Year: 2015

Cuba and US become stronger neighbours

Posted on by Ashton Wenborn

For more than half a century, relations between Cuba and its superpower neighbour have been frosty. Beginning with an embargo imposed on Cuba by the US, the two countries have spent the past 53 years distrusting and refusing to do business with one another. Undoubtedly, the worse off of the two has been communist-run Cuba, which has been unable to sell its exports to its nearest and largest neighbour as a result of the embargo (see Figs 1 and 2).

However, just before the end of last year, US President Barack Obama delivered a speech that was the most conciliatory stance shown by an American leader since the dispute began. If the speech turns into more than just rhetoric and brings an end to an economic ban that has lasted more than half a century, then the potential for prosperity for Cuba’s downtrodden citizens is vast.

US President Barack Obama delivered a speech that was the most conciliatory stance shown by an American leader since the embargo began

Cuba effectively became an enemy of the US when Fidel Castro led a revolution against US ally Fulgencio Batista at the end of the 1950s. It subsequently embraced the communist ideology espoused by the Soviet Union.

Before the revolution, the US and Cuba had been strong trading partners. Cuba was seen as an exotic location to which the rich and glamorous of American society holidayed, while acting as a strategic link to the rest of Latin America. General Batista was a staunch ally of the US for many years, but his regime was widely condemned for causing mass corruption throughout the country.

Troubled past
Batista’s regime led to more than two decades of close cooperation between the US and Cuba, so much so that the US effectively propped up his government with military and economic aid. US companies flocked to the island during his reign, and there was widespread corruption throughout the country as a result. This ultimately fuelled a huge amount of resentment among the Cuban people, with a rebel group led by Fidel Castro rising up during the 1950s.

The US Government’s part in the conflict and propping up of Batista meant that many Cubans saw their larger neighbour’s interests being pursued at their expense. Eventually, the US ceased supply to Batista’s regime, leading to disgruntled US State Department Advisor William Wieland famously stating: “I know Batista is considered by many as a son of a bitch… but American interests come first… At least he was our son of a bitch.”

Ever since the Cuban Revolution deposed General Batista at the start of 1959, the two countries have had practically no relations whatsoever. John F Kennedy’s government initiated an embargo on all trade from Cuba a year later when the new regime, led by new President Fidel Castro, nationalised a number of US-owned oil refineries without paying a single dollar in compensation. All this changed at the end of last year, however, when Obama announced plans to normalise relations between the US and Cuba, open an embassy in Havana and negotiate the end of the embargo.

Fig 1

Ending the embargo
Announcing the dramatic shift in policy towards Cuba, President Obama said: “In the most significant changes in our policy in more than 50 years, we will end an outdated approach that, for decades, has failed to advance our interests, and instead we will begin to normalise relations between our two countries. Through these changes, we intend to create more opportunities for the American and Cuban people, and begin a new chapter among the nations of the Americas.”

He added that the embargo had become especially outdated in light of improved relations between the US and other communist-run countries. “Neither the American, nor Cuban people are well served by a rigid policy that is rooted in events that took place before most of us were born. Consider that for more than 35 years, we’ve had relations with China – a far larger country also governed by a communist party. Nearly two decades ago, we re-established relations with Vietnam, where we fought a war that claimed more Americans than any Cold War confrontation.”

It’s important to note that the embargo on trade with Cuba is yet to be lifted, and any such move would have to pass through a potentially hostile Republican-led Congress. Nevertheless, the softening of relations between the two countries is a historic moment that came as a surprise to many.

Raul Castro, the current president of Cuba and younger brother of Fidel Castro, was quick to acknowledge the steps taken by Obama. He hailed the news as a huge opportunity for Cuba, and said Obama’s decision “deserves the respect and acknowledgement of our people”. However, Raul Castro also called for the US to go further and end the embargo. “We have agreed to re-establish diplomatic relations, but this does not mean the principal issue has been resolved: the blockade which causes much human and economic damage to our country should end.”

Boosting trade
A key part of the deal between Cuba and the US will be trade, according to Obama – in particular, giving the Cuban people more money through remittances and boosting the country’s nascent private sector. “I also believe that more resources should be able to reach the Cuban people,” he said. “So we’re significantly increasing the amount of money that can be sent to Cuba, and removing limits on remittances that support humanitarian projects, the Cuban people and the emerging Cuban private sector.”

