OIL: Mexico allows private sector back into oil production
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MINING: Mining companies agree new royalty system
On 16 August mining companies and the Peruvian government said that they had agreed a new royalty system. The new system is more what the companies wanted than the government did. In the new system, the government will charge royalties on operating profits, rather than easier-to-monitor sales. Currently, mining companies in Peru pay royalties of between 1% and 3% on their sales. The new royalty figure has yet to be published.
Mining companies say that the change will boost investment: since charging a royalty on sales would make a lot of marginal investments unprofitable for the companies.
The Peruvian government may also levy a windfall tax, when metal prices boom and mining companies’ operating profits soar, according to Ricardo Giesecke, the minister of the environment.
What the government seems to have got in return for the switch to operating profits from sales is a significant increase in its revenue inflow. The risk is that if metal prices fall, however, the government’s take will also come down, along with the companies’ operating profits.
In Chile, mining companies pay a royalty of between 4% and 9% of their operating profits, after a new agreement at the end of 2010.
The big mining companies operating or with projects in Peru are: Xstrata, BHP Billiton, Anglo America, Barrick Gold and Southern Peru Copper, which is now part of Grupo México.
Chile: On 5 August striking miners at La Escondida, the world’s biggest copper mine, ended their two-week long strike. The miners accepted a management offer of a special production bonus for 2010, a year in which the mine had record earnings, a spokesman for the mine's largest union said. The strikers accepted a Ch$2.6m (about US$6,000) bonus, about half what they were initially demanding. La Escondida reported US$4.3bn in earnings in 2010, a 35% increase over the previous year.
The mine produces about seven percent of the world’s copper. Chile accounts for a third of the world's production of the metal, which has soared in price along with other commodities.
The strikers blinked before BHP-Billiton, the operators of La Escondida. The strike had driven the copper price up towards new highs.
Support for the strike has been strong and at the end of July La Escondida was forced to declare ‘Force Majeure’ because it was unable to meet its supply commitments. The company’s production is down by 33,000 tonnes (t), worth US$330m.
The strikers dropped their demand for a compensation bonus even though the mine is now working thinner ores and thus it is producing less copper. Originally, the strikers wanted a bonus of US$11,000.
The company was unwilling to give a bigger bonus than Ch$2.6m (even though this would cost only US$20m over a year) because of the precedent it would set.
The company expects production to get back to normal pretty quickly.Codelco: Output at the state-owned copper company in 2011 is likely to be less than the 1.7m t originally forecast, but the company’s profits are likely to be higher than the US$5.8bn the company made in 2010 because of higher copper prices. Codelco expects prices, and Chinese demand, for copper to remain at their current (early August) levels for the second half of 2011.
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AGRIBUSINESS: Mozambique courts Brazilians
The government of Mozambique has offered large areas of the country to Brazilian farmers to grow soya, maize and cotton. The statement came from the Mozambique agriculture minister, José Pacheco.
Brazil has three advantages for Mozambique: the first is that both Mozambiqueans and Brazilians speak Portuguese; the second is that Brazil has successfully developed over the past 30 years the Cerrado (an area of the outer-Amazon basin), which Pacheco claims physically resembles land in Mozambique. The third reason is that Brazilians are more in tune with the rhythm of life in Mozambique than the Chinese who are also seeking agricultural land in Africa and Latin America.
Pacheco said that Mozambique had offered Brazil 60,000 km² of land in the north of the country for US$13 a hectare (0.01 km² per hectare) a year for a term of 50 years. The only other demand the Mozambique government is making is that 90% of the labour employed in developing the land should be from Mozambique.
Mozambique is also offering Brazilian agribusiness groups tax breaks on the importation of machinery and equipment.
Carlos Ernesto Augustín, the president of the Mato Grosso cotton growers’ association, said that Mozambiquean land was very similar to a lot of the interior of Brazil. He added that another advantage the African country offered was a simpler system for environmental permits. Augustín said that it was now all but impossible to get permission to clear new land in Mato Grosso and thus open it up for agricultural development. However, developing northern Mozambique comes with its own constraints; due to poor infrastructure in the north of the country, any agribusiness investment would require an expansive long-term investment in infrastructure. Whilst the soil types are claimed to be similar, the climates are in fact quite different: Brazil has four seasons; Mozambique has two.
Brazil expects that around 40 agribusinessmen will visit Mozambique in September to set up in the northern regions of Niassa, Cabo Delgado, Nampula and Zambezia.
Bananas: On 18 August Ecuador declared a state of emergency in the banana market because of a glut. International consumption and purchasing of bananas is falling away, partly because of the global economic crisis, and this is having major affect on producers in Ecuador. Ecuador is the world’s biggest banana exporter. Bananas are the country’s second biggest export earner after crude oil.
