2013

Airbus - world’s fleet will double in 20 years

Article published on October 2013 in Legal Eye and reproduced by courtesy of Stephenson Harwood

In its latest Global Market Forecast in September, Airbus predicted that in the next 20 years the world will need to double the size of its aircraft fleet from 17,740 aircraft to 36,560 aircraft, as a consequence of economic growth, and increased air travel by the affluent
middle classes in fast growing markets, such as India and China. Of the new 29,220 passenger and freight aircraft predicted by Airbus to be
required, worth over £2.7 trillion, 10,400 will replace existing jets with more fuel-efficient models, with aircraft sizes increasing to make the best use of limited airport capacity.

With air travel becoming increasingly accessible in all parts of the world, the growth of the travelling middle classes, and increased
urbanisation, tourism and migration in emerging economies, Airbus predicts that by 2032 two thirds of the population in emerging markets will take at least one flight annually.

Airbus is also predicting that by 2032 domestic flights within China will be the world’s largest airline market, outgrowing the US domestic market, and that the wider Asia-Pacific region will account for 34% of the total distance travelled by fare-paying passengers.


Author: Paul Phillips (Partner, Head of aviation litigation and regulation with Stephenson Harwood) / Publisher: SCMO

EU blacklist labelled absurd

Article published on October 2013 in Legal Eye and reproduced by courtesy of Stephenson Harwood

Following the publication of the latest update to the EU blacklist of foreign carriers in July of this year, which removed Philippine Airlines and Venezuelan carrier Conviasa from the list, Tony Tyler, the Director General of IATA, spoke out again about the lack of transparency in the decision-making process followed by the EU in adding and removing airlines or whole countries to or from the EU blacklist.

In June 2013, Tony Tyler called the EU’s list of banned airlines “absurd” when speaking at the IATA Annual General Meeting in Cape Town, South Africa. Of the 20 countries currently subject to a blanket ban on the EU blacklist, 15 of them are African, and Tyler has warned that the EU’s disproportionate focus on Africa has led many observers to conclude that its blacklist is a mercantile policy masquerading as a safety policy. He says “the point that all the African airlines make – and that we certainly agree with – is that if a government isn’t exercising sufficient regulatory oversight on aviation, then that applies equally to air navigation service, ground services and everything else. So if it’s not safe for the African carrier to operate into Europe, then why is it safe for the European carrier to operate to the African country?”

The EU’s disproportionate focus on Africa has led many observers to conclude that its blacklist is a mercantile policy masquerading as
a safety policy.

IATA takes a different approach, it says, to that taken by the European Commission, by working with countries to put in place IATA operational safety audits (IOSAs), and engage with countries and carriers on the implementation of IOSA training programmes, as opposed to penalising under-performing airlines. In calling for greater transparency, Tyler said “There are no clear guidelines on what you have to do to get off the banned list...or, indeed how exactly you got on it. In America, the FAA says you’re Category 2, then it identifies what
particular tests you have failed, or what you’re not doing properly, but in Europe there is no checklist. There are no specifications about what standards they want.”

In a thinly veiled reference to the EU’s unilateral imposition of its own emissions trading scheme on foreign carriers, Tyler said:

“ICAO does its own inspections of the regulatory authorities and helps them lift their game where necessary. But Europe is going off on its own again, as it seems to love doing in this industry.”

Author: Paul Phillips (Partner, Head of aviation litigation and regulation with Stephenson Harwood) / Publisher: SCMO

Holding pattern for EU Airports Package

Article published on October 2013 in Legal Eye and reproduced by courtesy of Stephenson Harwood

The progress of the European Commission’s EU Airports Package, which was published in December 2011 to address issues on slots, ground-handling, and noise, has stalled. The European Parliament has approved all three elements of the package of legislation, with some substantive amendments, at First Reading stage, but the European Council has not.

Slots

The slots proposal was amended and approved at first reading by the European Parliament on 12 December 2012. The Parliament made some changes to the Commission’s original proposal, maintaining the current ratio of the use it or lose it rule at 80:20, and reduced the Commission’s proposal for the qualifying length for a series of slots from 15 to 5 in Summer and 10 to 5 in Winter. The amendments are now with the European Council for consideration. The rumours coming out of Brussels are that the text of the proposed new Slot Regulation is
not agreed and that it is becoming increasingly uncertain whether a new Slot Regulation will be required at all.

One ongoing concern for airlines is that the European Commission and Parliament are resentful that airlines have control of their own slots, and that they (the EU legislature) may reserve the right to tackle the issue of who should own slots at a later date. This issue is of particular concern because airlines have capitalised the value of their slots as assets in their balance sheets, so any indication of an attempt by EU legislators to introduce measures to change slot ownership has to be monitored carefully.

Ground-handling

The proposed increase in the minimum number of ground handling companies given licences to operate at large airports is politically very sensitive, with the German ground-handlers’ unions, particularly at Frankfurt and Munich airports, exerting considerable lobbying pressure on MEPs.

The European Commission proposed an increase in groundhandlers at large airports from 2 to 3 at airports with more than 5 million passengers per annum. The Rapporteur for the TRAN Committee of the European Parliament, Polish MEP, Arthur Zasada, proposed in his working report to the TRAN Committee an increase in groundhandlers from 2 to 4 at qualifying airports. The TRAN Committee rejected this proposal, requiring the Rapporteur to significantly amend his report and find a compromise with the demands of the Employment Committee of the European Parliament. The text that was adopted by the TRAN Committee in March 2013 proposed a smaller increase in groundhandlers from 2-3 only at airports with over 15 million passengers per annum over a 10 year period. The TRAN Committee also proposed more stringent social terms and conditions and protection of employment conditions. These revised recommendations have been narrowly voted through the first reading of the European Parliament, but have not been voted on yet by the European Council – where there are reported to be significant differences of opinion. The timeline for the European Council to vote on this proposed new Regulation is unclear.

Noise

The proposed new noise Regulation is far less controversial than the proposed groundhandling Regulation. The European Parliament agreed on amendments on 12 December 2012 but approval by Council is still pending.

The current EU Lithuanian Presidency did not include the Airports Package in the European Council work plan for its six month Presidency of the EU, which expires in December 2013, which is why progress on the Airports Package has stalled at Council level. The EU Transport Commissioner, Vice President Siim Kallas, wants to have the Airports Package adopted in full, and there has been no move by the European Commission to disaggregate the three component parts of the Package, so the three draft Regulations in their current state look set to stagnate until the Greek Presidency takes over in January 2014.

The Greek Presidency has not yet said whether it is going to prioritise the Airports Package, but if it does, it will face political difficulties in pushing the proposed new groundhandling regulations through. It seems likely that it will not prioritise this package of regulations until after the European Parliament elections have taken place in May next year.

Author: Paul Phillips (Partner, Head of aviation litigation and regulation with Stephenson Harwood) / Publisher: SCMO

Merger creates the world’s largest airline

Article published on October 2013 in Legal Eye and reproduced by courtesy of Stephenson Harwood

The filing of an anti-trust suit by the US Department of Justice back in August to block the merger of American Airlines and US Airways on grounds that it would eliminate competition, reduce route choices, and raise prices, looked as though it would, at worst, completely derail the merger or, at best, delay the process by several months.

