http://www.marketwatch.com/story/how-big-mining-deal-will-sabotage-america-2012-08-24?pagenumber=1
Submitted by Tyler Durden on 08/25/2012 14:15 -0400
How big mining deal will sabotage America
Commentary: Ex-Im bank financing too risky for U.S. taxpayers
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By Paul B. Farrell, MarketWatch
SAN LUIS OBISPO, Calif. (MarketWatch) — Yes, the proposed Export-Import Bank of the United States investment in a $10 billion Australian coal-mining deal is at best highly suspect, failing to use sound underwriting principles ... too secretive for general public scrutiny ... may contradict the best interests of American foreign policy.
And at worst, our Ex-Im Bank is putting hard-earned American dollars and credit into a mining deal in far-off Australia in what appears to be a poorly thought-out use of tax dollars, at a time when there’s a high risk of a global recession ... when our bloated federal budget is increasing an already excessive national debt, piling new hidden tax burdens on the backs of future generations of American taxpayers.
1. Mining joint venture too risky as global economies fear recession
Here’s the deal basic from LiveMint.com, an India News Service partner of the Wall Street Journal. Early this week the headline read: “Rineheart confident of GVK approval.” Turns out Australians had already been telling the world the American government has approved this $10 billion joint-venture deal between the Ex-Im banks of the U.S., China and Korea. Not true even before Friday’s announcement by Australia’s Federal Environmental Minister Tony Burke that the project could move ahead.
The Australians seem in too big a hurry. Listen: “Australian mining tycoon Gina Rinehart, one of the world’s richest women, said on [Aug. 19] that she is confident the GVK Group’s Alpha Coal and Rail project, in which she is a minority stakeholder, will receive stalled environmental clearances from the Australian federal government by August.” Bloomberg Billionaires Index lists Reinhart as one of the richest at $18.1 billion.
Rinehart’s “backing is crucial for the project in Queensland considering her influence in Australia’s mining industry. ... GVK got environmental clearance for the project from the Queensland government, but the approval process was halted by the federal government on June 5 on grounds that the earlier assessment lacked information including the likely impact on the Great Barrier Reef that lies off the Queensland region.”
2. U.S. tax dollars helping anti-environment Australian billionaire
When I was a Morgan Stanley investment analyst years ago, we were helping Japan’s largest trading company with real estate deals. A senior company officer was once visiting from Tokyo. Their company had just arranged a joint venture to acquire all the output of an Australian mining operation for 25 years. He laughed as he explained the Japanese translation of joint venture: “Dosho-mu, same bed, different dream.”
Well, here America’s going to bed with China and Korea as well as Australia, and it smells fishy.
Unfortunately, this Australian dream project may become a nightmare for America as well as Australia. Rinehart apparently doesn’t care for the environment. Earlier she “came down heavily on Australia’s recent controversial carbon tax to tackle climate change and the equally contentious minerals resource rent tax (MRRT) to be levied on mining profits,” reported LiveMint. And with “labor costs rising,” she warned “Australia is losing in its cost competitiveness” and “is not the only country with resources’.”
Even before Friday’s federal approval, GVK was arranging project financing and “in talks with several investors, banks and export credit agencies. Of the $10 billion GVK is planning to invest on developing the three mines, the railway line and the port, it will require $2 billion to $2.5 billion of equity, and expects to raise the balance of $7.5-8 billion as debt.”
GVK’s Vice Chairman G.V. Sanjay Reddy added: “We got responses from Korean Ex-Im Bank, Chinese Ex-Im Bank and U.S. Ex-Im Bank to fund the debt portion, if we choose contractors from those particular countries. Funds shouldn’t be a problem.” Given the slowdown in America you can guess that maybe all this may involve pressure from U.S. mining equipment manufacturers lobbying for the U.S. Ex-Im Bank to approve the deal.
3. Bad timing: Australia near a recession warns Deutsche Bank
Just this week a Journal report flashed this bold headline: “Deutsche Bank Warns of Australian Recession Risk.” Get it: “The warning by Deutsche Bank comes amid rising concern that Australia’s mining investment boom, which has insulated the commodity-rich economy from a global slowdown, is waning, leading to mine expansions being scaled back and mounting job losses.”
Same day the Deal Journal Australia posted a report headlined: “Australia’s Resource Boom Losing Steam.” So why are American tax dollars being put at risk in a fading Australia economy?
4. More bad market timing: China’s demand for coal on rapid decline
Recently the media has illustrated stories and shots of China’s stalled port activities. A couple weeks ago China’s Xinhua news network headlined: “China’s July exports slow sharply, outlook grim.” adding that “export growth slowed sharply to a six-month low in July on dwindling foreign demand, strengthening anticipation for weak trade performance for the whole year and more government action to support the economy.”
That’s from inside China: Yes, they anticipate weak foreign trade through 2012, likely longer when you factor in the likelihood Washington will mishandle the 2013 “Fiscal Cliffs.”
As HuffingtonPost columnist Mark Gongloff just put it: “The U.S. economy will sink into a deep recession in 2013 and unemployment will jump back above 9% if Congress does not avoid a ‘fiscal cliff’,” according to a just published CBO study.