With so many Cubans fleeing the country for the US over the past 50 years, there has been a substantial amount of money sent back to the country to family members. It is thought that every year around $2bn is sent to Cuba, but the US has restricted the amount that individuals can send to $500. With the reforms, Cuban Americans are likely to be allowed to send back as much as $2,000, which would prove a huge boost to Cuba’s economy. Private citizens will suddenly have a lot more cash to spend, while the wider economy will benefit from more money being available.

Obama has been keen to stress the importance of opening up Cuba to US firms, with the benefits to the Cuban population being a key offshoot of increased trade. “I believe that American businesses should not be put at a disadvantage, and that increased commerce is good for Americans and for Cubans. So we will facilitate authorised transactions between the US and Cuba. US financial institutions will be allowed to open accounts at Cuban financial institutions. And it will be easier for US exporters to sell goods in Cuba.”

Increased trade will ultimately improve the fortunes of a number of industries, both in the US and Cuba. While opportunities for US firms looking to expand into a potentially lucrative new market will exist, it is Cuban industry that should see the biggest financial shot in the arm from the relaxing of relations between the two countries.

Tourism surge
One of the industries most likely to be transformed by the new relationship is tourism. Although a popular destination for many global travellers (see Fig 3), Cuba has been cut off from direct access to the US for decades. Currently, the island sees three million visitors each year, but just 90,000 of those come from the US – instead, Americans that have wanted to travel to Cuba have had to do so via airports in nearby Mexico or other Caribbean islands. The costly flights have deterred many travellers, as has the general assumption that Americans aren’t welcome in Cuba. However, according to the IMF, Cuba could see around 180,000 US citizens travel to the country once the restrictions are lifted.

Fig 2

The attractions on offer in Cuba are vast, with stunning (if poorly maintained) early-20th-century architecture throughout the country. An influx of American tourists could also see Cuba’s many tropical beach resorts transformed into thriving destinations. Beach locations like Varadero already have high-end hotel facilities, but US hotel groups will likely swarm these tropical destinations once they are able to. US groups looking for a prestigious home in the country’s capital could also target other historic hotels, like Havana’s Hotel Nacional de Cuba.

It is thought that the tourism industry could treble in size as a result of the new rules between the two countries. And yet, whether the country is ready for such a massive influx of tourists remains to be seen. Its tourism infrastructure is largely state-run, with costs kept down and little investment made in higher-end services that many US tourists might expect. The wider infrastructure of the country could also do with substantial improvements.

Infrastructure investment
Cuba’s creaking infrastructure has seen minimal investment over the last few decades, with little in the way of a modern transport network and its crumbling housing rarely invested in. There will certainly need to be more hotels built, and there are signs that this has already begun, with reports of Swiss luxury hotel chain Kempinski looking to build a 200-room resort. There is even a $350m luxury golf course being built by UK firm Esencia close to the Varadero resort, five decades after Fidel Castro ordered all golf courses to be closed for being “elitist”.

Aside from tourism infrastructure, the country is in dire need of a digital revolution. Its internet penetration is one of the worst in the world, currently standing at just five percent. Obama is hoping the reforms will see US telecoms giants enter the market and drastically improve the Cuban population’s access to the internet and other modern technologies.

There have even been other tentative steps from US firms moving into the Cuban market. Online video streaming service Netflix has recently started offering its product in Cuba, although a lack of high-speed internet in the country could hinder its chance for wider expansion. However, it is a symbolic step towards the country opening itself up to US firms, not least ones that will widen the population’s perception of America.

Another industry likely to enjoy a rapid increase in business is Cuba’s aviation sector; domestic airlines like Cubana, the country’s largest, could expand their services to the US. With a lifting of the embargo, many US airlines will also look to offer services from across the country to Havana. United Airlines has already said it plans to start offering flights to Havana from its hubs at Newark and Houston, while American Airlines, Southwest, Spirit and JetBlue are also said to be enthusiastic about serving the country in the future.

Lighting up
Cuba’s most famous export is undoubtedly tobacco. Cuban cigars are widely regarded as being the best in the world, but getting them into the US has been particularly hard. With a new market being opened up to Cuban tobacco farmers, huge amounts of cash could be brought into the country. The US is already the world’s largest market for premium cigars, but because of the embargo and the country’s refusal to recognise well-known Cuban trademarks, rival firms have been selling cigars under Cuban brand names for years. This may result in a series of trademark disputes over world-renowned brands like Cohiba, Partagas and Romeo y Julieta – for instance, there has been a dispute between the General Cigar Company and Cuba over ownership of the Cohiba brand since 1997.