The DoJ’s blocking move seemed to represent a seismic shift in its attitude to consolidation in the US airline industry, which it has generally approved in recent years. It was also in stark contrast to the more relaxed stance of the European Commission, which approved the merger in double-quick time, albeit with minor conditions.

US Airways and AMR Corporation, AA’s parent company, that has been in Chapter 11 bankruptcy protection since November 2011, responded aggressively to the DoJ’s announcement, saying it would mount a “strong and vigorous defence” of its plans for the US$11 billion merger. Both US Airways and AA pointed to the advantages of the wave of consolidation over recent years in the US airline industry that has cut the number of large carriers in the US market from eight down to five, and how the reduction in cut-throat competition had enabled the consolidated airlines to operate more profitably and improve services for consumers.

In explaining its position, the DoJ maintained that it had learned important lessons from the 2008 merger of Delta and Northwest Airlines, and the 2010 merger between United and Continental, and were not convinced that the AA – US Airways merger would improve the lot of consumers further. Assistant Attorney General, Bill Baer, said that both US Airways and AA were in a position to be “competitive, aggressive and successful on their own, and that passengers would suffer if the merger was allowed to proceed”. The DoJ focused on how the merger would affect travellers from Washington’s Reagan National Airport, from which the merged airlines would have controlled 63% of nonstop flights, and on the fact that four US airlines would control over 80% of all US commercial flights.

Baer observed “If this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight change fees would result in hundreds of millions of dollars of harm to American consumers.” He did not, however, rule out alternative ideas to a straightforward merger block, in order to preserve competition.

Faced with the prospect of unpicking what would be a very complex merger, which US Airways and AMR Corporation had been planning for over a year, and a costly and time-consuming anti-trust trial scheduled to start on 25 November, settlement negotiations were initiated to try and break the legal deadlock, and the parties agreed to consult a court appointed mediator.

On 12 November 2013, AMR and US Airways announced that they had settled the litigation with the Department of Justice, challenging the merger. Under the terms of the settlement the airlines will divest 52 pairs of slots at Washington Reagan National Airport and 17 pairs of slots at New York LaGuardia Airport, as well as certain gates and related facilities to support services at those airports. The airlines will also divest two gates and related support facilities at Boston Logan International Airport, Chicago O’Hare, Dallas Love Field, Los Angeles International and Miami International airports. The divestitures will take place through a DoJ approval process following the
completion of the merger. As part of the settlement agreement with the Department of Justice, the newly merged airline group has agreed to maintain its hubs in Charlotte, New York (JFK), Los Angeles, Miami, Chicago O’Hare, Philadelphia and Phoenix, in line with its historical operations, for a period of three years. In spite of the enforced divestitures, the new American Airlines Group Inc., as the combined airline will be called, is still expected to generate more than US$1 billion in annual net synergies from the merger, beginning in 2015.

Commenting on the settlement of the litigation and the approval of the merger, Bill Baer said that the airlines’ agreement to divest slots at key airports will allow low-cost carriers to expand and “will disrupt today’s cosy relationships among the incumbent legacy carriers and provide consumers with more choices and more competitive airlines”.

This agreement has the potential to shift the landscape of the airline industry

The settlement was approved by the US Bankruptcy Court on 27 November 2013, and Judge Sean Lane advised that the merger should be completed “without delay”. American Airlines and US Airways were planning to close their merger by 9 December 2013.

The US Attorney General, Eric Holder, commenting on the approved merger said:

“This agreement has the potential to shift the landscape of the airline industry. By guaranteeing a bigger foothold for low-cost carriers at key US airports, this settlement ensures airline passengers will see more competition on nonstop and connecting routes throughout the country.”

Author: Paul Phillips (Partner, Head of aviation litigation and regulation with Stephenson Harwood) / Publisher: SCMO

Technology to counter future volcanic ash crisis

Article published on October 2013 in Legal Eye and reproduced by courtesy of Stephenson Harwood

Between 15 April and 21 April 2010, Europe experienced an unprecedented closure of its airspace, with over 100,000 flights cancelled, and an estimated 10 million passengers affected over a period of seven days. Airlines based in Northern Europe had all of their aircraft grounded as a result of airport closures, and overall, the European airline industry had 75% of its operations closed at the peak of the ash plume. It was catastrophic.

Three days into the crisis, as European airspace remained closed, several of the major carriers protested that national civil aviation authorities and Eurocontrol were acting too cautiously in maintaining the flight ban. Several airlines conducted their own test flights in the last two days of the crisis, including Air France-KLM and Lufthansa, and found the atmosphere to be clear.

Since the volcanic ash crisis, Airbus and Nicarnica Aviation have been developing technology for the fitting of sensors to aircraft for the detection and the measurement of the density of ash clouds, so that pilots can avoid them.

In an extraordinary experiment conducted on 13 November 2013, a tonne of volcanic ash, collected and dried from the 2010 Eyjafjallajokul eruption by the Institute of Earth Sciences in Iceland, was flown to Toulouse, then carried in an A400M Airbus aircraft and released at between 9,000-11,000 feet over the Bay of Biscay, to simulate conditions consistent with the volcanic ash cloud in 2010. easyJet then flew an Airbus A340-300 fitted with Airborne Volcanic Object Identifier and Detector (AVOID) sensors developed by Nicarnica Aviation towards the ash cloud, and successfully identified the ash from distances of 60 km, as well as accurately measuring its concentration. The tonne of volcanic ash released was apparently measured at 2.8km in diameter and was visible to the naked eye, but quickly dissipated, becoming difficult to identify.

Aircraft fitted with AVOID sensors would be able to feed back information to the ground in any future volcanic ash eruption, giving real time data to enable an accurate picture of the location and size of ash clouds to be built up, as well as their density, which would inform decisions on the ground as to whether airspace needs to be closed.

easyJet is planning to fit several of its aircraft with AVOID sensors by the end of 2014, so that if, and when, the Icelandic volcanoes erupt again, they will be able to argue coherently with national civil aviation authorities in the EU that it is not necessary to impose a blanket no-flight ban and shut down large areas of European airspace.

Author: Paul Phillips (Partner, Head of aviation litigation and regulation with Stephenson Harwood) / Publisher: SCMO

Supply Chain Global Governance

Article published in The Economist Management Blog | September 16, 2013 and reproduced by courtesy of Parag Khanna

Could corporations replace national governments?

Five years since the collapse of Lehman Brothers, the post-financial crisis world has played out quite differently from the dominant narrative of the immediate aftermath. Then it was predicted that globalization could rapidly unravel, export-led emerging markets would slump, and the private sector would be massively re-regulated. Instead, cross-border trade and investment have exceeded 2007 levels, emerging market growth has been robust, and corporations have proven quite nimble in limiting overly onerous regulation.

