AVIATION AND RISING FUEL PRICES

Chart of the Day: The Real Cost of Rising Gas Prices
by Adam English, Associate Editor, Inside Investing Daily

If you think high gas prices are eating into your bottom line, try running an airline.

In 2012, the fuel bill for airlines is expected to be around $200 billion. That would account for more than 30% of total operating costs.

In the end, we all must pay the price.

By comparing oil prices to airline fares we can get a good idea of how the average passenger is getting hit by rising fuel costs.

A 12.1% increase in a six-month period last year was painful enough... but with oil prices predicted to stay above $100 per barrel throughout 2012 and a 4% rise in fare costs since the beginning of 2012 it will only get worse.

Southwest Airlines, the most consistently profitable U.S. carrier, has already announced that its first-quarter profits will be wiped out by rises in fuel costs.

As oil approaches $120 per barrel, airlines have no choice but to start making drastic changes to their businesses.

Airlines are already purchasing more efficient planes as quickly as their revenue allows. Routes are being dropped and passengers have fewer direct flights to anywhere except a major hub.

With crude prices creeping up past $107 per barrel, we can expect to pay through the nose for less-convenient routes well beyond the summer vacation season.

The only other possibility is a new round of airline bankruptcies.

CRIPPLING EFFECT OF STRIKES

Ships shun Auckland as strike cripples port 
Twelve ships have already diverted to other ports during seven strikes at Auckland port since December 

At least six more ships are expected to shun Auckland before Sunday as the country's largest container port lies crippled from the early days of a three-week strike.

That is on top of 12 ships already diverted to other ports during seven strikes against the council-owned port company since early December, when about 300 workers were also locked out for 48 hours, reported The New Zealand Herald..

Many other ships have been delayed and the company estimates its revenue loss so far from the diversions at up to US$2.94 million, not counting hefty costs to importers and exporters unable to get goods to market in time.

The dispute has also started putting a squeeze on exports from other ports, which rely on the supplies of empty containers imported through Auckland.

Although shipping giant Maersk hopes to berth a vessel in Auckland, and have it worked by non-striking port staff, the Maritime Union says it will believe that when it happens.

That follows a last-minute decision by a Singapore-based shipping line to turn around a container vessel and its cargo including foodstuffs and industrial supplies in the Hauraki Gulf on Sunday night and divert it to Tauranga, under alleged union pressure.

Auckland port company chief Tony Gibson and the union, whose members are striking against a threat to contract out their jobs, traded claims and denials yesterday about where such pressure came from.

Gibson said Ports of Auckland was urgently considering whether it could sue the union for damages.

He said it had been told by the shipping company Pacific International Lines of being threatened by a Maritime Union official from a conference in Australia with a ``black ban'', a claim denied by union president Garry Parsloe.

`I am the spokesman for the Maritime Union of New Zealand and I never said it and never instructed anybody to say it,'' he said.
`International unions talk to international shipping companies every day - they are entitled to do that - nobody can stop them and if that results in ships not coming to Auckland, I can't do anything about that.''

Importers' Institute secretary Daniel Silva, although a strong critic of the strike, said the company was ``barking up the wrong tree'' by investigating legal action against unionists.
``They are in the business of demanding with menaces, and the law allows it,'' he said.

Despite his pessimism, both sides have agreed to meet before a mediator on Thursday and Friday to explore the chance of settling a new collective employment deal.

INVESTMENT MARKET

Australia is one of my favorite "go to" markets for investors who want to "globalize" their portfolio. It's a safe and stable economy with a lot of potential.

Better yet... it is largely removed from the debt worries plaguing the U.S. and European markets.

But with problems this big, it's hard not to get sucked into the turmoil.

In November 2011... Australia cut its interest rates. This relatively small adjustment sent ripples through the global economy.

That might not sound like big news... Major economies around the world have been slashing rates for the past four years. But this is different. Australia was the first developed economy to raise its interest rates after the global financial crisis in 2008 and 2009.

And it continued to raise rates through November 2010, when it made its last move, bumping rates from 4.5% to 4.75%.

But on Nov. 1, 2011, Australia trimmed rates back to 4.5%. It was the first cut in 2 ½ years.

The reason? Europe's debt crisis was affecting trade with Asia. Bloomberg reported that China and South Korea were exporting less because of European and U.S. economic woes.

And China is a huge market for Australia.

You are probably wondering why you should care. I have two words for you: resource and opportunity.

What this rate cut meant for investors was this: more exports for Australian companies and more profits for their bottom line.

The resource sector is strong in Australia.

In fact, Australia is going through a mining boom. In late October 2011, BIS Shrapnel said in its report "Mining in Australia 2011 to 2026" that investment in Australian mining could reach $85.7 billion by 2015 or 2016.