Aside from tobacco, Cuba’s agricultural sector is dominated by sugar. It has huge potential, and could see a big boost from having the US market opened to it. However, Cuba imports a lot of its food from abroad – as much as 65 percent, according to some reports – and so outside investment could help it harness its own industry potential. For US agricultural firms, there will be significant gains to be made from having Cuba open for business.

Alvaro Vargas Llosa, a senior fellow at the liberal US think tank the Independent Institute, wrote in The Globe and Mail newspaper in January that, despite the tough talk of proponents of the embargo for many decades, the reality has seen many businesses trade with Cuba regardless of the restrictions. He explained: “Given the somewhat flexible conditions of the embargo, the US is already Cuba’s fifth-biggest trading partner and its largest supplier of food and agricultural products. This limited economic exchange will not vary much and the tiny amount of private enterprise allowed in Cuba will continue to see some 300,000 very small businesses go about their daily routine.”

Wider impact
The impact of this normalisation of relations could be felt far and wide. Cuba has relied upon the assistance of countries like Venezuela, Russia and China in the past, but its existing trade partners are beginning to become less reliable. Venezuela’s economy is in turmoil thanks in large part to the collapse in the price of oil and recent political upheaval. Russia has its own troubles to be dealing with, not least as a result of the western-imposed sanctions over the Ukraine crisis, and China is beginning to be more selective with where it invests its money overseas. If the US is to offer Cuba an alternative source of investment, it will prove a timely boost to the struggling Castro regime.

Fig 3 Tourist arrivals in Cuba

This thawing of relations between Cuba and the US could even see the country rejoin the IMF. Though Cuba was one of the original 40 founding members in 1945, Fidel Castro renounced the country’s membership in 1964 after a series of delays in paying back loans to the organisation. However, having relied heavily upon financial assistance from the Soviet Union until its fall in 1991, Cuba has reportedly been trying to rejoin the IMF ever since. Were the country to gain access in the future, it would no longer be reliant on getting financial assistance from countries like Venezuela, which is itself in economic turmoil.

However, some observers feel that the deal to normalise relations between the US and Cuba will likely benefit the Castro regime, rather than ordinary Cubans. Vargas Llosa believes that the deal will give the Castro brothers both political and financial benefits, but will “have only tiny economic impact on the people”.

He added: “The substance of the new agreement is that the Cuban hierarchy is now recognised as part of the civilised community of states and will be granted access to foreign exchange at a time when the Venezuelan subsidy is in grave peril due to that country’s economic collapse. No political change is even insinuated in the accords; the Cuban people will at best pick up a few economic crumbs spilled on the floor by their masters. The only way the Cuban people could truly benefit from an agreement would be if the island was inundated with US investment and trade, none of which will happen because the federal embargo prohibits this. Only the US Congress could lift it.”

The Castro regime, however, has control over Cuba’s currency, the Cuban peso, and so any US dollars that come into the country as a result of trade will go to the regime, rather than into the wider economy, according to Vargas Llosa. “The new measures entail a small increase of US dollars that flow to Cuba by way of travel and remittances. But because the Castro regime has complete control of Cuba’s currency, the foreign exchange will go directly into its pockets. Under the prevailing system, the ordinary people will obtain only Cuban pesos [which are] worth very little.”

A hugely divisive and passionate issue among Cuban nationals and the Cuban-Americans who fled Castro’s regime over 50 years ago, the embargo has proven a popular piece of policy for many US politicians. Getting it lifted will prove especially difficult with a Congress and Senate dominated by Republicans ideologically opposed to recognising Cuba’s communist leadership. Nonetheless, Obama’s intent and changing the relationship between the US and Cuba, and offering an olive branch to the country, should be welcomed as the first serious attempt in a generation to bring back such a historically important neighbour into the international fold.

Hong Kong buys $5.85bn to maintain currency peg

Posted on by Ashton Wenborn

On April 20, the Hong Kong Monetary Authority bought $1.2bn for HK$7.75 a dollar in its latest round of purchases this month that bring the total to $5.82bn.

Since Chinese authorities have made it easier for mainland firms to make purchases on the city’s stock exchange, demand for the Hong Kong dollar has been rapidly rising. As such, Chinese magnates are beginning to shift their investments from overseas into Hong Kong.

Chinese magnates are beginning to shift their investments from overseas into Hong Kong

According to Bloomberg, Hong Kong shares listed on the Hang Seng China Enterprise Index have risen by 16 percent in April, exhibiting the most growth among equity benchmarks, bar Dubai.

