Would Las Vegas Sands Current Cash Crisis Have An Impact On Singapore Marina Bay Project?

Posted on the Economics Times: Global turmoil hits gambling industry

• NEW YORK: The ongoing economic downturn has hit the gambling industry, a media report says. For Las Vegas Sands casino operator, a full-blown financial hurricane may be brewing, Time magazine reported, pointing out that in a November 5 filing to the Securities and Exchange Commission, the company had revealed its cash was drying up.
  
  For the first six months of 2008, according to the filing, the casino's earnings were "insufficient to cover fixed charges" by USD 80.1 million.
  
  This gaping shortfall, astonishing for a company that was throwing off more than USD 600 million in free cash flow annually just three years ago, could trigger defaults on its USD 8.8 billion in long-term loans.
  
  Controlled by billionaire Sheldon Adelson, Las Vegas Sands is yet another high-flying company that has been caught out by the global credit crunch and crashing economy, Time said adding, with the US economy entering recession, gamblers in Las Vegas are growing more reluctant to part with their money.
  
  Adelson, who is credited with helping to revitalise Las Vegas with his lavish Venetian and Palazzo resorts, has become a well known figure in Asia in recent years after he has spent billions building new casinos and hotels in the Chinese enclave of Macau.
  
  The company, Las Vegas Sands was tapped to build an anchor casino and resort complex on Marina Bay in Singapore, when the country, several years ago, had decided to boost its economy by becoming a tourist destination.
  
  The government of the conservative little city-state had then taken the controversial step of legalising gambling, the magazine said.
  
  "In light of recent turmoil in the global markets," the 75-year-old Adelson, pledging to personally ensure the "success" of the Singapore casino, said in a statement released November 7, "I felt the need to personally reaffirm our commitment to the success of Marina Bay Sands."
  
  Analysts were quoted as saying that the casino is too important for the economic diversification of Singapore, which is overwhelmingly dependent on electronics exports and trans-shipping, for it to collapse.
  
  The Singapore Tourism Board may step in either with an infusion of cash or an agreement to assume a sizable chunk of the troubled casino operator's debt, the paper said.
  
  "We are working closely and are in dialogue with Marina Bay Sands [Las Vegas Sands' Singapore subsidiary] to facilitate the completion of the project," says Margaret Teo, Assistant CEO of the Singapore Tourism Board.
  
  She declined to provide further financial details. The statement from Adelson also did not specify what steps are being taken to bolster the finances of his company or its Marina Bay project, apart from announcing that executives from Las Vegas Sands had met with officials from the Singapore government over the last week, the paper said.
  
  Meanwhile, Las Vegas Sands, the news magazine said, has also been grappling with an unexpected problem -- Chinese government, increasingly alarmed by the profligacy and gambling debt of its citizens, had recently imposed visa restrictions on mainland tourists to Macau, reducing the anticipated cash flow from the company's Asia operations.

Here's the report on Bloomberg News on Nov 6th: Las Vegas Sands Plunges on Default, Bankruptcy Risk

• Las Vegas Sands Plunges on Default, Bankruptcy Risk
  
  By Beth Jinks
  
  Nov. 6 (Bloomberg) -- Las Vegas Sands Corp., billionaire Sheldon Adelson's casino company, fell the most in New York trading since going public after saying it may default on debt and face bankruptcy.
  
  The casino owner, which had $8.8 billion in long-term debt at the end of June, said in a regulatory filing today that it probably won't meet the requirements of loans arranged by Citigroup Inc., Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. unless it cuts spending on developments, boosts earnings at its Las Vegas Strip casinos and raises more capital.
  
  The reversal of fortune is a black eye for the 75-year-old Adelson, who was once America's third-richest man on the strength of his Las Vegas Sands holdings. The Las Vegas-based company's dwindling cash flow is threatening $16 billion worth of developments in Macau, China, and Singapore, where Las Vegas Sands is building resorts to cater to wealthy Asian gamblers.
  
  ``They need to raise money,'' said Keith Foley, a New York- based analyst at Moody's Investors Service Inc. ``It's getting to the point where they need to do something now.''
  
  The shares dropped $3.81, or 33 percent, to $7.85 at 4:04 p.m. in New York Stock Exchange composite trading, the biggest decline since its initial share sale in December 2004. Las Vegas Sands had tumbled 91 percent before today this year as investors dumped the stock, worried that falling casino winnings and the global financial meltdown would leave the company without enough cash.
  
  More Capital
  
  Spending declines on the Vegas Strip and restrictions on visas in Macau have stemmed the flow of cash into Las Vegas Sands. Today's admission comes after Adelson, who holds a stake of more than 64 percent, invested an additional $475 million in September to avoid violating the terms of a loan, and hired an unidentified investment bank to raise more capital with his help.
  