The agriculture minister, Stanley Vera, said that the initial state of emergency will run for five weeks. What the government intends to do is spend U$15m on buying excess bananas from the domestic market. The government calculates that this should be enough to take between 1m and 1.5m (22kg) boxes of bananas off the market. This is equivalent to about 0.7% of the country’s total annual output. The fruit will probably be destroyed.
Banana growers have been complaining that the weakness of the market had forced them to sell their bananas for as little as US$2 a box, when the official intervention price is US$5.5.
Vera said that the idea was that by restricting supply the country could push up the international price. The big risk is that rival banana producers, from Central America, will step into the space created by the government’s action.
Eduardo Ledesma, the executive director of the Asociación de Exportadores de Banano del Ecuador (AEBE), said that he also wanted the government to help local producers break into new markets such as Canada, Switzerland and Turkey. -
VEHICLES: The contrast between Brazil and Mexico
Brazil’s car market is booming thanks to strong domestic demand and, more surprisingly given the strength of the Real, rising exports. Mexico’s car market still depends on exports to the US, where the economy is starting to toil and there are signs that the current recovery may be petering out.
Sales of new cars are a good proxy for the state of consumer demand. In Brazil the 8.6% increase in the sale of new vehicles (cars, pick-ups and trucks) in the first seven months of 2011 (compared with the same period of 2010) shows that Brazilians are still pretty confident about their future. What makes the stats from Brazil’s motor industry so illuminating is that they also show that the industry has increased exports by almost 25% this year, despite the strength of the Real.
In the first seven months domestic sales of new vehicles came to 2.04m units, slightly ahead of domestic production of 2.02m units (figures from the Associação Nacional dos Fabricantes de Veículos Automotores, Anfavea). Sales of new passenger cars were actually down by 10,000 units in the first seven months of the year, compared with the same period of 2010, but this fall was made up by increased sale of pick-ups (up 15%) and mid-sized trucks (up 27%). This suggests that businesses are more confident than households.
In Mexico, the year-on-year figures look good. In the first seven months of 2011, sales of cars and light vans came to 481,859 which were 11.3% up on the first seven months of 2010. The figure is, however, 20% below domestic sales level for the first seven months of the pre-Crisis year of 2008. In Brazil, however domestic sales are well ahead of 2008, as are numbers of licensed vehicles. In 2008, 2.4m new vehicles were licensed; in the 12 months from August 2010 to July 2011, 3.68m vehicles were licensed.
Mexico’s vehicle industry depends on exports to the US. Production in the first seven months came to 1.438m vehicles which was 14% up on the same period of 2010, and 20% up on the same period of 2008. Exports are currently running at 83% of production. In the first seven months of 2011, 1.197m vehicles were shipped out, 16% more than for the same period of 2010 and 25% more than for the same period of 2008.
What is fascinating is that the value of Brazil’s exports of vehicles and agricultural machinery in the first seven months of 2011 was up by 24% at US$8.5bn. This suggests that the Brazilian motor industry is beginning to overcome the challenge of an overvalued currency. The big increases in exports by volume have been in pick-ups (where exports are up by 19% in the first seven months of 2011 at 63,344) and heavy goods vehicles (HGVs) where exports are up by 46% at 5,694.
To be fair, imports of passenger cars in the first seven months of 2011 were also up, by 46% at 308,881. This increase was only slightly more than the increase in the imports of trucks which was up by 39%. As a proportion of total new cars sold, imports now account for almost 23%, up from 15% in 2009.
At the beginning of August BMW, a German manufacturer of luxury cars, said that it was considering building Brazilian plant to service South American demand. Currently BMW has only one factory in the Americas, in South Carolina, in the US. Such is the worldwide demand for BMWs that the company is currently building 2% more cars than its factories were designed to produce
What is interesting about the Mexican figures is that Mexican-built vehicles are taking a bigger slice of a shrinking US pie. The overall US market for vehicle sales in the first seven months of 2011 stood at 7.36m units, 11% up on the same period of 2010 but 14% below the comparable figure for the same period in 2008. Exports of Mexican-built vehicles to Canada were up by 14%. More strikingly, exports to Latin America were up by two-thirds, year-on-year and now account for 15% of total exports, up from 10% in the first seven months of 2010. The US is still by far the industry’s biggest market but its weight is diminishing. In the first seven months of 2010, 69% of vehicle exports went to the US. For the first seven months of 2011, 65% did.
Exports to Europe, the industry’s third biggest market, were up by 12% but still stand at just over 9% of total exports (just ahead of Canada, which buys 8% of Mexico’s vehicle exports), much the same as they were in the first seven months of 2010. Exports to the less important markets of Africa and Asia were up by 27% and 32% respectively.