Experts believe that the influx of wealth into the city could cause further tension given Hong Kong’s infamous level of economic inequality, which contributed to the widespread protests that took place last year. Property prices and living costs can be expected to experience an additional hike as a result of this new trend, thereby raising the possibility of another outbreak in social unrest.

Since 1983, Hong Kong’s local currency has been pegged to the US dollar as a means of providing economic stability and international credibility. Doing so has worked for decades, but given recent moves made by Chinese premier Li Keqiang to open up the Hong Kong Stock Exchange to the rest of China, the opposite could now be in effect.

Hong Kong’s devaluing currency is also contributing to its rising inflation rate, which grew to 4.6 percent in February, a sizeable difference in comparison with Mainland China’s 1.4 percent. It would seem that maintaining the dollar peg is no longer required, while removing it in favour of the yuan could make China’s currency more accessible and transparent on the international market, therefore aiding its objective to internationalise the yuan.

Pakistan and China united by new economic corridor

Posted on by Ashton Wenborn

China and Pakistan have together unveiled plans for $46bn in vital energy and infrastructure projects, as the nations look to strengthen their existing relationship and construct a “land corridor” between the two. China’s Xi Jinping was in Islamabad to oversee the signing of the agreement, and the plans, once completed, include a Pakistan-China Economic Corridor – or superhighway – that runs from China’s western Xinjiang region to Pakistan’s southern port of Gwadar, as well as a whole host of energy projects.

Security is very much front and centre for any party operating in Pakistan

The investment is significant insofar as it equates to some 20 percent of Pakistan’s annual GDP, and, once the projects are up and running, Pakistan’s place as an often-overlooked investment destination may well begin to fade. As it stands, investors favour neighbouring India ahead of Pakistan, though the proposed projects will do much to quash any qualms concerning the lesser-known nuclear power.

Inadequate electricity generation has blighted the economy in years past, and blackouts remain a constant threat. $37bn of the total will be dedicated to energy projects, which should generate an additional 16,400MW of additional power and more than double the country’s current capacity.

Add to that on-going fighting between local terror groups and the military, and security is very much front and centre for any party operating in Pakistan.

For China, the new trade routes will go some way towards lightening the load on a country for which energy imports are key. Trade between the two nations will also be made easier, with the China-Pakistan Economic Corridor meaning that transit will be both more direct and less treacherous. Ultimately, the deal constitutes one part of a much wider plan to improve trade relations with those in Asia and beyond.

China slashes reserve requirement ratio

Posted on by Ashton Wenborn

Effective as of April 20, the People’s Bank of China (PBOC) has cut the reserve requirement for banks by one percent in a bid to boost lending and buoy China’s slowing economy. In the first quarter of this year China’s economic growth clocked in at seven percent, marking the lowest quarterly expansion since 2009 and underlining policymakers’ failure to arrest the slide.

Many see the latest RRR cut as a last ditch effort to boost lending

While the headline figure hit the central bank’s seven percent target, less-than-impressive industrial output along with a retail slump leaves due cause for concern, according to state media. Add to that a real and growing problem in the property market, together with ever-mounting piles of debt, and it would appear that the downward pressure on China’s economy is building.

By lowering the reserve requirement ratio (RRR) to 18.5 percent, down from 19.5 previously, sources at China’s central bank will be hoping that lending will step up some. As opposed to RRR cuts in years past, which have been introduced primarily as a means of keeping money in the country, this one is designed with the intention of boosting lending to the real economy.

The cut is the second this year already, and this, together with two interest rate cuts since November, demonstrates that the PBOC is serious about forcing changes to the Chinese economy. However, the measures feed into a wider debate about the usefulness of stimulus in boosting the economy, as opposed to structural reforms, which the government has promised and promised in abundance.

With the situation having shown little positive change recently, many see the latest RRR cut as a last ditch effort to boost lending before the government decides instead to pursue aggressive structural reforms.

Saudi Arabia opens its stock market to foreigners

Posted on by Ashton Wenborn

Following a resolution passed by the country’s Council of Ministers last year, the Capital Market Authority will be permitted to allow foreign institutions to trade shares that are listed on Tadawul, the Saudi Stock Exchange. The shift is estimated to bring around $40bn of foreign capital into the economy.

The shift is estimated to bring around $40bn of foreign capital into the economy

On April 16, the CMA revealed that the $509bn stock market will be opened to the rest of the world on June 15, with the final rules due to be published on May 4.