Still, the world economy is fragile and expectations are high—from governments, the public (“the 99%”), and a growing chorus of shareholders—that companies play a role commensurate with their resources and influence to advance agendas ranging from environmental sustainability to reducing income inequality. The debate has moved beyond clichés about “the market” being necessary to solve all problems towards a more sophisticated approach that I call “supply chain global governance.” This combines the “do no harm” mantras around limiting operational externalities with a proactive strategy to leverage supply chains wherever possible to improve standards and quality of life. I believe that this regime-based approach is likely to replace “corporate social responsibility” in the coming years.

Some of the world’s largest firms have taken notable steps in the direction of progressive supply chain governance. Walmart, the world’s largest retailer, has partnered with the Environmental Defense Fund (EDF) to reduce emissions across its vast footprint of warehouses, distribution centers, and outlets. In May this year it blacklisted almost 250 Bangladeshi factories after the tragic building collapse in Dhaka, sending ripples throughout the garment industry. Apple has worked with the Fair Labor Association (FLA) to identify dozens of improvements in worker safety and other areas now being implemented in Foxconn factories in China. DHL works closely with customs officials in dozens of countries to smooth customs processing, bringing efficiency gains that alone can boost global GDP by 5 percent according to a recent study by Bain Capital.

While examples from the Fortune 100 are numerous, within those same ranks many questions remain such as how this approach differs across public and private firms, and how it will (or will not) scale across state-owned enterprises and SMEs—particularly from the developing world. Some emerging market companies like Petrobras and Vale, both of Brazil, have established solid track records in the sustainability arena, but more opaque Chinese SOEs are far further behind the curve.

Then there is the deeper challenge of the incredible complexity of supply chains themselves. The European horsemeat scandal, the tainted New Zealand baby formula in China, and the BP Deep Water Horizon oilrig in the Gulf of Mexico are just several of the major supply chain crises in recent memory. These complex meta-national structures therefore require far more scrutiny and analysis even as we come to rely on them as tools of delivering public goods.

Still, corporations and their supply chains are already critical players in global governance. The highest body in commercial arbitration, for example, is the privately run International Chamber of Commerce (ICC) based in Paris, which simultaneously helps craft collective business positions on international policy issues such as WTO trade negotiations. A nascent effort has begun to apply international humanitarian laws to business actors. The UN Voluntary Principles seek to regulate the activities of corporations operating in zones of conflict. While on the surface this appears to be an example of states strengthening their leverage over corporations, it should instead be viewed as a mutually beneficial process: firms are intimately involved in crafting the regulations, for which the UN is a repository, but its ultimate effectiveness ultimately hinges on the participating companies themselves.

Over the past several years I’ve been involved in the U.S. National Intelligence Council’s Global Trends 2030 process that earlier this year published a major report titled “Alternative Worlds.” It includes a very plausible scenario titled “Non-State World” in which urbanization, technological advance, and capital accumulation accelerate the rise of private players that bend rules to maximize their productive power, particularly through the creation of special economic zones within and across national borders. As the scenario describes this trend, “It is as if the central government acknowledges its own inability to forge reforms and then subcontracts out responsibility to a second party. In these enclaves, the very laws, including taxation, are set by somebody from the outside. Many believe that outside parties have a better chance of getting the economies in these designated areas up and going, eventually setting an example for the rest of the country.”

My only quibble with this fine analysis is that it describes the world of 2013, not 2030. Supply chains, like globalization itself, are a complex system that is a whole greater than the sum of its parts. They are already integral to global governance. Corporate leaders must get accustomed to being CEOs, diplomats and statesmen at the same time.

Author: Parag Khanna / Publisher: SCMO

The Independent Republic of the Supply Chain

Published by Quartz on March 19, 2013 and reproduced by courtesy of Parag Khanna

Each week brings new revelations in the scale of the European horse meat scandal and yesterday came news of faulty, too-sheer yoga pants, but there is a common theme: the complexity of untangling the supply chains of producers, distributors and vendors spanning a dozen countries. From Romanian abattoirs to IKEA in the Czech Republic to frozen lasagna meals in Britain’s Tesco grocery stores, the process of tracing the origins of the horse meat, conducting food safety tests, and enforcing standards has overwhelmed regulators, laboratories, consumers, and food vendors. When HSBC’s airport jet-way campaign featured a panel that read, “In the future, the food chain and supply chain will merge,” this is surely not what it had in mind.

The horse meat scandal pertains to one sector, food, and one geography, Europe. But the supply chains of energy, finance, electronics, and much else have driven the matrices of business to envelop the world. Ever more, not less, multinationals depend on foreign markets for parts and profits. In many sectors, supply chains have become nearly impossible to untangle, even within just one or two countries. Whether BP, Transocean or Halliburton is responsible for the sinking of the Deep Water Horizon oilrig and massive subsequent Gulf oil spill in 2010 is still being arbitrated. Every day brings new headlines about supply chain confusion, exploited loopholes, and messes to clean up: in late February a Taiwanese company making Apple iPhone casings at a plant outside Shanghai was accused of polluting a local river.

Supply chains—the systems and networks of producers of goods and services that transform raw materials and components into products delivered to customers—are now an autonomous force in the world. Like globalization itself, they are greater than any one nation or economy. Some are entirely private, while others are hybrids of public and corporate actors. Many now connect Western and emerging market firms into a sprawling nexus that lacks a single headquarters and thus obeys no one jurisdiction. Supply chains have widened and deepened to such an extent that we must now ask ourselves: do we control the supply chains, or do the supply chains control us?

The new empire

With their cash reserves and legal protections, corporations act with greater agility than governments or households, who face greater constraints on their movements. In the 1980s, before “political economy” became a vogue graduate school major, the legendary London School of Economics professor Susan Strange coined the term “triangular diplomacy” to describe how multinational corporations (MNCs) have become so powerful that they engage on equal footing with governments, that are often mere “supplicants” to firms as they seek the capital, technology, and knowledge they cannot themselves generate. China’s rise is largely owed to its integration into global manufacturing supply chains, while India’s economy would not grow at all without liberalizing in ways that favor the expansion of private commercial supply chains.

Supply chains have effectively become their own form of governance, varying widely in nature depending on geography and sector, and with differing degrees of involvement by states, but undoubtedly transnational units of authority in their own right. The supply chain’s ambition is not territorial aggrandizement, but access to markets. They seek to oversee the greatest share of the flow of goods, capital and innovations. Expanding and improving supply chains is more important that boosting trade for the future of global growth. According to a new study by Bain Capital, if countries reduced border administration delays and improved telecom and transport infrastructure to just half the global standard, global GDP would rise by 5%. For supply chains, the extended market is the empire.