In 2011 the estimated investment figures top out at only $48.5 billion, meaning the industry could see growth of nearly 20% a year for the next four years.

When interest rates are cut, the value of the underlying currency drops. After the announcement on November 1, the Australian dollar fell 0.4% overnight. That might not sound like much, but when you're talking about millions of dollars' worth of exports, this difference can add up quickly.

For example, if a buyer wanted to buy $1 million in iron ore, he would pay $4,000 less after rates were cut.

No wonder 80% of the investment capital in Australia's resource projects comes from outside the country. Everyone wants a piece of this pie.

Australia isn't the only fish in the pond, though... Indonesia, Turkey, Brazil and a host of other export countries are all trying to bolster exports. Australia's rate cuts could be justified by needing to stay competitive in the resources sector.

The growth expectations and stable government and economy make Australia very attractive.

And the best opportunities may just be in the smaller companies -- those where $4,000 makes a big difference. The junior mining sector will be a big place for investors over the next three or four years.

JUMEX, or junior mining and exploration companies, can move quickly.

One company worth looking at is Independence Group (IGO:ASX). It is a nickel producer with the Long Nickel Mine in Kambalda, Western Australia. It also owns stakes in six joint ventures across Australia. Plus, it is exploring in five 100%-owned mines.

The company's looking for gold and base metals... and prospects are good.

IGO also has made some strategic acquisitions that have bought it stakes in other joint ventures. Plus, it has strong cash flow thanks to the facts it is actually producing metal... not just searching for it.

These points are key for any investor looking to take a position in a junior mining company. A producing company is almost always safer (from an investment standpoint) than a small exploration company.

Reserve estimates for its exploration projects keep growing, too. Its Tropicana joint venture boosted gold reserves from 5.56 million ounces to 6.61 million ounces. IGO's stake is for 1.98 million ounces of those deposits.

Australia is a hotbed of mining projects, and the interest rate haircut will make exporting cheaper. For junior mining companies, this is great news. Investors could have a field day.

Keep in mind, some of these small miners are great takeover candidates, as well.

If you're looking to take advantage of the Australian mining boom and its role in the currency wars, now's the time to do it. Small-cap companies could offer you a great advantage in this industry.

Happy Investing,

Sara

MISC - POOR EARNINGS

Monday February 27, 2012

Analysts cautious on MISC

By SHARIDAN M.ALI
sharidan@thestar.com.my

Company’s prospects uncertain on poor earnings visibility

PETALING JAYA: Analysts remain cautious on MISC Bhd’s prospects going forward due to poor earnings visibility of its petroleum tankers, chemical tankers and liner divisions.

This was after the world’s single largest owner-operator of liquefied natural gas (LNG) tankers was dragged into the red for the first time in its history in its financial year ended Dec 31, 2011 with a net loss of RM1.48bil on revenue of RM8.5bil.

The loss was mainly due to recognition of one-off provisions totalling RM1.4bil following its recent decision to exit from the liner business. Excluding liner provisions, the group also recognised RM287.2mil impairment losses on its vessels on the back of the poor shipping market.

MISC had on March 2, 2011 announced the change of its financial year-end from March 31 to Dec 31. The first new financial year ended on Dec 31, 2011 with a shorter nine-month period.

Kenanga Research said the MISC management anticipated a gloomy outlook for charter rates, which had yet to bottom out partly due to the oversupply of vessels.

“The continuous rising bunker price definitely does not augur well for its shipping business and this will likely persist for another two to three quarters before it gets better.

“Although we are positive on its exit from the liner business, we remain cautious on the company due to its poor earnings visibility,” said Kenanga in recent report.

It added that the overall shipping businesses performed poorly as even its usual star performer, the LNG shipping division, registered a 1.1% contraction in its earnings before interest and taxation (Ebit) in the quarter ended Dec 31.

“This was mainly due to escalated bunker price where, currently, the bunker price remains high at US$728 to US$730 per tonne.

“In addition, higher drydocking days and lower off hire days had squeezed LNG’s margins while soft charter rates continued to compressed petroleum and chemical shipping’s profitability,” said Kenanga.

Hong Leong Investment Bank Research (HLIB) expected further impairment on petroleum tankers at US$22.1mil (RM66.6mil) and chemical tankers at US$62.7mil (RM189mil) due to weak outlook on these sectors.

“Regarding the delay on Gumusut Kakap floating production system, MISC has been levied for late penalty, which will be recognised by 2013,” it said.

On the flip side, HLIB said there could a potential writeback on its liner business provisions.

“MISC has specifically provided RM1.45bil (larger than previous guidance of RM1.2bil) for the potential losses of exiting the liner business.

“There is potential writeback should MISC able to realise its liner business at higher than the expected value,” it said.

Additionally, HLIB said MISC’s 66.5% subsidiary, Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) that handles the group’s heavy-engineering business, still had an orderbook of RM3.1bil that would last until 2013.