As the self-set deadline of the first half of 2015 soon approaches, the frustration of foreign investors continues to grow due to the lack of detail and transparency given so far. With only eleven weeks to go, Riyadh-based CMA has yet to divulge how existing rules and new restrictions on foreign involvement in the Saudi business sector will be amalgamated.

The country’s ‘negative-list,’ which catalogues businesses that forbid foreign participation, will be extended to the Tadawul also. For example, the real-estate market in Islam’s holy cities, Makkah and Medina, will continue to be barred from foreign investment. Several companies have been specified so far, including Jabal Omar Development Co, Makkah Construction & Development Co and Taiba Holding Co., which, according to Gulf Times, collectively account for approximately seven percent of the Tadawul All Share Index.

Granting direct investment to foreign enterprises is part of the country’s $130bn strategy to bolster non-oil industries. As 90 percent of the Saudi economy currently relies on the energy sector, a far greater focus will be paid to diversification, particularly given the volatility of the global market and plummeting oil prices.

“Initially, you’ll see additional liquidity being injected mainly by local investors,” John Sfakianakis, the Regional Director GCC for Ashmore Group, told Bloomberg. “International investors would come in multiple phases and would provide positive momentum over the short to medium term. Overall this is very positive as it’s what international and local investors have been waiting for.”

Five lesser known financial bubbles

Posted on by Ashton Wenborn

Stuffed-toy assets

In 1993 Ty Warner began to sell stuffed-animal toys, known as Beanie Babies. Due to the self-imposed scarcity of the product by the manufacturer – a result of Ty Warner never wanting to see his product in discount bargain bins – in the mid 90s the toys were considered collectables. Customers began reselling Beanie Babies for high prices to other speculators who imagined, as with all bubbles, the resale price would keep climbing. One such speculator purchased 20,000 of the stuffed animals for $100,000 dollars. After the bubble burst in 1999, prices never recovered. The toys now go for only a few dollars on eBay. According to Zac Bissonnette, author of The Great Beanie Baby Bubble: Mass Delusion and the Dark Side of Cute, “It was something really adorable that brought out the worst in people,” with one man serving a prison sentence in West Virginia for a murder stemming from a Beanie Baby sale gone-wrong. In an age of stock market rallies and economic optimism, people imagined everything, even stuffed animals, had high investment-potential.

Too many dollars, not enough nickel

The Poseidon bubble of 1969-1970 was also a product of its time. The Vietnam War had created a soaring demand for nickel, while industrial unrest had restricted its supply. When the Australian mining company Poseidon NL purportedly found a promising site for nickel mining in Western Australia, speculation on future profits was rife. As a result the price of Poseidon’s shares soared from $0.50 to $35. As Poseidon stock became too expensive for some investors, they began to snatch up shares in mining companies in nearby locations, often with no prospect of mining nickel. Other companies began to list to attract money from the investment frenzy, often with no intention or realistic prospect of ever mining nickel. Once it became apparent in 1970 that a lot of this stock was worthless, the bubble burst. Poseidon suffered further. When it began to mine the nickel that had started the boom, the quality was not of the grade first thought, resulting in higher extraction costs making the operation unprofitable.

The original Ponzi

Many speculative bubbles are often seen as skirting the line between frenzy and fraud. Ponzi-scheme bubbles – where the seller pays new investors with the money of old investors – sit firmly in the latter category. The originator of the Ponzi scheme was an Italian migrant to America in the early 20th century named Charles Ponzi. In 1919, his scheme was originally to purchase international postage stamps from countries where they were cheaper, exchange them for the American versions and resell at the higher American price. Operating this scheme in Boston in an age of European migration, such international postage stamps were a common feature of everyday life. The fluctuation of exchange rates and variation in international stamp prices allowed for profit to be made. Yet Ponzi went further, promising unrealistic returns to clients who would offer large investments, which Ponzi then paid back to older clients. Money poured in as people began to hear about this alleged Italian financial genius, and Ponzi’s celebrity and charisma was able to keep the charade going for a while. Saner heads soon started to question the ability to make such large profits through the sale of postal stamps, considering that much more stamps would need to be in circulation than actually were to justify the large profits Ponzi was claiming to be able to make. As the world’s first Ponzi scheme collapsed, authorities caught up with the conman, and gave him a hefty prison sentence.