  Las Vegas Sands' rush to raise capital ``points to the deterioration of fundamentals, not just for the company, the fundamentals of Las Vegas,'' said Dennis Farrell, a debt analyst with Wachovia Capital Markets LLC in Charlotte, North Carolina.
  
  The casino owner said it doesn't expect to meet a maximum leverage ratio covenant in the fourth quarter. That would trigger defaults that might force it to suspend development projects and ``raise a substantial doubt about the company's ability to continue as a going concern.''
  
  ``Sheldon still has considerable resources, and we doubt he will sit on the sidelines and watch LVS go bankrupt,'' Robert LaFleur at Susquehanna Financial Group LLLP, said today in a client note he titled ``Scary Post-Halloween 8-K Filing.'' ``The question is how much dry powder does he have, and what can he do?''
  
  Deep Pockets
  
  In a July conference call, Adelson suggested he would step in to help the company with any financing it might need, saying a friend described him as ``the tallest person I know when you stand on your wallet.''
  
  ``And I'm saying right now, the company will not have liquidity problems,'' he said at the time.
  
  Ron Reese, a spokesman for Adelson, didn't return an e-mail seeking an interview.
  
  Las Vegas Sands made a filing with regulators today to allow it to quickly sell stocks or bonds if it finds investors.
  
  ``The offering shows what their intent is, but it doesn't mean they'll be successful,'' said Foley. ``How and when is uncertain, and their ability to successfully do that is uncertain.''
  
  Adelson founded the Comdex computer expo in 1979, later selling the business and using the proceeds to build the Venetian Resort Hotel Casino in Las Vegas.
  
  U.S. Projects
  
  He is also building a $600 million condominium in Vegas and a $600 million casino resort in Bethlehem, Pennsylvania. The risk of default applies to some of Sands' U.S. unit loans.
  
  ``It would be prohibitively expensive to raise outside debt capital at this time,'' said Farrell. The company will probably sell more stock, which would hurt existing shareholders including Adelson.
  
  Other alternatives might be another investment from Adelson, an injection of cash from an outside investor or a loan from foreign banks, said Farrell.
  
  The filing, which affects its U.S. unit's debt, sparked new concerns that Las Vegas Sands won't finish Singapore's first casino or a 20,000-room complex of hotels and casinos in Macau. The Chinese territory overtook the Vegas Strip as the world's biggest gambling market in 2006.
  
  `Other Alternatives'
  
  Should Sands fail to raise capital, ``we would need to immediately suspend portions, if not all, of our ongoing global development projects and consider other alternatives,'' the company said in the filing.
  
  Las Vegas Sands owns the Venetian and Palazzo casino resorts on the Las Vegas Strip, plus the Macau Venetian, Sands and Four Seasons, and had expected sufficient earnings from the properties to fund its expansion and pay loans.
  
  Las Vegas Strip casino gambling revenue slid 6.7 percent this year through August, on track for its biggest annual decline on record, as airlines cut back capacity and consumers, battling declining home values, job losses and the worst financial crisis since the Great Depression, spent less.
  
  China increased visa restrictions on some mainland residents traveling to Macau, causing casino gambling revenue in the former Portuguese colony to fall to 26 billion patacas ($3.28 billion) in the third quarter from 28.9 billion patacas in the second.
  
  Adelson plans to sell Sands' Four Seasons apartment hotel in Macau as a co-operative and wants to sell the attached mall space.

And Singapore DBS has quickly assured that there is no loan defaults from Las Vegas Sands. Posted on Reuters.

• SINGAPORE, Nov 7 (Reuters) - DBS Group (DBSM.SI: Quote, Profile, Research, Stock Buzz), Southeast Asia's biggest bank, said there had been no default or indication of a default from casino firm Las Vegas Sands Corp (LVS.N: Quote, Profile, Research, Stock Buzz) for its project in Singapore.
  
  "There's been no default, no indication of default. The project is still going along," DBS's CEO Richard Stanley said on Friday. "I do expect there will be an integrated resort in Marina Bay in Singapore in 2010."
  
  Shares in Las Vegas Sands, which is building one of two casinos in Singapore, fell as much as 44 percent on Thursday after the casino operator's auditor said there are doubts about the company's ability to continue as a going concern. [ID:nN06321876] (Reporting by Saeed Azhar and Kevin Lim; Editing by Lincoln Feast) Source: here

Here is how LVS has performed so far this year!!!

Warren Buffett: You Pay A Very High Price In The Stock Market For A Cheery Consensus

Blogged last month: Warren Buffett Puts His Money Where His Mouth Is ( see also Warren Buffett Buys Stocks, The Snowball Chapter 2 and J. Kyle Bass )

See also: Warren Buffett's Three Market Buy Calls

• The first came in 1974 when Buffett said, "I feel like an oversexed man in a harem. This is the time to start investing." The Dow almost doubled over the next two years.
  