Research & Development: On 3 August the US Food and Drug Administration (FDA) approved the first specific treatment for scorpion stings. The treatment, Anascorp, is the first drug that has been developed in Mexico to be authorised by the FDA. Anascorp treats stings from Centruroides scorpions, which can be lethal for young children. Around 250,000 people a year are stung by scorpions in the US and Mexico. Anascorp is made from the plasma of horses immunized with scorpion venom. Anascorp’s effectiveness was based on results from a randomised, double-blind, placebo-controlled trial of 15 children with neurological symptoms of scorpion stings. These symptoms were resolved within four hours of treatment in the eight subjects who received Anascorp, but in only one of the seven participants who received the placebo. Anascop was developed by the Instituto Bioclon de Tlapan.
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DEBT: Argentina imposes order on credit rating agencies
Argentina’s Comisión Nacional de Valores (CNV) issued a new regulation on 9 August, requiring credit rating agencies to publish their methodologies. The government claims that this will improve the system.
From 1 September, all the credit rating agencies operating in Argentina will have to publish their criteria for evaluating companies and other issuers of debt. The CNV said the new regulations will give investors more inormation about how the agencies work out their ratings.
The Argentine move follows the controversial decision by a credit rating agency Standard & Poor’s to downgrade the US from its AAA credit rating. Embarrassingly, US officials pointed out an arithmetical error in the S&P calculations: the agency corrected its figure and said that the US$2bn change did not affect its conclusion.
It is worth noting that Dagong, China’s credit rating agency, currently rates the US as an ‘A’ risk, below Chile (A+), the top ranked Latin American credit , according to all the main agencies, S&P, Moody’s, Fitch and Dagong. Dagong rates Brazil A-, Peru BBB+, Mexico BBB, Venezuela BB+, Argentina B and Ecuador CCC.
MEXICO: Ernesto Cordero, the finance minister, and possible Partido Acción Nacional (PAN) presidential candidate, has launched an attack on borrowing by Mexican states. As 19 of Mexico’s 32 states are controlled by the Partido Revolucionario Institucional (PRI), the move is clearly designed to reduce the support these states can provide to the PRI’s candidate for the presidency in 2012, almost certainly, Enrique Peña Nieto, the outgoing governor of the Estado de México.
Cordero’s attack, however, may not be as politically motivated as it seems. Under Peña Nieto the Estado’s borrowings have been lower than under the previous administration. It is also worth noting that on official (finance ministry) figures, the indebtedness of Mexico City (technically not a state, but effectively treated as one) has fallen marginally in the past year. Mexico City is run by Marcelo Ebrard, a likely left-wing candidate for the presidency in 2012.
The finance ministry figures show that the states’ and municipalities’ total debts now stand at M$316.7bn (US$26.4bn), which the ministry said is M$2bn (US$163m) up on the end of 2010 figure. The states account for M$250bn (US$20bn) of the total.
Some states have been borrowing heavily in past six months: Zacatecas for example, has increased its debt by 171% in the past six months (to the still modest figure of M$1.78bn [US$144m]). Although Mexico City has reduced its debt by 1% in the past six months, it still has the biggest debt of M$52.1bn (US$4.5bn). Ebrard, however, likes to point out that Mexico City’s GDP is slightly bigger than Argentina’s. The Estado owes M$37bn (US$3bn) and the northern industrial powerhouse of Nuevo León M$34bn (US$2.75bn).
The states with the biggest problems, according to the finance ministry, are Quintana Roo, Veracruz and Coahuila, which have mostly short-term debt. Coahuila, which was ruled by Humberto Moreira, now the president of PRI, before he handed it over to his successor who was his brother, Rubén, has been the butt of most of the criticism about the rising states’ debt.MEXICO: In the first six months of 2011, public sector debt increased by 8.2% to US$389.54bn. In the first half of 2011 fiscal revenues came to M$1.52 trillion (US$129.1bn) up 4.6% on the same period of 2010. Public spending rose by 5.3%, year-on-year, to M$1.65 trillion (US$140.2bn).
PANAMA: The government has bought back a highway which had been built and operated by a Mexican constitution company, ICA since 1996. The highway links the business district to the Tocumen airport. The 14 year bonds were issued by the Empresa Nacional de Autopistas (ENA) to buyout ICA. The bonds are secured against the tolls that will be generated by the Corredor Sur and do not carry the guarantee of the government. The ENA was set up by the current government to take over the Corredor Sur and the Corredor Norte. The Corredor Norte is run by another Mexican company, Proyectos y Construcciones (PYCSA) which is also in the process of being bought out by the government.
The ENA issue was in two tranches: the first, for international investors, pays 5.75%, while the second for domestic investors, pays 5.25% but allows holders to use the highway toll free.
Critics of the deal say that ENA is overpaying for the highways which should have been depreciated over the past 15 years, but appear not to have been.