Brazil’s failed industrial policy

The late 19th century was an era of industrial catch-up. From Germany, to the United States to Japan, previously agricultural nations were rapidly moving closer to the established industrial power of Great Britain. Seeing this advance, the government of Brazil was influenced to foster its own domestic industry in the late 1880s. The Brazilian state hoped to achieve this through unrestricted credit for industrial investment, increasing the money supply. The access to easy money did little to structurally transform the Brazilian economy, but rather created a financial and real estate boom. The bubble burst in the early 1890s and saw the foreign exchange value of Brazil’s currency collapse to a third of its former price.

Higher education bubble

According to some, we are in the midst of an expanding bubble right now. Higher education is one of the main political and economic concerns of our time. With rising tuition fees in much of the developed world, and increasing access to and demand for higher education in the developing world, a university degree is now often seen as a personal investment. And with all investments, there is an expectation of some sort of return. According to PayPal co-founder Peter Thiel, the higher education expansion is a bubble, primed to pop. Thiel’s argument was summarized in Tech Crunch as such: “Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.” With Americans forking out large sums of money for a university degree, the bubble will supposedly burst once it becomes apparent that the investment has not accrued the benefits promised upon purchase.

Japan overtakes China as the biggest holder of US debt

Posted on by Ashton Wenborn

Japan’s current fiscal crisis has inflated its debt to the US Government to $1.2244trn in February, leading it to overtake the $1.2237trn owed by China.

The figures released by the Treasury Department indicated that although both countries experienced an easing of holdings in January, China’s decline was slightly bigger, thereby switching the two rankings.

China has held onto the top spot since the economic crisis in 2008

“The dynamic between Japan and China has shifted, in part due to foreign-exchange-reserve needs and the currency dynamics between the two countries,” Edward Acton, a US government-bond strategist for RBS Securities, told Bloomberg.

China has held onto the top spot since the economic crisis in 2008. As the US increased lending to foreign governments in order to prop up the international economic landscape, its own debt grew considerably. Deficit exceeded $1trn for the first term of the Obama Administration, but has shrunk each subsequent year, falling to $483bn in 2014.

Given China’s slowing economic growth and level of exports, as capital outflows also taper, fewer dollar holdings are being purchased by Beijing. Not only is this a result of less funds with which to do so, it also prevents the yuan from strengthening too much, which would place even greater pressure on China’s export market.

On the other hand, as Tokyo battles with falling inflation and a sluggish economy, capital outflows are rising. Investment overseas has been further bolstered by attractive dollar assets, which have a relatively high rate of return.

In an interesting turn of events, the positioning of Asia’s two biggest economies are rotating, with China gaining the standing that Japan had upheld for years. Historically, Japan and China have never risen at the same time: the pattern shows that as one grows, the other weakens. This latest indication seems to prove this particular lesson correct once again, as Japan bows to China in terms of economic and political clout.

Greece downgraded thanks to deficit underestimate

Posted on by Ashton Wenborn

Greece’s long and short-term sovereign credit ratings have been handed another blow by S&P, following the realisation that last year’s deficit was higher than initially forecast. Reduced from B-/B to CCC+/C respectively, the ratings reflect a negative outlook for both the near and far future, and, “without economic reform or further relief,” S&P expects “Greece’s debts and other financial commitments will be unsustainable.”

The credit ratings reflect a negative outlook for Greece for both the near and far future

The downgrade comes as tensions between Athens and its creditors reach boiling point, with both parties at loggerheads over the exact conditions of the country’s debt repayments. The Syriza-led coalition currently has until May 12 to meet a €750m payment, though it seems unlikely that the government will be able to pay what’s owed by the deadline.

“The downgrade reflects our view that Greece’s solvency hinges increasingly on favorable business, financial, and economic conditions,” according to an S&P statement. “In our view, these conditions have worsened due to the uncertainty stemming from the prolonged negotiations between the almost three-month-old Greek government and its official creditors.”

Ultimately, the fear is that Greece could default on its obligations and force a “Grexit”, meaning the country would leave the eurozone and, according to some sources, inflict serious pains on the economy. “We believe that the economic, social, and political ramifications for Greece of such an unprecedented step would be severe and likely be accompanied by widespread public- and private-sector payment defaults.”

The negative outlook means S&P could lower Greece’s rating within the year in the event that the government and its creditors fail to reach an agreement. Alternatively, the outlook could become stable, assuming that Greece and its creditor countries “agree on a new financial support program with policy conditions that satisfy all parties. Such a scenario could contribute to promoting political stability, tax compliance, and a gradual economic recovery in Greece.”