  The second came in 1979, when Buffett told Forbes that "stocks now sell at levels that should produce long-term returns far superior to bonds." That prediction also proved to be correct.
  
  The third positive call from Buffett came last Friday. Warren Buffett Puts His Money Where His Mouth Is

I still have a copy of what Warren Buffett wrote back in 1979 on Forbes on my hard disk. Let me share here. Sorry the link I have is broken.

• You Pay A Very High Price In The Stock Market For A Cheery Consensus
  
  Pension-fund managers continue to make investment decisions with their eyes firmly fixed on the rearview mirror. This generals-fighting-the-last-war approach has proven costly in the past and will likely prove equally costly this time around.
  
  Stocks now sell at levels that should produce long-term returns far superior to bonds. Yet pensions managers, usually encouraged by corporate sponsors they must necessarily please ("whose bread I eat, his song I sing"), are pouring funds in record proportions into bonds.
  
  Meanwhile, orders for stocks are being placed with an eyedropper. Parkinson--of Parkinson's law fame--might conclude that the enthusiasm of professionals for stocks varies proportionately with the recent pleasure derived from ownership. This always was the way John Q. Public was expected to behave. John Q. Expert seems similarly afflicted. Here's the record.
  
  In 1972, when the Dow earned $67.11, or 11% on beginning book value of 607, it closed the year selling at 1,020, and pension managers couldn't buy stocks fast enough. Purchases of equities in 1972 were 105% of net funds available (i.e., bonds were sold), a record except for the 122% of the even more buoyant prior year. This two-year stampede increased the equity portion of total pension assets from 61% to 74%--an all-time record that coincided nicely with a record-high price for the Dow. The more investment managers paid for stocks, the better they felt about them.
  
  And then the market went into a tailspin in 1973-74. Although the Dow earned $99.04 in 1974, or 14% on beginning book value of 690, it finished the year selling at 616. A bargain? Alas, such bargain prices produced panic rather than purchases; only 21% of net investable funds went into equities that year, a 25-year record low. The proportion of equities held by private noninsured pension plans fell to 54% of net assets, a full 20-point drop from the level deemed appropriate when the Dow was 400 points higher.
  
  By 1976, the courage of pension managers rose in tandem with the price level, and 56% of available funds was committed to stocks. The Dow that year averaged close to 1,000, a level then about 25% above book value.
  
  In 1978, stocks were valued far more reasonably, with the Dow selling below book value most of the time. Yet a new low of 9% of net funds was invested in equities during the year. The first quarter of 1979 continued at very close to the same level.
  
  By these actions, pension managers, in record-setting manner, are voting for purchase of bonds--at interest rates of 9% to 10%--and against purchase of American equities at prices aggregating book value or less. But these same pension managers probably would concede that those American equities, in aggregate and over the longer term, would earn about 13% (the average in recent years) on book value. And, overwhelmingly, the managers of their corporate sponsors would agree.
  
  Many corporate managers, in fact, exhibit a bit of schizophrenia regarding equities. They consider their own stocks to be screamingly attractive. But, concomitantly, they stamp approval on pension policies rejecting purchases of common stocks in general. And the boss, while wearing his acquisition hat, will eagerly bid 150% to 200% of book value for businesses typical of corporate America but, wearing his pension hat, will scorn investment in similar companies at book value. Can his own talents be so unique that he is justified both in paying 200 cents on the dollar for a business if he can get his hands on it, and in rejecting it as an unwise pension investment at 100 cents on the dollar if it must be left to be run by his companions at the Business Roundtable?
  
  A simple Pavlovian response may be the major cause of this puzzling behavior. During the last decade, stocks have produced pain--both for corporate sponsors and for the investment managers the sponsors hire. Neither group wishes to return to the scene of the accident. But the pain has not been produced because business has performed badly, but rather because stocks have underperformed business. Such underperformance cannot prevail indefinitely, any more than could the earlier overperformance of stocks versus business that lured pension money into equities at high prices.
  
  Can better results be obtained over, say, 20 years from a group of 9 1/2% bonds of leading American companies maturing in 1999 than from a group of Dow-type equities purchased, in aggregate, at around book value and likely to earn, in aggregate, around 13% on that book value? The probabilities seem exceptionally low. The choice of equities would prove inferior only if either a major sustained decline in return on equity occurs or a ludicrously low valuation of earnings prevails at the end of the 20-year period. Should price/earnings ratios expand over the 20-year period--and that 13% return on equity be averaged--purchases made now at book value will result in better than a 13% annual return. How can bonds at only 9 1/2% be a better buy?
  