The paradox of the growing power of corporations is that even as their autonomy grows, their role as co-governors (or suppliers of governance) does as well. More than ever before, corporate supply chains shape and even create government regulation where they are lacking and provide public goods governments don’t. European hydropower companies write the legislation to govern their own industry in Nepal, since no such laws exist; private hospital chains in India enter poor backwaters and provide basic medical services where the government never has, as do private or philanthropic schools spreading literacy. As states come to depend more on corporations, the distinction between public and private, customer and citizen, melts away. Nowhere is this more true than a country like Nigeria, whose budget depends so existentially on Shell’s oil extraction, yet whose population expects public services to come from Shell as much as from its own government. In Nigeria, it is never clear who is in charge or who is exploiting whom.

Our dependence on many supply chains is nearly absolute. DHL can get any item anywhere in the world faster than anyone—even than the US military, one of its biggest clients, who uses it to transport everything from mobile battle stations to Halloween candy. When China suddenly banned the export of rare earth minerals in 2010, politically oblivious disk drive manufacturers woke up to their reliance on Chinese suppliers of these precious but essential components. The tsunami/earthquake that devastated Japan in early 2011 forced Taiwanese semiconductor manufacturers to scramble to new suppliers. With lagging Indian investment in the extractive sector, its diminished iron ore production has led to a spike of greater than $40 in the key ingredient for steel-making, swelling profits for BHP, Vale, and other mining giants. Commanding supply chains, not geography per se, is how winners and losers are determined today.

The tug-of-war between public and private power is far from settled. Indeed, it is just one symptom of far deeper shifts in global order that is still in the early phases of unfolding. With this complexity comes the need to re-assess, even supersede, some of the bedrock concepts of modern international relations, particularly the primacy of state sovereignty and territoriality. Instead, we need to appreciate how non-state actors are building global authority on the basis of wealth and resources, how loyalty can be horizontal to communities beyond vertical states, and how a wide range of players operate with increasing autonomy to pursue the own interests. Governance, both local and global, are open to all, and governments have to prove their utility to matter.

The global mobility of money

There is an adage that “who has the money makes the rules.” Sovereign wealth funds, currency traders, hedge funds, dark pools, institutional investors, asset managers, private equity firms, bond holders, and debt vultures are major independent players in driving, shaping, and pushing the world’s $225 trillion of global financial stock. The countless public and private players in the financial world compete for profits, ride each other’s waves, and discipline each other at the same time. Hedge fund managers spotted the weakness in the US housing market while Fannie, Freddie and mortgage lenders advanced the sub-prime mortgage policy. Hedge funds face less regulatory oversight than public companies, and are thus attractive to the wealthy. As the Economist recently reported, the re-privatization of public companies has restored financial control over to private hands. The total market value of privatized firms grew from less than $50 billion in 1983 to almost $2.5 trillion in 2009—roughly 10% of the world’s aggregate market capitalization, and 21% of the non-US total—and overall private capital assets are estimated at $21 trillion.

Globalization has dramatically enhanced the financial autonomy of even the world’s largest and seemingly most rooted multinational corporations. Whereas it was once an article of faith, as articulated in the 1950s by GM president Charles Wilson, that “What is good for the US is good for GM and vice-versa,” today it is far less clear. American multinationals increasingly enjoy the rule of law, investor protection, and innovative environment of the US, but derive over half their revenues from emerging markets. This applies across the spectrum from Hollywood films to automobile and pharmaceutical sales. As a result, MNCs can grow even during downturns at home while growth continues abroad. But globally distributed enterprises such as Apple, GE, IBM also hold massive assets offshore where tax rates are lower or nil – and sometimes relocate headquarters altogether as Halliburton did in moving to Dubai.

For nations, geography is fixed. For firms, it is an arbitrage opportunity. The Financial Times reported that Starbucks, Google, Amazon and other mega-companies pay less in tax to the UK than their share of revenue from it by using offshore holding companies from Belgium to Bermuda. An important component of a firm’s resiliency today is its capacity for regulatory arbitrage, the capacity to be geographically agile in mastering jurisdictions and regulations.

Of the 100 largest economic entities in the world, approximately half are companies, even excluding state-owned companies. Wal-mart has a market capitalization greater than all but the G-20 economies. Its annual revenues are greater than $446 billion (2012). In 2006, it alone was responsible for 12% of China’s exports. It is also the world’s largest private employer with a workforce of over 2 million people. Apple’s $600 billion market cap is larger than the GDP of over 120 countries. Its cash on hand is sufficient to bail out several ailing euro zone economies. In South Korea, Apple’s rival Samsung accounts for 8% of the national tax revenue.

Exxon Mobil, the largest energy company with a market cap of about $400 billion, represent how private energy companies like Shell and Chevron deliver stable global supply to the market while also providing local populations with employment and welfare—outlasting dozens of failed governments in the process. As Steve Coll points out in his recent book Private Empire, Exxon is the largest taxpayer in Chad, while Shell accounts for more than 21% of Nigeria’s total petroleum production of 629,000 barrels per day in 2009. In Iraq, Exxon’s direct dealings with the provincial government of Kurdistan could very well trigger an Arab-Kurd civil war that will force the country’s disintegration.

There is no doubt that the surge in state-owned enterprises in banking, energy, and other sectors represents a countervailing trend, especially given its prominence in crucial states such as China, Russia and Saudi Arabia. But it is also a trend that has reached its high-water mark for significant reasons. One is the suspicion of hostile state intent and subsequent blockage of cross-border state-owned enterprise (SOE) activity. Recent examples range from Dubai Ports World in 2006 to Huawei in 2011, and Australia’s blocking the merger with Singapore’s stock exchange. Another is the quality of corporate governance, whereby SOEs are often inefficient and slower to respond to changing market conditions. They also tend to lack the technological sophistication of private players. Because SOEs are bound to national governments, they cannot relocate when domestic circumstances worsen. Only private firms have agility when nationality becomes a liability.

We should be grateful for this trend. As Paul Midler documented in his supply chain tell-all Poorly Made in China, China’s SOEs face no market accountability; their only aim is to cut costs, often at the expense of standards. Witness the melamine contaminated pet food and baby milk scandals, and Mattel recall of baby bear toys whose eyes could fall out and choke children. The trust networks of factory managers and workers never extend past the next link in the supply chain, let alone to the broader Chinese or global consumer population. It was 6,000 Chinese babies poisoned by the melamine formula, not foreigners.

Western firms too want to cut costs; that is, after all, what drives outsourcing in the first place. But they face consumer pressure points that can have impact where government regulation falls short. Consumer activist and NGO expert groups have been crucial to certifying supply chains for diamonds and timber, and labeling dolphin catch-free tuna and GMO-free organic produce.

Auret van Heerden, head of the Fair Labor Association (FLA), gave a prominent TED talk in 2010 in which he used the phrase “Independent Republic of the Supply Chain.” He provided striking examples of how the outsourcing of outsourcing to suppliers for the production of mobile phones and pharmaceutical has led to large-scale human rights violations, drug contamination, and deaths from Congo to Bangladesh to China. But van Heerden is not an anti-corporate activist. The FLA has over 4,000 corporate members who work with NGOs, regulators, and other bodies to make supply chains safer and cleaner. It has pressured Apple, for example, to improve working conditions at FoxConn factories while Chinese authorities preferred efficiency at the lowest price.