Rubber: the muscles and sinews of industrial society

Posted on by Ashton Wenborn

“Think of our industrial structure as a living thing…. and the flexing muscles and sinews of which are rubber,” proclaimed Paul W. Litchfield, then president of Goodyear Tire and Rubber, in 1939. Such claims were not without warrant; in the same year crude rubber was the largest single-imported-commodity in terms of dollar value. While humans had found various uses for rubber for thousands of years, it became a vital natural resource – and therefore valuable commodity – with the rise of modern industrial society in the 19th century.

Most natural rubber is extracted from Hevea brasiliensis trees, which are native to South America. Pre-Columbia Native Americans had used the rubber extracts from these trees to form rubber balls to play a squash-like game with. The history of rubber as a commodity begins with the European conquest of the Western hemisphere. Ships began to transport this strange substance back to Europe, creating intense interest and excitement about its potential uses. As John Tully notes in his The Devil’s Milk: A Social History of Rubber, while “[c]onsideration of the commercial and industrial possibilities of rubber date from the Enlightenment… it was not until the nineteenth century’s industrial revolution that rubber’s potential began to be realised.”

The legacy of the history of rubber is still there to
be seen

The search for reliable rubber
In 1830s New York, the financially bankrupt Charles Goodyear stumbled upon the shop of the Roxbury India Rubber Company, the first American rubber manufacturer. Following a declined offer to improve a valve on one of the company’s rubber life vest jackets, Goodyear was shown racks of melted rubber products by the store manager. The store’s rubber products had been destroyed in the hot New York summer. Unable to keep its form in high temperature, the commercial potential of rubber was severely limited. This brief encounter inspired a life-long interest in the potential of this curious material. Goodyear’s finances soon saw him end up in a jail in Philadelphia and during his internment he asked his wife to provide him with raw rubber and a rolling pin, allowing him to experiment with rubber. After his release, his attempts to improve the quality of rubber continued and in 1839 he discovered that through a mix of heat of sulphur he was able to make rubber a more stable substance, allowing it to withstand extreme temperatures. This process was known as vulcanization. Yet due to a string of a bad luck and poor business talents, Goodyear was never able to turn his efforts into commercial success.

Across the Atlantic the more business-minded Thomas Hancock had also developed an interest in rubber. Its waterproof properties first attracted Hancock, who had hopes of it being used to keep patrons of his coach passenger business dry. Working with the Glaswegian chemist Charles Macintosh, the light weight waterproof coat the Macintosh was born in the 1830s. Five years after Goodyear – seemingly independent of him- Hancock also successfully vulcanized rubber. The new and improved properties of rubber saw it put to use in a variety of products integral to modern society: hoses, footwear, piston rings, railway buffers, solid rubber tyres, foot and valve pumps for ocean steamers, rollers for press printing, life belts, handgun grips, and telegraph kit, among others. In 1858 “the first transatlantic cable was laid between Ireland and Newfoundland by civil engineer Isambard Kingdom Brunel’s colossal steamship, The Great Eastern”, notes Tully. Rubber, by providing protection and insulation from the ocean water, made this possible. This precipitated a communications revolution, 200,000 nautical miles of telegraph cables being laid across the sea floor by the 1880s. According to Tully, “[b]y the 1880s, the uses of rubber seemed limitless.”

The Brazilian boom
The increasing demand for rubber led to the Amazon rubber boom between the late nineteenth century and 1920. In 1872 about 8000 tons of rubber were exported from Pará, Brazil. By 1890 this had grown three-fold to 20,000 tons. Prior to the boom, 19th century rubber extraction was usually carried out by small cooperatives, funded by trading companies. However, “as soon as it was appreciated that vast amounts of money could be made,” writes John Loadman in his Tears of the Tree: The Story of Rubber, “large companies run by the great…’rubber barons’ moved in.” Brazil enjoyed a near monopoly of rubber extraction and export, selling nearly 90 percent of all commercial rubber at the time. Rubber was also increasingly in demand due to automobile mass production and the development of the pneumatic tire. This made the rubber barons of Brazil fantastically wealthy. As Felipe Tâmega Fernandes of the Harvard Business School notes, “it was said that Manaus [a Brazilian town reliant on the rubber industry] diamond consumption per capita was the largest in the world, men walked with canes topped in gold and silver, children went to school in Paris or Lausanne and almost 2,500 inhabitants took first-class tickets to Europe every year.”