  Think for a moment of book value of the Dow as equivalent to par, or the principal value of a bond. And think of the 13% or so expectable average rate of earnings on that book value as a sort of fluctuating coupon on the bond--a portion of which is retained to add to principal amount just like the interest return on U.S. Savings Bonds. Currently our "Dow Bond" can be purchased at a significant discount (at about 840 vs. 940 "principal amount," or book value of the Dow. Figures are based on the old Dow, prior to the recent substitutions. The returns would be moderately higher and the book values somewhat lower if the new Dow had been used.). That Dow Bond purchased at a discount with an average coupon of 13%--even though the coupon will fluctuate with business conditions--seems to me to be a long-term investment far superior to a conventional 9 1/2% 20-year bond purchased at par.
  
  Of course, there is no guarantee that future corporate earnings will average 13%. It may be that some pension managers shun stocks because they expect reported returns on equity to fall sharply in the next decade. However, I don't believe such a view is widespread.
  
  Instead, investment managers usually set forth two major objections to the thought that stocks should now be favored over bonds. Some say earnings currently are overstated, with real earnings after replacement-value depreciation far less than those reported. Thus, they say, real 13% earnings aren't available. But that argument ignores the evidence in such investment areas as life insurance, banking, fire-casualty insurance, finance companies, service businesses, etc.
  
  
  In those industries, replacement-value accounting would produce results virtually identical with those produced by conventional accounting. And yet, one can put together a very attractive package of large companies in those fields with an expectable return of 13% or better on book value and with a price which, in aggregate, approximates book value. Furthermore, I see no evidence that corporate managers turn their backs on 13% returns in their acquisition decisions because of replacement-value accounting considerations.
  
  A second argument is made that there are just too many question marks about the near future; wouldn't it be better to wait until things clear up a bit? You know the prose: "Maintain buying reserves until current uncertainties are resolved," etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.
  
  If anyone can afford to have such a long-term perspective in making investment decisions, it should be pension-fund managers. While corporate managers frequently incur large obligations in order to acquire businesses at premium prices, most pension plans have very minor flow-of-funds problems. If they wish to invest for the long term--as they do in buying those 20- and 30-year bonds they now embrace--they certainly are in a position to do so. They can, and should, buy stocks with the attitude and expectations of an investor entering into a long-term partnership.
  
  Corporate managers who duck responsibility for pension management by making easy, conventional or faddish decisions are making an expensive mistake. Pension assets probably total about one-third of overall industrial net worth and, of course, bulk far larger in the case of many specific industrial corporations. Thus, poor management of those assets frequently equates to poor management of the largest single segment of the business. Soundly achieved higher returns will produce significantly greater earnings for the corporate sponsors and will also enhance the security and prospective payments available to pensioners.
  
  Managers currently opting for lower equity ratios either have a highly negative opinion of future American business results or expect to be nimble enough to dance back into stocks at even lower levels. There may well be some period in the near future when financial markets are demoralized and much better buys are available in equities; that possibility exists at all times. But you can be sure that at such a time the future will seem neither predictable nor pleasant. Those now awaiting a "better time" for equity investing are highly likely to maintain that posture until well into the next bull market.
  
  Editor's Note: This editor's note accompanied the original publication of this article:
  
  Warren Buffett is a down-to-earth man of 48 who prefers to operate out of his native Omaha rather than in the canyons of Wall Street, but the pros regard him as possibly the most successful living money manager, a direct descendant of the legendary Ben Graham under whom he studied. Buffett made a fortune for himself and his clients in the Fifties and Sixties but threw in the towel in 1969 because he could no longer find bargains. Then in late 1974, when the Dow Jones industrials were below 600 and the air was thick with doom, he told Forbes: "I feel like an oversexed man in a harem. This is the time to start investing." Within months, the greatest rally in history began, with the DJI running almost 450 points in a bit over a year. What does Buffett think now? In this article, he puts it bluntly: Now is the time to buy.

And here is a collector's item. Two scanned pictures of the said article - click on the pictures itself to get a bigger view!

General Motors Says No More Money!!!

General Motors (GM) is simply in dire straits!!

• GM Says It May Run Out of Operating Cash This Year
  
  By Jeff Green and Mike Ramsey
  
  Nov. 7 (Bloomberg) -- General Motors Corp., seeking federal aid to avoid collapse, said it may not have enough cash to keep operating this year and will fall ``significantly short'' of the amount needed by the end of June unless the auto market improves or it raises more capital.
  
  The largest U.S. automaker reported a $4.2 billion third- quarter operating loss today and said its available cash fell to $16.2 billion on Sept. 30 from $21 billion at the end of June. Merger talks with Chrysler LLC were suspended.
  