Accountability means knowing where the buck stops—something that is increasingly complicated in a supply-chain driven world. Governments can’t fully control what they do not own. They need supply chains to carry out their own functions, and they need to partner with corporations and NGOs if they want to protect and serve their citizens. A franchise business can be more accountable due to strict rules set forth by a powerful parent company. McDonald’s has more capacity to inspect itself, and more incentive to do so to protect its brand, than any government can devote to monitoring efforts. All consumers worldwide are simultaneously citizens of the Independent Republic of the Supply Chain.

Diplomatic agency and responsibility

As multinational firms acquire wealth and market access through overseas expansion, their economic footprint and diplomatic reach becomes larger than many countries’ diplomatic services. The world’s largest democracy and a rising power such as India has fewer than 1,000 foreign service professionals, less than the number of lobbyists employed by a handful of multinationals in Washington and Brussels alone. Some African countries have foreign services that number only several hundred at the largest, many of whose primary task is to woo investment from such companies.

The Arab Spring has revealed a far deeper challenge than the corruption of Arab regimes. It is in fact just a symptom of the much broader entropy gripping much of the post-colonial world, from Africa through the Near East to South Asia. Dozens of states have squandered the last half-decade since independence. Cold War alliance politics takes some of the blame, but across these regions a succession of corrupt regimes have presided over populations that have tripled and sometimes quadrupled in size without building or refurbishing the requisite infrastructure, whether power lines, railways, housing, hospitals or schools. These conditions of general neglect have given rise to the reality of corporations serving as de facto “public” service providers.

Particularly in Latin America and Africa, supply chains serve as governance due to the absence of meaningful government. In Congo’s “copper belt” of Katanga, mining enclaves have become a new kind of post-colony that scarcely belongs to a country that barely exists. Mining companies in the Andean region educate and train their local managers who would otherwise be illiterate; oil companies in Guinea-Bissau fund AIDS treatment; and bottling companies provide housing for workers in Indonesia. There are no doubt many abuses of power, even crimes such as Chiquita’s usage of paramilitaries in Colombia to target union activists, but these take place within the context of supply chain service provision as compared to the outright neglect of the state. Even for what seem like the obvious sectors for resource rich countries to invest their scarce capital in, the private sector still does the public’s job. To this day, if you want to scope out a location for a mine in Zambia, you’ll need to lease a private plane from a company like K5 aviation to get to the site, still inaccessible by road. Public airports haven’t been built yet outside major population centers.

The privatization of major infrastructure, from American ports to British airports to the Panama Canal, applies de facto the world’s newest and most pervasive infrastructure: telecoms and the internet. Thirty corporations today control 90% of world internet traffic. Mega-grids that span entire regions connect once “off-grid” territories to world markets faster than any inter-governmental negotiation. Want to hire some techies to program African apps? Better hire them from Google-sponsored computer training centers in Nairobi, rather than public universities.

Even powerful nations face the paradox of being wealthy on paper, but unable to muster the fiscal investment to meet basic needs. Across Russia, the infirmed and elderly volunteer to be guinea pigs for Western pharmaceutical companies’ clinical trials given the precipitous decline in the country’s healthcare system. Even in America, rehabilitating once mighty Detroit has fallen on the shoulders of a troika of corporate moguls such as Dan Gilbert, founder of Quicken Loans, who along with the owner of the Detroit Redwings and CEO of Pensky Tires is funding myriad real estate redevelopment projects and a light-rail for the city’s downtown area.

Whether or not certain governments are in retreat, private-private diplomacy is becoming increasingly important to provide for global public goods. Private actors increasingly network with each other in ways that improve their overall effectiveness. For example, the Environmental Defense Fund (EDF) now works directly with Wal-Mart along its supply chain to reduce carbon emissions. Neither is waiting for an inter-governmental climate treaty. Business for Social Responsibility (BSR), another NGO, has a staff of over 30 in China who are full-time consultants to Western and Chinese companies on improving labor conditions in factories. In the new supply chain diplomacy, form follows function: whoever can get the job done gets the deal.

Does it all add up?

The convergence of post-war Western economies created the conditions for the rise of the modern transnational corporation, and there is very little that can be done to reverse it. Protectionist policies that would undermine the international presence and standing of one’s own national champions by evoking painful reciprocal measures from other states. Inter-state diplomacy enabled our current phase of globalization and interdependence, but multinationals have become the key driver. Even the strong regulations imposed on Wall Street banks in the aftermath of the financial crisis have severe loopholes, and calls are growing stronger to revise aspects of the Dodd-Frank legislation that have harmed competitiveness.

There is no doubt that inter-state regulations and international law provide both the crucial opportunity as well as the ultimate constraint on the rising global power of private actors. Yet we must be careful not to assume sovereignty as a trump card when it clearly matters only where it is meaningfully enforced. There is also the claim that global firms require the stability and rule-in-law that is only provided by Western nations. But this fails to notice the rise of hundreds of globally competitive multinationals emerging from Brazil, the Arab world, and Asia that meet the criteria of product standards and corporate governance to be listed on stock exchanges worldwide. Furthermore, many global firms increasingly act as international partnerships, diminishing the centrality of any single headquarters, even in the US, in favor of local joint ventures and tailored strategies for each market.

Corporations and their supply chains are already critical players in global governance. The highest body in commercial arbitration, for example, is the privately run International Chamber of Commerce (ICC) based in Paris, which simultaneously helps craft collective business positions on international policy issues such as WTO trade negotiations. A nascent effort has begun to apply international humanitarian laws to business actors. The UN Voluntary Principles seek to regulate the activities of corporations operating in zones of conflict. While on the surface this appears to be an example of states strengthening their leverage over corporations, it should instead be viewed as a mutually beneficial process: firms are intimately involved in crafting the regulations, for which the UN is a repository, but its ultimate effectiveness ultimately hinges on the participating companies themselves.

The newly published Global Trends 2030 report of the National Intelligence Council titled “Alternative Worlds” includes a very plausible scenario titled “Non-State World” in which urbanization, technological advance, and capital accumulation accelerate the rise of private players that bend rules to maximize their productive power, particularly through the creation of special economic zones within and across national borders. As the scenario describes this trend, “It is as if the central government acknowledges its own inability to forge reforms and then subcontracts out responsibility to a second party. In these enclaves, the very laws, including taxation, are set by somebody from the outside. Many believe that outside parties have a better chance of getting the economies in these designated areas up and going, eventually setting an example for the rest of the country.”

America—and its companies—can only strengthen regulation where they participate in supply chains, such as th rough the Foreign Corrupt Practices Act (FCPA), which holds sway over American companies and those doing business with American companies. For better or worse, supply chains are the answer to supply chains. Supply chains, like globalization itself, are a complex system that is a whole greater than the sum of its parts. The food chain and the supply chain have indeed merged—as has much else.