“And the acquisition of Sime Darby’s Pasir Gudang yard by MMHE is expected to be completed by the second quarter this year.

“MMHE recognised lower earnings mainly due to timing of revenue recognition,” it said.

In general, according to a shipping analyst, the situation at MISC could be worse if it was a purely shipping company, but MISC’s businesses were diversified in energy-related construction as well as offshore.

“This has kept the company afloat and weather the longer-than-expected storm that has hit the shipping industry globally.

“The situation at MISC may be clearer after the provisions, especially for its liner business, are finalised most probably by mid-year,” he said.

MISC in a recent statement accompanying its latest financial result admitted that the demand outlook for shipping remained weak.

“The supply-demand imbalance will continue to further depress and add volatility to petroleum and chemical freight rates. However, the group’s recent decision to cease its loss-making liner business operations is expected to benefit in the medium to long term,” said MISC.

“Meanwhile, LNG, offshore and the heavy engineering businesses will continue to provide stability to the group’s earnings. And no dividend has been proposed for this financial year.”

PORT RATE CUT

Rates at PSA's Chennai terminal cut 

Shipping container cargo through India's second biggest container port, located at Chennai, will cost less for exporters and importers after the port tariff regulator cut rates by 12.23 percent at the facility run by PSA International, reported The Mint.

PSA's facility is one of the two private container loading terminals operating at the Union government-controlled Chennai port.

PSA International had asked for a 15 percent raise on the US$61 it charges customers for handling a standard container at the terminal. A rate revision was required because the validity of the existing rates ended on 31 December.

PSA International, the world's second-biggest container port operator, is fully owned by Temasek Holdings, the sovereign wealth fund of Singapore.

"An estimated additional surplus of $17.4 million will accrue during the (new) tariff cycle, if the existing tariff is allowed to continue till 2014," Rani Jadhav, chairperson of the Tariff Authority for Major Ports (Tamp), wrote in an order notified in the gazette of India on 14 February.

"As there is no justification for giving any increase over the existing tariff, the proposal of Chennai International Terminals seeking an increase of 15 percent is rejected," Jadhav wrote in the order. "A reduction of 12.23 percent is effected across the board in the existing tariff as warranted by the estimated cost position."

The new rate will be valid till 31 December 2014. Chennai International Terminals, wholly owned by PSA International, handles more than 400,000 standard containers a year. By 2014, it plans to handle more than one million standard containers.

"The terminal would incur a loss on the basis of existing tariff," Chennai International Terminals said in its application seeking a rate hike of 15 percent. This is the second rate cut ordered by TAMP in the past few days at a container gateway in India.

On 8 February, India's port tariff regulator notified a rate cut of 44.28 percent at Gateway Terminals India, the container loading facility that is 74 percent owned by APM Terminals Management at Jawaharlal Nehru port near Mumbai, India's busiest container gateway.

Chennai International Terminals said volumes were growing steadily after it started operations in September 2009. But with three quay cranes and 10 rubber-tyred gantry cranes, the terminal is in a weak position to compete with other terminals in the region.

"Hence, for strategic reasons and for competitive edge, we are investing $50.26 million to install additional container-handling equipment, including four rail-mounted quay cranes and eight rubber-tyred gantry cranes," a spokesman for the terminal said. The additional equipment will be commissioned in the third quarter of this year, he added.

"By deploying additional equipment, we will ensure faster vessel turnaround as shipping lines seek to minimise the amount of time spent in ports and prefer ports with faster vessel turnaround time," the spokesman said.

PSA has invested about $121.77 million to build the new facility. The firm won the rights to build and operate the terminal for 30 years in a public auction in 2007. 

MANUFACTURING-THE ENGINE OF GROWTH

MIDA: Manufacturing sector still growth driver for Malaysia

Wednesday, 22 February 2012 10:10 Farah Saad 0 Comments

The manufacturing sector is expected to remain a "significant" contributor" to the growth of the country’s economy, according to the Malaysian Investment Development Authority (MIDA).

In its report on Malaysia’s investment performance for 2011 released yesterday, MIDA said a total of 846 manufacturing projects, valued at RM56.1 billion, were approved, showing an increase of 19% from RM47.2 in 2010.

"Foreign and domestic investors continue to respond positively to the government’s initiatives to invest in new growth areas and emerging technologies, high value-added industries, high technology and capital intensive industries and research and development activities," Minister of International Trade and Industry Datuk Seri Mustapa Mohamed said at a media conference in Kuala Lumpur yesterday.

The approved amount accounted for almost 38% of the total RM148.6 billion in approved projects. It exceeded by RM28.6 billion, or 104%, of the average annual investment target of RM27.5 billion set in the Third Industrial Master Plan, 2006-2020.