  ``GM is making a pretty direct plea for help,'' said Pete Hastings, a fixed-income analyst at Morgan Keegan Inc. in Memphis, Tennessee. ``The message is, `we've done all the things we can do, and we need help.' And if we don't get help, fill in the blank.'' ... read rest here

And it's no wonder that chatter of bailout has begun!

Will Obama Bail Out GM, Chrysler and Ford?

• Posted by Heidi N. Moore
  
  Will it or won’t it?
  
  It is the question swimming around the Big Three U.S. auto makers. Will the federal government give them a bailout? The auto makers, particularly General Motors, have been begging the government for quick disbursement of the $25 billion of loans and they seek more. GM chief Rick Wagoner has been making the rounds of Congressional and Bush Administration officials to talk about the industry’s need for help; one of his advisers, former Treasury official Roger Altman, has been kicking up some dust as well.
  
  And as GM and Ford Motor continue to post massive losses, the windows keep closing for options, such as the now-called-off GM-Chrysler deal. Today, GM warned it “estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business.” The company would find it prohibitively expensive to borrow, even if it could pay it back. The auto maker also abandoned plans to merge with Chrysler. And Wagoner wasn’t afraid to invoke the precedent of disastrous bankruptcies today on CNBC: “Letting GM go is a terrible idea. Look at the effect of Lehman Brothers.”
  
  Enter President-elect Barack Obama. His first press conference included encouraging signs for the auto makers and their efforts to get government helpHere is what Obama said:
  
  The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil. I would like to see the Administration do everything they can to accelerate the retooling assistance that Congress has already enacted. In addition, I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States. I have asked my team to explore what we can do under current law and whether additional legislation will be needed for this purpose.
  
  But read between the lines: While it’s certainly nice that Obama called the auto makers “the backbone of American manufacturing,” Wagoner & friends might be in for a rude awakening unless they come around to Obama’s way of thinking on producing more fuel-efficient cars.
  
  After all, the auto makers have long resisted the call to make more fuel-efficient cars. And while the $25 billion of federal low-cost loans were intended to help the auto makers retool to produce smaller, greener vehicles, the auto makers, especially GM, would like to use that government money for other priorities.
  
  So were Obama’s words a prelude to negotiation, or a Hobson’s choice? The auto makers can’t wait ’til inauguration day to find out.

Here is how GM has performed as the stock this last 10 years!

Too big too fall?

Hold for longer period?

That above chart simply says it all!

A Very Brief Look At A Leading Steel Stock: Southern Steel

Southern Steel announced its quarterly earnings. Quarterly rpt on consolidated results for the financial period ended 30/9/2008

I thought it was extremely interesting to see how it perform since I do regard Southern Steel as one of the leaders in the steel sector.

Here's the briefest of brief look at how it performed.



Looks really superb if one compares what it earned for the same period last year!

However, as we all knows, looks can be so deceiving at time!

3 months earlier, in August 2008, Southern Steel announced the following set of numbers.


3 months ago, Southern Steel reported net earnings of 202.466 million. It was a bumper time!

In today's earnings, Southern Steel net earnings only totals 65.697 million!

Not looking good at all considering that steel prices and demand has dropped!

Factories Closing In Guandong

This morning, I posted Global shipping slump stokes fears

The following passage caught my attention.

• While there could still be an estimated 8-per-cent jump next year in China's gross domestic product, it would be a deceleration from the 12-per-cent GDP growth last year. "Factories in Guangdong province in the south, the world's shop floor with the greatest concentration of manufacturing output on earth, are closing down as costs are overwhelming skinny profit margins," HSBC said.

So I decided do some search on this issue.

Posted on Asia Wall Street Journal, Chinese Toy Firm Becomes Casualty of Global Crisis

• BEIJING -- In one of the first casualties in China from the U.S. economic slowdown and the global financial crisis, Smart Union Group Holdings Ltd. said it filed for bankruptcy and moved to liquidate the company.
  
  The Hong Kong-listed company issued a statement Friday that the Hong Kong High Court has appointed provisional liquidators to wind up the toy and recreational products company and its subsidiaries. The company's statement didn't say what prompted its move for liquidation, but Chinese media agencies suggested the move stemmed from a slowdown in consumer consumption in the U.S. and Europe because of the global financial crisis.
  
  According to Chinese media reports, the company Friday shuttered the two factories it operated in Dongguan city in the southern Chinese province of Guandong, triggering an angry protest by some 6,500 workers over unpaid wages. Xinhua news agency said the workers haven't been paid since August.
  
  Xu Hongfei, deputy chief of Zhangmutou Township Government, said the factories closed because of the continuing international financial crisis.
  