Author: Parag Khanna and Ahmed El Hady / Publisher: SCMO

Transport Weekly

Published on 15 March 2013 in "I am an Analyst" and reproduced by courtesy of Charles de Trenck

BDI 880 +6%: The BPIY continues at rebound levels of mid-12 and is up about 3% on the week (slope of rebound is slowing), with long term concerns on China coal and ore inventories remaining.  Reference ore prices came off quite a bit this week. Comments going around recently were that China is not going to buy ore at recent peaks. Moreover steel inventories are pretty chunky even if ore levels are down … A question would be the new run rate needed for inventories, which does not have to be at previous averages, and given lower growth trajectory for China…. Keeping a quick track on the dollar index, it is up about 3.6% YTD. Strong dollar is usually negative for shipping/commodities… only that shipping is so down at this point I would not hold this relationship key, except for its general impact to the commodities world… TANKERS behaving better… some are cautioning to keep an eye out for news on Suez Canal and Egypt

Investment stance: Gold shares still getting killed. I have stayed long dollar long US, but most things I have held that are China-related has been weak, ex anti-pollution themes. My health, anti-pollution focus brings me to flagging [XXXX] and how fast (after being ignored since IPO) it has gotten on the map. Macro wise (like GLNG after the Japan earthquake), it makes sense to look for names that can play the theme on China Cleanup. For me it has been Platinum. But I think clean engines… clean-up equipment companies all fit into a China eco-friendly theme that will be around for a very long time

MAIN APPROACH UPDATE

My approach has remained the same throughout – be conservative in a highly volatile sector.  

Shipping, Logistics, Ports for me have always been about staying in tune with the pulse of world trade. On the whole, I don’t pay attention to WTO statements, national GDP data, senior management statements, rate hike announcements, etc. I believe in running real time series and cross-referencing what their inter-relationships are saying.

When is a correlation important? When could it breakdown? What is the raw volume data looking like? What time of the year is it? What’s our visibility like right now? Where is the value? In what currency or value marker terms? I have believed gold has been a more true marker of value and that it has shown US equities in general to be in the cheaper range, while not discounting the need to own some gold long term to defend against central bank fiat currencies gone wild. At the same time I have seen value in holding more dollars than other FX in recent months even if I always believe we should have a diverse holding of currencies and commodities.

My main support from oversold levels in the last few years has been certain areas of the US property market.

When it comes to shares I have stayed away from focusing on individual stocks “in and of themselves” and preferred to recommend making our own ETFs. Even in a weak market for shipping there has been a way to get exposure. I need companies with track records, reasonable managements and reputations, liquidity, market leadership, defensive exposure to liabilities (despite the Fed, Central Banks and commercial banks (up until 2008-09) telling the whole world to gear up on mind-numbingly low interest rates. I believe currently in long term ETF bundles for:

  • Energy/infrastructure: Canada, coal, oil…companies oversold and unloved and generally trading at lower ends of multiples, whether Warren likes them or not…
  • Shipping/Logistics/Traders: Market leaders and from levels that were relatively low long term. There are a few good leaders in Europe in this space. There are a couple in the US, and a few in Asia. For corporate governance/ethical reasons, I try to stay away from some companies with bad names (and abusing common sense such as in Ethanol…)
  • US Consumer/healthcare: Without supporting big pharma overall, I have looked for defensive yield, good management. I have traded around positions in some of the big heavyweights of US retail/discounters
  • Health: For a double dose and core concentration, I am increasing where and when I can clean living focus companies. There are not many listed and they trade at premiums. I have learned that sugar based consumer product and beverage companies are the biggest sells out there. America will have to change!
  • Tech: I see this as consumer, and I have looked for bellwethers on sell-offs     

China Rebar Inventories…

Source: Bloomberg   Note: Shanghai steel inventories higher in recent weeks but way below ‘10. BUT checkout Wuhan at 100% over ‘10 levels!

Source: Bloomberg  
Note: Shanghai steel inventories higher in recent weeks but way below ‘10. BUT checkout Wuhan at 100% over ‘10 levels!

What happens to a stock when it’s got the right theme (note the share volumes out of nowhere)

Source: Bloomberg

Source: Bloomberg

CONTAINERS/PORTS/LOGISTICS

Data for Asia-Europe remains weak, with 2012 at about -4% (always getting revised…)...Hopefully 2013 can be better, but issues such as how weak the Euro is against the dollar and Italian and other crises could have positive or negative impacts.  My view has been that the dollar is in steady rebound mode. If the dollar continues higher this could make Asia a little less competitive if Asia currencies tend to gravitate around dollar strength. On the flipside and to a less impactful degree for the Asia trade, this could help this could eventually help Europe export more.  In the Transpac, although 2012 growth was not negative, the 2% type growth from Asia to the US was lower than 3-5% growth many of us had expected several months back. … Interestingly, US inventories were reported to be higher. LB and LA ports reported better Feb container port data with LA +17.0% and LB +36.6%. CMA is key driver of LB growth.

Asia Outbound Current Pattern (we’ve been relatively flat in big picture for some time now)

 

Source: Charles de Trenck Note: 4Q12 picture not complete/still seeing revisions… 1Q13 needs March data to see proper direction given Chinese New Year interuptions

Source: Charles de Trenck
Note: 4Q12 picture not complete/still seeing revisions… 1Q13 needs March data to see proper direction given Chinese New Year interuptions

Question: How often do we get a jump like this in inventories?
(as we had in US this week…is it cause sales about to jump more? Or will volumes have to slow a little more?)

 

Source: Bloomberg

Source: Bloomberg

APL shelves the 53footers: Launched in November 2007, APL's custom-strengthened 53ft ocean capable containers are to be retired from the carrier's South China to Los Angeles service due to poor returns. “The economics just didn't work,” according to APL Americas' CEO, Gene Seroka.  53ft containers are basic to US domestic transportation. The 53 footers have about 60% more capacity than 40 footers Until APL's launch of the hybrids, standard 53ft containers were not strong enough for ocean voyages.

APM Terminals to operate Turkish terminal:  APMT (Maersk) will build and operate the Aegean Gateway Terminal under a 28-year concession, with a $400m and in a phase I 1.5m TEU facility for mid-15 start. Bulk will also be part of operations. The port lies in the petrochemical complex of Petkim in Nemrut Bay, close to Izmir, the second-largest industrial city in Turkey. The initial 1.5m TEU capacity at the new container terminal is about 50% more than the current city port of Izmir at about 700,000 TEU a year. With a depth alongside of 10 m, Alsancak can handle vessels no larger than 2,500 TEU.

CSCL takes a share in APM (Maersk) Belgium terminal: CSCL is taking 24% in Zeebrugge from APM Terminals. The 2-berth terminal handles about 380,000TEU but capacity is for 1m TEU. SIPG has 25% as well. APM soldfor EUR27.2min 2010 the 25% stake.

