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Asian Voice - Saturday 31st March 2012
ArcelorMittal closes Luxembourg furnace indefinitely Dear Financial Voice Reader, Each month I do a free webinar on my outlook for the month ahead. It’s based on hours and hours of research. Having just finished the research before the webinar, I thought I would provide some of the findings. If you take into account dividends, then the US market is at an all time high. It’s beaten the previous high of 2007. You probably have not noticed. We notice falls and losses more than gains and rises is why. But it is also cheap still. The benchmark US S&P 500 traded at 14 times earnings when it hit its recent high on March 1st. That’s the lowest valuation of any 52 week market high going back to 1989. Why should it be so high and cheap? Because we’re still scared. The big question is should we be? Some of the markets cheaper than they were in 2007 include Japan, Brazil, China, India. The good thing about stocks rising is that consumer confidence rises at the same time too. This leads to a self-fulfilling prophesy of confidence – usually. What about debt? US companies’ debt as measured by the amount of debt they have per $ of profits is at pre-crisis levels. They have $5 debt for $1 of profit. Or it takes $5 borrowing to make $1 in profit. In 2001 it was 11 times. They’re getting better! Of course nations are indebted. If you take all financial and non-financial debt, government and household debt then the UK is the most indebted of all 10 of the world’s largest economies – with a debt of 900% of GDP. Yes, 900%, that is not a type. By comparison, Europe is 500% and the US 400%. In case we are worries about Europe and US, you should know Norway and Switzerland are also around 400%. So will profits take us out of these debts. Well corporate profits since 2008 are up 80% in the US, after tax and inflation. Indeed the US economy has growth 10 straight quarters! Doesn’t feel like it. But it has. So if you are positive how do you benefit from this? I was at lunch with Jim O’Neill the Chairman of Goldman Sachs Asset Management and his team have analysed all global stocks for their best of the best picks for a three year outlook, allowing for valuations and global competition etc. Some names include Infosys, BG Group, BHP Billiton, Antofagasta, ARM, Unilever, HSBC, Shell, Centrica, BskyB, Diageo, Standard Chartered, Commonwealth Bank, China Mobile. That’s 14 names right there. Of course some of them are in the same sector and will tend to track each other. But usually after 14 names, there is not much point picking more, because the influence of each individual stock to the rest of the portfolio is limited. I also prefer an exit if any drop 25%. Over 3 years, according to Goldmans such a portfolio has a good chance of 30% pa rises. Hmmm…seems a lot. But they are God’s bankers! For free market webinars by me on the monthly global outlook, trading strategies, why people lose money in the markets see www.alpeshpatel.com
Woodford named ‘boldest business person of year’ Michael Woodford, the former Olympus CEO who blew the whistle on one of Japan's most high-profile frauds, added the title of "boldest business person of the year" to his list of awards for unearthing the $1.7 billion accounting scandal. Woodford, a rare foreign CEO in Japan who was fired last October after questioning a series of murky acquisitions and fees, received his latest accolade at the Financial Times ArcelorMittal Boldness in Business Awards. "If there was one person who captured the spirit of boldness in business in 2011, it was Michael Woodford at Olympus," said FT editor Lionel Barber. Armed with a laptop, a clutch of documents and a
tale of intrigue, 51-yearold Woodford alerted prosecutors and journalists around the world to a scandal that has seen seven arrested and which sent Olympus's stock plunging 80 per cent. Woodford is one of the few business people to have received awards from almost all major British newspapers. He has been named "Briton of the Year" by The Telegraph and "Business Person of the Year" by The Times, The Independent and The Sun. The Association of Certified Fraud Examiners (ACFE), the international anti-fraud organisation, has also awarded him its 2012 Cliff Robertson Sentinel Award for whistle blowing.
ArcelorMittal, the world's largest steelmaker, said it would extend the closure of its electric arc furnace in Schifflange, Luxembourg, indefinitely, a measure which highlights the deep crisis affecting the EU steel sector. ArcelorMittal's decision, which will affect 282 employees at the site, is due to weakness in the construction sector in Western Europe, the company said. "Unfortunately the construction market, for which the products at Rodange and Schifflange are made, has not recovered from the downturn that started at the end of 2008 and there is still no
sign of meaningful improvement," Nico Reuter, ArcelorMittal's Europe vice-president for long carbon steel, said. This closure extension follows similar ones at other European sites. Other high-cost European steel plants are also likely to be shut in the near future as low steel prices and poor demand make them unprofitable, analysts and traders said. "Steel prices are not too spectacular, underlying demand is not great
while costs are rising so there is still potential for many high cost mills to be shut down in Europe," said Kaye Ayub, steel and iron ore consultant at Meps. Competition from lower-cost producing areas such as Turkey, Russia and Ukraine, and Asia has also reduced steelmakers' margins. "This is the beginning of a number of shutdowns across Europe; Europe can simply no longer compete with the cheaper material being produced in other parts of the world and consumption of standardgrade steel is also falling in Europe," said a source at a UK-based steel trading house.
"There is only one solution: steel mills have to shut down. ArcelorMittal is likely to be the leader in this field as they are so large and diversified, that they are able to shut down one or two plants and still remain a competitive player. Small mills will either have to change the type of steel they produce, or eventually go bust." At its sites at Rodange and Schifflange, considered a single operational unit, ArcelorMittal produces long carbon steel products such as reinforcement bars, crane rails and special sections. The mill in Rodange will continue to operate on two shifts, the company said.