  "A serious problem occurred with the circulating capital as Smart Union's shares were pulled out of trading Wednesday," said Mr. Xu, according to Xinhua. Mr. Xu said workers with the two factories hadn't been paid since August.
  
  The news agency said the government of a township in Dongguan city where the two factories are located has raised 23 million yuan ($3.4 million) and started to pay the workers' salaries in an effort to quiet their anger. It said factory bosses have gone into hiding, a factor that also helped fan worker anger.
  
  Earlier this week, citing a report by China's General Administration of Customs, Xinhua reported the yuan's appreciation, along with escalating production costs, drove half of China's toy exporters out of the market in the first seven months of this year.
  
  According to the Customs report, a total of 3,631 toy exporters or 53% of the industry's businesses shut down in 2008, leaving 3,507 toy exporters in business. They were mainly small-sized toy producers with an export value of less than $100,000 U.S., it said.

Posted on Australia's On Line Opinion, The Rudd strategy Part II: just how good is China's economy? , the following passage was mentioned..

• Factory closures
  Guandong is the major centre for export manufacturers which employ about 10 million.
  
  In the first seven months of 2008, safety standards non-compliance closed over 50 per cent of China's toy exporting factories.
  
  New credits restrictions are severely impacting on the supply chain. Exporter's who once received payment ex-factory, are now giving 90 days credit and warehousing surplus stock.
  
  Closures range from global brands to component manufacturers: 18,000 of the 70,000 Hong Kong owned factories will close following deliveries for Christmas and Chinese New Year orders. Some will close earlier...

There Is Real Crisis Out There In Global Trade!

When the shipping industry is breaking down as what we are seeing within the Baltic Dry Index ( the Baltic Dry Index has plunged some 93% of its high in May 2008), we know that there is a massive crisis in global trade.

How optimistic can one be right now when there is a trade flows are breaking down?

The following two articles highlights the massive problems!

On theGlobeandMail.com, Global shipping slump stokes fears

• The global financial crisis and China's reduced appetite for raw materials have left the ocean shipping industry reeling, disrupting trade around the world.
  
  "What is happening now is that importers and exporters no longer trust each other, or their banks, and cargo is piling up at export ports waiting to be shipped," London-based shipbroker HSBC Shipping Services Ltd. said in a confidential report to clients. "This breakdown in trust, mirroring mutual suspicion in the interbank loans market, is now seriously undermining global trade flows and, by default, shipping."
  
  The Baltic dry index, a shipping barometer of the volume of global trade, has plunged to its lowest level in nearly a decade.
  
  Since hitting a record high of 11,793 points in May, the index has tumbled 93 per cent. Yesterday, the index posted its first gain in more than a month, rising 11 points to 826 points - still down 83 per cent over the past seven weeks.
  
  "The speed and violence of this collapse is as unprecedented as it was unexpected," HSBC said, noting that spot freight rates to charter ships plummeted to an average of $7,340 (U.S.) a day at the end of October from a daily peak of $233,988 in June.
  
  With shipments of "dry bulk" commodities such as iron ore and coal slowing, HSBC warns that "global shipping is being contaminated by global finance."
  
  China went on an importing spree for raw materials in preparation for the Beijing Olympics in August, but then closed factories and steel mills to cut down on air pollution during the 2008 Summer Games.
  
  "We fully anticipated that China would return to business as usual," HSBC said.
  
  "Instead, China dragged its feet as the insidious effects of financial contagion spread from the West."
  
  While there could still be an estimated 8-per-cent jump next year in China's gross domestic product, it would be a deceleration from the 12-per-cent GDP growth last year. "Factories in Guangdong province in the south, the world's shop floor with the greatest concentration of manufacturing output on earth, are closing down as costs are overwhelming skinny profit margins," HSBC said.
  
  Stuart Bergman, director of economics for Export Development Canada, said he views the Baltic dry index's decline in ocean freight rates as a leading indicator of an economic slump in 2009.
  
  With fewer bulk commodities being shipped, it means that factory production is destined to falter. For instance, weaker iron ore shipments will translate into lower steel output, he said in an interview. "It's mainly the China story, but there's a general slowdown in global trade flows."
  
  China had been exporting a steady stream of manufactured goods to industrialized countries, but with the credit crunch, demand for finished products has softened as importers in the West face tightened credit markets, which have made it tougher to import as much as they would like, Mr. Bergman added.
  
  Randy Cousins, an analyst at BMO Nesbitt Burns Inc., said some exporters are reluctant to accept letters of credit.
  
  "This is symptomatic of the seizing up of credit markets. It's symptomatic of a broad-based slowdown in world economies," Mr. Cousins said. "There's no question that there has been a dramatic drop in shipping demand in the past four to six weeks. It's extremely difficult to get financing to move stuff between point A and point B."
  