SITC 94$m in 2012: I wasn’t too happy about the timing of the IPO, though my level of concern was never at the level of Rongsheng or HPH in terms of lack of compunction from company and bankers on IPO process/timing. Another issue was the positioning of the company’s image. That aside profit seemed to please in 2012.  SITC said revenues rose to $1.2bn in 2012 from $1.1bn the year before and given about +15% in volumes. SITC’s revenues from China fell from $489m in 2011 to $439m in 2012. S Korea revenues more than doubledto $131m. Japan was + 2% to $428m. Japan is known for being a killer trade with SITC being a main culprit. In addition China- Japan relations will hold back growth here. SITC’s capacity for the year 2012 amounted to 1.8m TEU, up from 1.5m in 2011, it said. It also expanded its land-based logistics business, revenue climbing to $739.6m, from $673.6m in 2011.

RCL still in red….Horizon still in red: I neglected to mention RCL of Thailand posted a $62.7m loss for 2012. I notice shares rebounded in last couple of days though…Horizon Lines over in the US (that little carrier we spent some time a few years ago flagging for some excesses from Beltway Bandit types over in Washington DC) also reported its 2012 loss at $46.1 m.

Container bonds: China Shipping Group issued, according to reports, two batches of short-term notes worth about Rmb3.5bn ($562.9m) to fund container manufacturing and shipbuilding. Gee, didn’t CSCL just sell a whole bunch of containers to book some needed disposal gains. My head is spinning. The first tranche of the Rmb2.5bn paper, due in six months, pays an interest rate of 3.85%.  The paper is jointly underwritten by China Development Bank and China Everbright Bank. Rmb700m of the new credit will “replenish the working capital of China Shipping Industry.”

BULK/COMMODITIES

Diana disappoints: Diana reported 4Q12 net income of $5m against $20m for the same period last year. Judging by the share reaction investors were not happy. It certainly has been a tough market out there. Vessel operating expenses were +30% (daily vessel op ex +6.8% to $7,128/day) against operational stats showing utilization in 4Q12 at 96.3% against 4Q11 at 99.2% 30 vessels end-12against 24 vessels end-11. TCEs were $17,681 in 4Q12 against $25,714 4Q11.

Also see http://seekingalpha.com/article/1274661-diana-shipping-s-ceo-discusses-q4-2012-results-earnings-call-transcript?part=single

Speaking of Bulk, and rebounds….It is interesting to see Precious Shipping enjoying a little of a rebound

Source: Bloomberg

Source: Bloomberg

Is gold price fixing investigation next? According to the Guardian and the WSJ, the London financial sector isbracing for another official investigation into alleged price-fixing following reports that a US regulator is considering launching an inquiry into the City's gold and silver markets. The Commodity Futures Trading Commission is discussing whether the daily setting of gold and silver prices in London is open to manipulation. The CFTC is examining whether prices are derived sufficiently transparently. The system of setting gold prices in London is unusual and involves a twice-daily teleconference involving five banks – Barclays, Deutsche Bank, HSBC, Bank of Nova Scotia and Société Générale – while silver is set by the latter three. The price fixings are then used to determine prices worldwide….

ENVIRONMENT

See comments on Beijing and China pollution front page and China sections….
The cost of compliance – sometimes out of reach: Lloyd’s List makes a good point that new environmental regulations coming into play over coming ears will see owners forced to instal ballast water technologies, and possibly seek to purchase exhaust gas scrubbers and take other fuel efficiency measures… But they may not be able to get the funding to do it! AP Moller Maersk expects rule compliance will cost the shipping industry $20bn a year. ..  Newbuilding loans often come with clauses, or covenants, that dictate vessels must remain fully compliant with all maritime regulations. Owners that struggle with rule compliance, such as the pending ballast water convention, could find banks use this to foreclose on loans rather than provide more capital. …

BNSF to test LNG locomotives: BNSF, a subsidiary of Berkshire Hathaway, is said to be the second-biggest user of diesel in the country, after the US Navy. And now it is working on with the two principal locomotive manufacturers, GE and EMD, under Caterpillar, to develop natural gas engine technology that will be used in a pilot LNG locomotive program. The WSJ ran a big story on BNSF this week. This follows stories back in January raising questions about BNSF monopoly in the Bakkenfields and proposed pipelines debates, in other words the Keystone XL pipeline…

One of Warren’s better investments in recent years
(with some behind the scenes questions on market “influence and pipelines….market dominance issues)

 

Source: Reuters

Source: Reuters

TANKERS/SHIPBUILDING

Scorpio more share sales: Scorpio continues to raise funds from investors with a further 29m shares tranche of its common stock at $8.10 per share, a discount of 35 cents. Shares again reacted well post placement. The move aims to raise $235m to fund its acquisitions war chest, to pay for further acquisitions and provide working capital, as well as for general corporate purposes.

DSME going into Jackups: DSME is aiming to build up jackps, to take share away from Keppel and Sembcorp Marine that have about a 70% market share. … The need to diversify and be flexible is paramount given a lackluster pipeline for ships over coming years.

STX OSV to stay listed…: This has been one of the most unexciting takeovers in recent memory. Shares were at lows and they remain at lows. Meanwhile Fincantieri which failed to get much more than 4.9% shares in OSV to add to its 50.7%, will rename STX OSV as Vard

COSCO….oh COSCO, when will you learn

My mother would have said… “COSCO, you couldn’t organize yourself out of a paper bag if you wanted to…”

Months after saying it had some re-organization ideas planned to avert issues such as the Shanghai Stock Exchange placing trading limits on it due to potentially running into a third year of losses, COSCO Holdings ( H and A shares) this week came up with a plan to sell its 100% COSCO Logistics division back to COSCO Beijing. But Bloomberg later in the week quoted that over $4bn could be raised! The timing would be awful, and one might wonder what the company would look like after selling $4bn in assets!

Planned sale of COSCO Logistics with recurring earnings power $100+m range, with long term upside: …Here we go again. This is the division that was injected into COSCO Pacific (49%) to boost assets before IPO of COSCO Holdings, while also earning extra fees for senior directors. Then the 50% was sold back to COSCO Holdings...and now it may get sold back to Parent.  COSCO had bought the other 51% from its parent in 2007 prior to its Shanghai IPO. …Not only is this is a poor band aid, it is also a look-see into a history of asset shuffling.

Event (WSJ summary) HK— China COSCO Holdings plans to sell its logistic unit to its state-controlled parent, China Ocean Shipping (Group) Co., as part of the Chinese shipping giant's efforts to improve its financial results in 2013 and prevent a possible delisting from the Shanghai Stock Exchange.

Initial thoughts (Tuesday): It is not any one transaction, but in the pattern that the full picture of the COSCO Logistics drama can be seen.

Original COSCO Holdings IPO process and valuations… a few long term questions on GROUP as whole here:

  • Asset transfers back and forth
  • COSCO Logistics continuous transfers between divisions
  • Wei Jiafu role
  • Add ship asset timing gaffes – the big ones on the ships at wrong prices
  • Bulk division massive underperformance (and check those fees please)
  • Accountant issues… PWC as accountant for life

COSCO Logistics follow on thoughts (Wednesday)

….COSCO Holdings dropped a fair amount (about -5%) on the back of its nonsensical logistics unit planned sellback (according to everyone else, check market response) to its parent to book an intended disposal gain to avoid (or partly cover losses against…) Shanghai Stock Exchange chastisement, and due to its guidelines on loss making companies, etc.  As the week wore on it became clearer that more asset sales may be needed, potentially up to over $4bn (??), according to Bloomberg.