Foreign investments in projects approved in 2011 amounted to RM34.2 billion (61%) compared to RM29.1 billion (39%) in 2010.

The majority of the projects approved in 2011 were new projects (511 projects) with investments of RM33.1 billion (59%).

In 2011, the electrical and electronic (E&E) industry remained the leading industry in terms of the number of new projects approved (34%), followed by basic metal products, and chemicals and chemical products. Projects approved in 2011 are expected to generate a total of 100,533 employment opportunities, with 42,688 of those jobs in the E&E industry.

Japan, South Korea, the US, Singapore and Saudi Arabia were the five leading sources of foreign investment in manufacturing.

Japan invested RM10.1 million in 77 projects, mainly in the E&E industry.

Meanwhile, Mustapa said the solar panel manufacturing sector was experiencing sluggishness due to the drop in solar photovoltaic panel prices in the global market and access capacity.

"Some companies have approached MIDA and have asked to put their projects on hold," he said.

Germany’s Robert Bosch has postponed its plans to build a solar plant in Malaysia due to pressure on costs in the sector.

Although the company has delayed its project, Mustapa said the company has "remained committed" to setting up its plant.

In line with a call from the government for domestic investors to step up to the plate under the Economic Transformation Programme, domestic investments approved in the manufacturing sector increased by 21% to RM21.9 billion, from RM18.1 billion in 2010.

PRIVATISATION TO ACCELERATE AIRPORT EXPANSION

Brazil gets a handsome $14b for three airports

Brazil took a major step toward modernising its airports on Monday by selling multi-year concessions worth US$14 billion to operate three of the busiest hubs, and secured a huge premium from local and international companies.

As with other areas of Brazil's stretched physical infrastructure, the country's airports are groaning under the rapid expansion of the domestic market, reported Dow Jones Newswires.

Brisk economic growth and record low unemployment have created millions of entrants into Brazil's middle class. That in turn has spurred air traffic growth of double-digit rates, with demand jumping 16 percent in 2011 to about 180 million passengers.

The government is also scrambling to be ready to receive visitors to the 2014 World Cup and the 2016 Olympic Games. Privatisation is seen as a mechanism for accelerating the expansion plans, as red tape tends to tie the hands of the government-run airports operator, Infraero president Gustavo do Vale said.

Contracts to upgrade and operate airports in the cities of Sao Paulo, Campinas and Brasilia were sold for a total of $14 billion, more than four times the government's initial asking price, a reflection of strong demand for the opportunity to manage the infrastructure of one of the world's fastest growing airline markets.

"The result is a positive sign that this country is a place where investments are safe and profitable," said Wagner Bittencourt, Brazil's Civil Aviation Secretary, which oversaw the auction process.

Brazil opted last year to privatise several airports, and sold a small airport in Brazil's northeast. Monday's auction marks a major step forward.

The prize asset, the Guarulhos airport in Sao Paulo, was taken by Investimentos e Participacoes em Infraestrutura SA or Invepar, a holding company made up of construction companies and some of Brazil's largest pension funds – together with Airports Co South Africa. The partners bid $9.41 billion, considerably higher than the next bid of $7.5 billion, made by EcoRodovias Infraestrutura e Logistica and Germany's Fraport.

"We are very confident about the bid we made," said Gustavo Rocha, chief executive of Invepar. "The bid was made based on months of studies and modeling. We didn't make the bid just to scare off other bidders."

Guarulhos was considered to be the most attractive of the batch because it already has a huge flow of customers, and so guaranteed revenues. The airport in Brasilia is smaller, but still has a significant customer base; its concession was picked up by Brazil's Engevix construction firm and Argentina's Corporacion America, with a bid of $2.62 billion, seven times the minimum.

Transportation company Triunfo Participacoes won rights to operate the Viracopos airport in Campinas, which is slated to become Brazil's biggest airport, but which will require the mosinvestment, at $5.06 billion. Triunfo partnered with construction company UTC Participacoes and France's Egis Airport Operation to bid $2.21 billion, more than double the starting price of $871.69 million.

Despite bringing in private-sector operators, the government is still expected to pay a dominant role in the funding for the airports, via the national development bank, or BNDES, which has agreed to lend about 80 percent of capital needs – excluding the amount paid for the licence – at heavily subsidised interest rates.

"During the first phase we will make use of BNDES, as it will be enough to start construction work," Triunfo's Bottarelli said.

"We may use infrastructure bonds. We know what rates BNDES charges, let's see what the market asks for."

Infrastructure bonds are a new class of debt for which the government is in the process of creating new incentives including tax cuts.

Meanwhile, the success of Monday's auction is likely to encourage more concessions later this year. Secretary Bittencourt told reporters the government is planning concessions for airports in Rio de Janeiro and Belo Horizonte.