  The HSBC report said the market for buying and selling used ships has slowed to a crawl, while contracts to build new vessels are being delayed or, in some cases, buyers have left behind down payments, unable to finance the balance.
  
  HSBC said it expects financing concerns will be gradually resolved to clear the way for healthy trade again, although it could take months for the recovery.

On the UK Independent, Holed beneath the waterline

• The staggering and sudden decline in the cost of chartering a cargo ship reflects both the global economic slowdown and the ongoing credit crunch. Sarah Arnott reports
  
  Thursday, 6 November 2008
  
  Hold on to your hat: the Baltic Dry Index was down at 826 points yesterday, a shattering drop from its high of 11,793 in May.
  
  The index, which tracks the price of shipping bulk cargo, might not sound like a reason to choke on your cornflakes. But it is an unparalleled, if subtle, barometer of the global trade in economic building blocks like iron ore, coal and grain – and it is telling a worrying tale.
  
  Put simply, the cost of shipping has dropped through the floor. Sending a tonne of iron ore from Brazil to China in early June would have set you back more than $100 (£62) per tonne, or around $15m per voyage. But freight rates have now dropped to only slightly over $10 per tonne, or just $1.5m for the 70-90 day journey.
  
  As if that wasn't dramatic enough, the drop in daily charter rates is even sharper. At the peak of the market, a 170,000-tonne Capesize bulk carrier was hired out at the eye-watering daily rate of $234,000. At the beginning of this week, it was $5,611 – a fall of nearly 98 per cent.
  
  Peter Kerr-Dineen, chairman of Howe Robinson ship brokers, said: "The scale of change in rate is utterly staggering – the market has come down from super-boom territory to pretty close to bust, effectively in two months."
  
  Contracting demand for imports in recession-wary economies across the world is a factor, as are steadily falling commodity prices and the mechanics of supply and demand in the shipping industry itself. But the real trouble is less obvious, largely unprecedented, and potentially devastating.
  
  The wheels of international shipping are greased with "letters of credit"issued to buyers of bulk cargo by their banks. These guarantee the value of the shipment once it is in transit but before it is delivered. The problem is that the credit crunch, with the resulting liquidity problems in the international banking sector, is taking its toll on the availability of these entirely routine instruments. "We have the hugely worrying and unprecedented development where there are perfectly creditworthy shippers and receivers unable to open perfectly standard letters of credit," Mr Kerr-Dineen said.
  
  Cargos are sitting on docksides because the finance is not available to ship them, with the gravest implications for the future. "This is a nuclear bomb in the freight market, and in world trade," Mr Kerr-Dineen said. "Liquidity has to return because if there is insufficient money to provide standard finance, world trade will be sharply cut back and economic growth will implode."
  
  This comes at the worst possible time, on top of a string of other adjustments already affecting the shipping market. After an unparalleled boom over the last five years – fuelled in large part by rocketing Chinese demand – it was to be expected that the overheated market would cool. And in the shipping industry itself, the number of vessels started to catch up with demand. Meanwhile ballooning commodity prices were being undercut as additional supply, fuelled by the high prices, started to come on stream.
  
  Against such a background, more recent concerns over the economic slowdown in both the East and the West have pushed users of commodities to run down their existing stocks, rather than buy in new supplies at what are still relatively inflated prices.
  
  These are all to some extent predictable economic adjustments, but a more sinister effect has been that de-stocking is masking the shortages caused by the dearth of credit. Mr Kerr-Dineen says there are around three months left before stocks run out.
  
  "If the problem is not resolved, there will be no way in which even the sharply revised economic growth forecasts for 2009 will be met, because without normal trade economies cannot function. Ultimately, flour mills will run out of wheat and power stations will run out of coal," he said.
  
  So far, the most significant problems have been confined to the bulk commodities trade. Manufactured goods have been are less affected because there is less reliance on letters of credit, said a source in a large container shipping company. Large shippers like Walmart or Nike do not need the letters because they are, in effect, sending to themselves. And even where trade is between companies, long-standing commercial relationships leave a lot more to trust than in the more volatile commodities market.
  
  But firms using containers to ship bulk products such as bananas, meat or fish are feeling the pinch. "We are certainly seeing unusual delays in issuance of letters of credit for commodity trades," the source said.
  
  Banks are charging more to issue the letters, and nervous traders are requiring guarantees, where historically trust might have been enough.
  
  Jeremy Penn, chief executive of the Baltic Exchange which runs the Baltic Dry Index, said: "Sentiment is also a key driver and has gone completely into reverse. People are also waiting for prices to fall further. There is no incentive to do today what they think will be cheaper tomorrow."
  