Vodafone tax case: Satyam & TechM merge to India readies fresh salvo form $2.4 bn IT company The revenue department of the government of India is ready with a fresh plan to issue a new demand notice on cellphone operator Vodafone, a day after the Supreme Court rejected the government's review petition in the country's biggest tax case. Finance ministry officials say that the tax department will issue a notice to Vodafone within 45 days of the passage of the Finance Bill, which is expected to get parliamentary nod in May. The department will issue another under the IT Act to make Vodafone a representative assessee as tax authorities are unable to issue a demand on Hutch that sold the stake to Vodafone. "It will be a new chapter in the case. We will send them a fresh notice once the Finance Bill is passed. Since Hutch is no longer present in India, we will make Vodafone a representative assessee," a finance ministry official said. Officials said that Vodafone is likely to challenge the validity of the new law. "It will be a long-drawn affair and we are prepared
for it," the official said. Within hours of the Supreme Court ruling, top ministers, led by finance minister Pranab Mukherjee, got into a huddle to look at the implications and the future course of action. Home minister P Chidambaram, telecom minister Kapil Sibal and law minister Salman Khurshid were part of the brainstorming. The tax department is likely to rely heavily on clause 113 of the Finance Bill to bolster its case. The clause proposes to ensure that notwithstanding a court or tribunal ruling, all capital gains tax notices or demands either levied or recovered under provisions of the Income Tax Act related to a share or income arising out of India will stay valid. Experts say the move is aimed at ensuring that the government collects taxes in merger and transactions involving an Indian asset, which is held by foreign entities. Clause 113 is in addition to amendments to Section 9 of the Income Tax Act that has come under fire from tax experts and investors.
The $14.4-billion Mahindra Group last week unveiled the widely anticipated merger of its two IT services firms, Tech Mahindra and Mahindra Satyam, creating a $2.4billion entity, which is poised to be India’s fifthlargest software outsourcing company by revenue. The development comes three years after the group acquired the scandalrocked Satyam Computer Services, later branding it Mahindra Satyam. As part of the merger, investors will get two Tech Mahindra shares (of Rs 10 face value) for every 17 shares of Mahindra Satyam (of Rs 2 face value).The group will own 26.3% in the combined entity while British Telecom, a strategic partner of the group in Tech Mahindra, will hold 12.8%. Since Tech Mahindra currently holds 42.65% in Mahindra Satyam (through Venturbay Consultants), 10.4% equity of the new entity that will come in existence because of this crossholding, post merger, this equity will be held as
treasury stock in a trust, said the management at a press briefing in Mumbai. The new entity, the branding of which will be decided over the next few months, will compete with the likes of Tata Consultancy Services, Infosys and Wipro for bagging big international outsourcing contracts. Tech Mahindra will issue 103.4 million new shares, increasing its number of outstanding shares to 230.8 million and its equity capital to Rs 2.308 billion, said the management. This values Satyam at Rs 76.3 a share ($1.8 billion), according to Bloomberg. “This merger does not bring about any cost savings. Instead, it’s driven by the proposition of delivering better value to our customers, and project the power of one,” said C P Gurnani, CEO, Mahindra Satyam.
A consortium led by Japanese firm Hitachi will set up Asia’s largest desalination plant at Dahej special economic zone (SEZ) in South Gujarat. An agreement to this effect was signed by the Gujarat government and the consortium in the presence of Chief Minister Narendra Modi last week. Others who form part of the consortium are Japanese firm Itochu and Singapore's Hyflux. The three companies together have formed Swarnim Dahej Spring Desalination Private Limited for setting up the desalination plant, an official note issued by the state industries department said, adding, "The project is supported by Japanese government through the ministry of economy, trade and
industry." The project, which is expected to cost Rs 20 billion, will be set up on design, build, finance and operate (DBFO) basis. To be set up in two phases, the consortium is likely to produce 70 million gallons per day (MGD) of sweet water for industrial use on completion. "The project will be completed in three years," a senior government official said. Work for the project is likely to begin in October, after obtaining all necessary clearances, including environmental, from the Centre. While the consortium proposes to buy up 30 hectares of land in Dahej SEZ, officials said, once ready, it would supply water to units in SEZ as well as enterprises being set up in
Petroleum, Chemical and Petrochemical Investment Region (PCPIR), Dahej, which is the fastest developing special investment region in the DelhiMumbai Industrial Corridor (DMIC). The official said the proposed cost of the desalinized water from the plant is "likely to be Rs 40 per 1,000 litres, which is considerably lower than other desalination plants in India." He added, "A desalination plant being set up in Chennai with the support of the Tamil Nadu government, for instance, supplies water for Rs 56 per 1,000 litres. Nowhere in India desalinised water is available for less than Rs 50 per 1,000 litres".
However, the official admitted, the desalination plant will not be enough to take care of the water requirements of Dahej SEZ and PCPIR. "The projected requirement of PCPIR, which includes Dahej SEZ, is 300 MGD. Other sources, especially a proposed pipeline from the Narmada canal off Narmada dam, will have to be tapped for enhancing water requirement of the industries."
Hitachi to build desalination plant in Gujarat