5. Foreign policy conflicts with other American national interests
Ever question why Americans are sticking our noses too much in other people’s business? Especially now as we endure the blowback, the unintended consequences, the unnecessarily high costs of our ill-conceived Iraq war. Why? Why are we wasting our taxpayer dollars in Australia when we have so many ignored priorities here at home, in energy, mining, natural resources, excessive debt and our own unemployment problems?
6. Sierra Club warns of damage to Australia’s greatest natural treasure
Writing in a HuffPost blog, Mary Anne Hitt of Sierra Club’s Beyond Coal Campaign, headlined with this dramatic warning: “Big Coal vs. The Great Barrier Reef ... Tell U.S. Ex-Im Bank: Don’t Use Tax Payer Dollars to Destroy the Great Barrier Reef.” Why? Because our U.S. Bank is using American “taxpayer money that would include an export terminal inside the Great Barrier Reef,” one of the world’s great natural wonders.
In fact, “Unesco released a damning report that shows coal development is damaging the Great Barrier Reef. Unesco then demanded that Australia take action to halt the project, or risk putting the reef’s World Heritage Site status in jeopardy.”
7. Coal is Earth’s biggest source of air pollution, why finance it?
Not only is coal the world’s biggest pollution source, China may be one of the biggest buyer of GVK’s mining ores. So why are we helping America’s biggest global economic competitor? Why, instead of encouraging alternative energy projects?
Even worse, Hitt reports “it is this vast flow of dirty coal that caught the interest of GVK and prompted the Indian conglomerate to buy a majority stake in Hancock. That’s because India is currently experiencing a coal crisis,” due to the high price of coal that’s triggering bankruptcies and bailout demands in India.
8. U.S. Ex-Im Bank’s analytical process fails the ‘smell test’
But why distrust the U.S. Ex-Im Bank? Very simple, the bank appears to have a secret agenda: “This is only the latest in a string of coal projects supported by Ex-Im Bank that are harming communities and the environment in South Africa, India, and even here in Appalachia.”
Worse, GVK’s projects “would not only flood the international market with nearly 8 billion tons of coal (double China’s current annual consumption) but also ravage one of the world’s unique natural treasures, the Great Barrier Reef.”
Yes, this deal fails the smell test: While at Morgan Stanley I once evaluated a collapsing program for Washington politicians. As I recall, the government had guaranteed over a hundred million in loans. About 20 deals were in default. I flew to Washington to pick up the documents. A bureaucrat met me at the airport. I recall him saying: “I wish someone had explained how to evaluate these.”
Since then, I’ve always been suspect of all government investments reviewed. This one is no different.
As Hitt warns: “Financing from the Ex-Im Bank could make or break this project.” But “unfortunately, the bank does not consider downstream emissions when assessing the carbon risks of proposed projects.” Not a good underwriting process. Why? The bank only counts “carbon released at the mine and associated transport, despite the fact that coal is mined and transported for the sole purpose of burning at another location.”
Worse, “even if Ex-Im Bank did consider downstream emissions,” they apparently ignore the data, because the bank “has already approved several of the world’s most carbon-intensive coal projects, in violation of its own carbon policy.” These are very serious charges that deserve independent review before any new Ex-Im Bank deals are approved.
Yes, this project and the bank underwriting processes fail the smell test. This is not a wise investment deal for the American taxpayer. This and other projects should be shelved until the Ex-Im Bank gets these issues independently reviewed.
At a minimum, the American taxpayer deserves a detailed review of the bank’s questionable processes.
and as for China.....
http://www.zerohedge.com/news/big-outflow-trouble-not-so-little-china
Big Outflow Trouble In Not So Little China?
China has two problems... well more than two we are sure, but these seem critical.
First, there is a significantly slowing economy that 'desperately' needs the hand-of-god Central-Banker to stimulate it with free-money - but is hand-cuffed by the huge disconnect between 'apparently' low CPI and extreme highs in food and energy priceswhich will only exaggerate spending retrenchment should any money-printing be enabled.
and with Corn stocks at a stunningly low level (lowest since 1995 and nearing 1975 levels) things are only going to get worse...
Which leaves the PBOC somewhat powerless to do the kind of massive stimulus hole-digging-and-re-filling that is required to plug the economic demand slack.
Second, it seems for many investors the writing is on the wall as money is flowing out of the world's growth engine faster than oil from a wok. While at the surface USDCNY appears to be doing its 'stable' thing - the PBOC is soaking up unprecedented amounts of CNY as the market 'sells' out.
This chart (that we previously discussed in detail here) shows the difference between market-driven movements in USDCNY (red) and PBOC-driven (blue) - clearly the market is selling its CNY and running away and while we are sure China would like a lower Yuan (to help exports etc.) it is nevertheless band-ridden and needs to maintain some stability or trade-wars or worse will escalate - so thePBOC is soaking up massive amounts of Yuan (and selling out its USD?) to maintain that illusion of control...
These 'adjustments' which are now on an unprecedented scale started right after LTRO2 ended and are accelerating...
which is leading to forward-Yuan trading at post-crisis high discounts...
This combination of slowing (and seemingly unstoppable) economic trajectory with significant negative money-flows is a vicious circle - evidenced by the efforts of the PBOC with stealth reverse repos and the 'easing' of their Yuan trading bands (chart below - as per Bloomberg's Chart of the Day) as perhaps they revert back to a weaker Yuan policy (and implicit strong USD mercantilist vendor-financing model).
Charts: Bloomberg and Diapason Commodities
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