  George Cambanis, head of global shipping at Deloitte, said: "Everybody can still hold their breath for the time being, but it is anybody's guess how long it will take for money to start circulating again."
  
  He added: "Trading has virtually come to a standstill, because there is no cargo for the ships. There has also been no trading of vessels in the last few weeks, so there is no market value out there for companies' capital investment in their ships."
  
  No longer oiling the wheels
  
  Freight cargo is not the only piece of the global economic infrastructure being hit by the on-going constriction of credit. Companies looking for forward hedging are also struggling to find banks willing to put up the cash.
  
  Earlier this week, Michael O'Leary, the chief executive of Ryanair, admitted that his plans to hedge 2009's fuel requirements went awry because banks were not willing or able to take the risk. "We were originally planning to hedge about 50 per cent of our needs for the next 12 months but we just couldn't get there," he said. "Banks in hedging are withdrawing and fuel companies don't trust the banks as counter party risk."
  
  The budget carrier was stung by soaring oil prices that reached $147 per barrel in July and more than doubled the airline's fuel bill, from €393m (£318m) to €789m (£638m) in the first six months of the year.

By the way, the Baltic Dry Index has managed to record it's 2nd consecutive gains!

It gained some 13 points yesterday.

However does it matter now?

Jim Rogers Interview on Bloomberg

Enjoy!

Part 1.



Part 2.

Even Scrap Buyers Are Fighting For Survival!!!

The following news clip caught my attention. Yes, it's yet another horror story!

• Buyers cancel orders as scrap steel prices fall
  Prices of ferrous scrap tumbled at least 80% in the past four months, but demand is expected to recover next year
  
  Beijing: Scrap steel buyers in Asia are cancelling orders after prices tumbled at least 80% in the past four months as demand slumps, traders said.
  
  “There are buyers in China, India and Europe that are literally fighting for their survival,” said Bob Garino, director of commodities at the Institute of Scrap Recycling Industries Inc., a trade association representing at least 1,600 companies. “Steel prices have fallen off a cliff, and they just don’t have the money to honour their contracts.”
  
  Sims Group Ltd, the world’s biggest recycler of scrap metal, said in October sales may fall and it may write down inventories. Steel makers in China, Japan, India and Korea, which account for more than 50% of global output, are slashing production as the global economic slowdown curbs demand from builders and car makers.
  
  Prices fell to $120 (Rs5,664) a tonne this month, from $730 a tonne in July, said Jeff Allman, managing director of ferrous trading at St. Louis-based Kataman Metals Inc., which does more than $1 billion in scrap trades a year.
  
  Scrap iron and steel prices in Japan slumped 22% to 14,076 yen ($141) a tonne in the week ended 27 October, according to the Japan Ferrous Raw Materials Association. That’s the lowest in at least three years. Prices in Korea dropped 27% in August from July, Citigroup Inc. said on 7 October.
  
  Surplus ferrous scrap is sitting in yards, ports and on ships as contracts are renegotiated, said Kataman Metals’ Allman.
  
  Profit margins have dropped to at most $20 a tonne, from as much as $200 a tonne previously, he added.
  
  In Thailand, which imports 2mt of ferrous scrap a year, 800,000 tonnes of the material is without buyers, said Suppakit Varnapurna, steel scrap manager at SCT, the trading affiliate of Siam Cement Pcl., the country’s biggest cement maker.
  
  Pramod Kumar Saraf, director of Chennai-based scrap buyer Jai Bhawani Steel Enterprises Ltd, agreed to share losses with a seller on a 2,000 tonne shipment by halving the agreed price to $250 a tonne.
  
  “Sellers are desperate,” Saraf said in an interview in Shanghai. “We have compromised too.”
  
  China, the world’s largest steel maker, will probably post a 20% output decline in the fourth quarter, the Central Iron and Steel Institute said earlier this week. Japanese mills are cutting production by the most in at least five years, the nation’s trade ministry had said on 29 October.
  
  Worldwide annual production of ferrous scrap is about 330mt a year, according to the Institute of Scrap Recycling’s Garino.
  
  Scrap from discarded cars, machinery and beams in developed economies is recycled into steel in so-called electric arc furnaces. Conventional blast furnaces use iron ore and coal to make steel.
  
  Still, China and West Asia will continue to consume large amounts of steel for urbanization and infrastructure, helping demand for ferrous scrap to recover as early as the first quarter of 2009, Kataman Metals’ Allman said.
  
  Falling copper prices have also led buyers to cancel purchases, said John Chen, executive vice-president of Tung Tai Group, a San Jose, California-based scrap metal trader that also owns processing yards in China.

Source: http://www.livemint.com/2008/11/06001517/Buyers-cancel-orders-as-scrap.html