….CIMC also fell in with COSCO Holdings as a stake sale was mentioned in press as a potential strategy by parent. By Wednesday it was the turn of COSCO Pacific to sell off at about -4% on early morning trade.

As to CIMC – I would not off the bat agree that it should start a new business in ship leasing, as per recent reports, since it has no core competence there. … and especially as it is competing against its partial parent, COSCO, …the other being China Merchants….  But if it is going to get cheap money from China Inc, and for container ships mostly built in China, and aim for economy of scale as it appears to be aiming for. …Perhaps there will be a role for it as ship lessor down the road. It is certainly too early to tell now. But as such I am fascinated to see what happens next on this front. Who knows – maybe COSCO will do a sale-charterback of some selected ships to vehicles such as CIMC – and at some point where CIMC could be more independent of COSCO (and that be a good thing).  Who knows?  As observers we need to see if CIMC becomes a ship lessor of scale, and if it gets the portfolio management thing…
As to COSCO Pacific – there was a 1 day delayed effect and selling started on Wednesday rather than Tuesday for the parent, potentially in response to the messed up strategy of the various parents. Who knows…

I continue to ask for mainstream press to take a proper look at the COSCO Group of companies. Even the easy pieces such as the crazy sale of logistics back to Beijing parent can still not be covered in any great depth. The SCMP put one small paragraph on it on day 1, followed by a Bloomberg story on day 2. The WSJ tried to do a better job. But there is still no understanding of the process and failures of the Logistics division, which was first pre COSCO Holdings IPO injected into COSCO Pacific at 49%, etc (I have explained this process before*) ...This division and stakes in it have been transferred back and forth with investors at times paying money for it. Now it is taken away from investors. For all we know the Beijing parent may sell it back to investors again later in another IPO!

For its own merits and failures, one forwarder had this to say about COSCO Logistics upon hearing of its intended sale back to parent:….

“Cosco Logistics? What is it? Sell what? Over the years Cosco has spawned logistics companies like Kenwa, who "jumped ship" joined CSCL as a slot charter semi NVOCC and changed their name to Rich Shipping. Cosco Air had one if the first A licenses for air freight. But had no sales offices anywhere in the world and went from being one of the only master loaders to being one of the only ones not moving any significant cargo. This is an organization that wasted the good years and ends up without a clue.”

*At first the logistics division was an internet concept back in ’99 – ‘00, running off the back of B2B relationships of the Group’s back end, along with legacy businesses accorded COSCO and other China state companies, legacies such as running off printers trade documents for a fee, as well as other captive China business. Ironically this was foisted onto investors first by Sinotrans Logistics, again at wrong valuations (because China was going to have to phase it out, and this was not properly explained to investors by bankers, while syndicate rules by bankers limited what analysts could say in deal research, for instance…). COSCO Logistics got the tail end of this. As COSCO Logistics grew, and as logistics in China grew by leaps and bounds with COSCO underperforming some of this BUT still growing, COSCO got higher valuations for injecting its stake at first in COSCO Pacific, on its way to playing a shell game for investors managed by investment banking franchises that won the COSCO Holdings mandate from COSCO leaders such as Wei Jiafu. What Weijiafu wanted was a big IPO for COSCO Holdings…one which raised lots of money for a company that had been fattened up – so they injected a COSCO Logistics stake first into COSCO Pacific. … Later on COSCO Pacific would sell its COSCO Logistics 49% stake to COSCO Holdings – and now COSCO Holdings is selling its larger COSCO Logistics stake back to its parent.   … WHAT DID SHAREHOLDERS GET FOR THIS 10 YEAR HISTORY OF COSCO LOGISTICS? ….

As George Clooney said in one of his films on CBS News early days newscaster Edward Murrow….Goodnight and GoodLuck (http://www.youtube.com/watch?v=kCaBCdJWOyM)

Anyone who isn’t confused really doesn’t understand the situation.
— Edward R. Murrow

CHARTS OF THE MONTH … Check out the number of buy ratings here (also look at Sing MRT vs HK MTR)    
SMRT Snapshot of broker ratings

 

Source: Bloomberg

Source: Bloomberg

No love lost for Singapore’s mass transit after it mishaps

Source: Bloomberg

Source: Bloomberg

CHINA NOTES

Pollution in China remains one of my key themes. I believe China’s leadership will be defined by what it does here, given that many local and some senior leaders openly allowed for decades the dumping of inordinate waste and unchecked wasteful production all over China. 10 years ago my main complaint was allowing for economic growth to be above what was necessary while allowing antiquated steel, coal, etc capacity to run alongside newer, cleaner production facilities. The list of mistakes is long. China needs to go into full reverse on this.

A couple of years ago, my friends at Environmental Services (Eisal) flagged China Everbright International as being on the right theme, though others have raised concerns on cash flow which must be examined long term….

Taicang strong growth…: Taicang terminal reported a total container 4.01m TEU throughput in 2012, or +39%. So farYTD Taicang is about +18% for Jan-Feb. Suzhou port has focused on Taicang for several years, now with MTL (51%) and COSCO Pacific (39%) as ownershttp://www.tac-gateway.com/eng/index.jsp

Ningbo Port planning Rmb 1bndomestic bond issue: A three-year bond, underwritten by Bank of China International, is the second tranche of a Rmb2bn quota approved by China’s securities regulator in 2010. Ningbo Portraised the first Rmb1bn in April 2012 at a fixed interest rate of 4.7% per annum. Rates of the new issuance will be decided after bookrunning is complete, Ningbo Port said in an exchange filing. …. SIPG.bonds: SIPG will sell 3bn RMB in one-year bonds, according to a statement on the Shanghai Clearing House’s website on 5 March.

Qingdao Port ore terminal:  Qingdao Group has started the operation of its new 400k ton iron ore terminal at Dongjiakou port, SinoShip and others reported. This is one of the largest iron ore terminals in the world with annual capacity of 40 m tons.  Dongjiakou becomes the first Chinese port that could officially have the technical capacity to receive Valemaxes.

Iron Ore: As of March 8, combined iron ore inventories at 30 major Chinese ports declined by 2.98m tons from a week ago to 66.54mtons, the lowest level since mid-January 2010 according to data from mysteel.com. Iron ore stocks decreased to 77.75 m tons at 34 Chinese ports compared with the previous week,  according to the China Securities Journal…. See the steel inventory charts. This has been expected and is a continuing trend. One reason given is that ore prices are on high side and buying would only come in at lower price points. One additional thought, as seen with US oil inventories a few years ago, is with industry deceleration comes a need to seek normalization around new averages as the old averages get thrown out the window.
 
From Caixin

(http://shanghaiist.com/2013/03/12/infographic_chinas_new_super_ministries.php)

 

Author: Charles de Trenck / Publisher: SCMO