Ali Al Hamdani, a senior official in Salah Al Din province, where the city is located. The insurgents freed hundreds of prisoners from the city's jails.

By Wednesday evening, there were reports of fighting between Iraqi security forces and Islamists on the outskirts of Samarra, a city further south and less than 80 miles north of the capital.

The conquests over the past two days were by far the most significant by the Sunni group, which has also taken control of parts of neighboring Syria during the civil war there.

ISIS overran Tikrit, the birthplace of former dictator Saddam Hussein, on Wednesday after capturing Iraq's second-largest city, Mosul, a day earlier. The takeover of the city of 250,000 about 85 miles north of Baghdad was confirmed by Ali Al Hamdani, a senior official in Salah Al Din province, where the city is located. The insurgents freed hundreds of prisoners from the city's jails.

By Wednesday evening, there were reports of fighting between Iraqi security forces and Islamists on the outskirts of Samarra, a city further south and less than 80 miles north of the capital.

The conquests over the past two days were by far the most significant by the Sunni group, which has also taken control of parts of neighboring Syria during the civil war there.

ISIS aims to set up a state in a continuous stretch of territory from Sunni-dominated Anbar province in Iraq eastward to Raqqa province in northeast Syria.

Members of Shiite militias in Iraq, many of which are funded and trained by the neighboring Iranian government, said they were standing at the ready to defend Baghdad. One Shiite militiaman who asked not to be named said he knew of groups raiding homes throughout Baghdad, where ISIS militants were thought to be active.

The Iraqi security forces were trying to rebuild their ranks after hundreds of soldiers and police deserted their posts as the rebels advanced on Mosul. Those who returned to their barracks on Wednesday have been offered amnesty from prosecution, said security officials in the provinces of Kirkuk and Salah Al Din.

During the day's advance, the Islamists took the oil refinery city of Bayji, though security officials there said the vital refinery in the city remained under the protection of some 250 government troops.

There is growing international alarm over the rapid advances of the militant group. Adding to that alarm, militants stormed the Turkish consulate in the northern city of Mosul and took 49 staff hostage including the consul-general, the Turkish foreign ministry said.

The International Organization of Migration estimated that at least 500,000 people have fled Mosul and the surrounding province of Nineveh out of fear of escalating violence. Most went to nearby Kurdistan, a semiautonomous region of northern Iraq.

ISIS is capitalizing on a wave of Sunni discontent with the Shiite-dominated governments that have ruled Iraq since Saddam's ouster in 2003. Tikrit and Mosul are the provincial capitals of two of the three Iraqi provinces dominated by the country's Sunni Muslim minority.

On their first full day of control in Mosul, insurgents took up posts guarding banks and shops on Wednesday and were policing lines at fuel stations, witnesses said. They also circulated through city neighborhoods to help distribute fuel for generators, a main source of electricity.

The rebels were employing the same strategy they have used in Fallujah, a Sunni-majority city 36 miles west of Baghdad, which they have ruled since early January. Instead of enforcing strict Islamic law by policing the wearing of veils by women and chastising cigarette smokers, they sought to restore an air of normalcy.