Akron, Ohio at the height of its industrial success, it was said, could be smelled before seen, owing to the strong smell rubber factories produce. At the turn of the century Akron was a minor Midwestern town playing only a marginal role in the growing rubber industry. The rise of mass production automobiles in the United States saw Akron take advantage of this new demand for pneumatic rubber tires. Ohio’s relatively small rubber manufactures were surpassed by large industrial operations led by men such as William O’Neil, founder of General Tire & Rubber, Harvey Firestone Sr. and Francis Seiberling’s Goodyear Tire & Rubber Company (the latter was named in honour of the then-deceased and aforementioned Charles Goodyear.) By 1909 the India Rubber Journal estimated that Akron was probably the largest rubber manufacturing centre in the world. “Swept up in the rubber boom”, notes Tully, “Akron grew swiftly from a sleepy Midwestern town into a booming industrial city. The barons’ factories were built at a colossal scale, strung like immense brick battleships along the East Market and South Main, puffing clouds of smut and smoke into the air.”

Plantations of empire
The method of extracting rubber – known as tapping – was, in the years of the Brazilian boom, very crude. It was based on extracting rubber from wild growing trees, often through the use of enslaved Amazon tribes or indentured labour. This made it rather unreliable and unsuitable as a component in the mature capitalist economies of North America and Western Europe. Yet the rubber barons of Brazil, with their virtual monopoly, maintained this primitive mode of resource extraction. What was needed was the creation of tropical plantations for rubber trees, providing a more orderly and reliable method of extraction and production, suitable for modern industrial economies.

In 1876, the explorer Henry Wickham returned to London from Brazil with 70,000 seeds for rubber producing trees, planting them in Kew Gardens. Further seeds were sent to India and other parts of the eastern British Empire, but many of the seeds at first failed to adapt to conditions or were not planted in favour of other established commodities. However, with the collapse of world commodity prices in the 1890s, gradually plantations started to plant the seeds of the now valuable commodity, with most rubber plantations located in Malaya or Sumatra. By 1913 the volume of rubber being extracted from Asian plantations for the first time outstripped the volume from the Amazon region.

Rubber is increasingly created synthetically now, through the use of petroleum. Around a of third of rubber is still produced from rubber trees. The legacy of the history of rubber is still there to be seen, with the vast majority of natural rubber sourced from Asia – the trees used being those introduced to British Empire plantations in the early 20th century. In 2013 the global market for natural rubber was worth $50bn, with “[s]ix and a half mn Tons of natural rubber…estimated to have been traded bilaterally,” according to a report by Accenture.

The history of rubber as a commodity can also be seen in Akron. This Midwestern town, like so many others, was conceived in an industrial boom. With its heyday now a distant memory after the rubber industry it relied upon was outsourced, it now forms part of the American post-industrial rustbelt. The story of rubber is reflective of the story of modern industrial society. Its awareness among Europeans coincides with the European ‘discovery’ of the Americas; its application to industrial purposes coinciding with industrial revolutions; its properties integral to modern modes of transport, communications, and production. “What people did to rubber is…fascinating” wrote Vicki Baum in her 1943 novel Weeping Wood “more interesting yet…what rubber did to people.”

China’s coal imports fall by 43 percent

Posted on by Ashton Wenborn

China’s coal imports amounted to 49.07 million during the first three months of the year, falling by 43 percent in comparison to the same period last year. This sharp decline can be attributed to a number of reasons, the most significant being China’s recent economic slowdown. As a result, demand from the industrial sector has slumped drastically, particularly as the practice of power plants purchasing extra coal in order to build stockpiles has ceased.

Chinese suppliers continue to be inflicted by debt
and oversupply

Stricter standards recently implemented for foreign coal so as to boost the domestic market have further accentuated the fall in imports. Yet, Chinese suppliers continue to be inflicted by debt and oversupply, while prices from overseas remain competitive.

Fewer coal purchases has been coupled with stricter regulations for traditional heavy industries as authorities make a more rigorous effort to reduce pollution. “Environmental pollution is a blight on people’s quality of life and trouble that weighs on their hearts,” Premier Li Keqiang told the National People’s Congress last month. “We must fight it with all our might.”

Beijing is also implementing a number of policies to make the country less energy-dependent; such as limiting the number of fuel intensive projects in badly polluted areas. Plans to reduce the annual consumption of coal by 176 million tonnes will have a direct impact on miners from the Western states of the US and Australia; both of which have experienced soaring sales as China’s energy demands rose exponentially during the peak of its economic boom.

Furthermore, as China continues to invest heavily in diversifying its energy mix, many believe that the glory days for international coal suppliers are over. Yet Australian industry experts remain hopeful that this is not the case; as China continues to grow, the process of industrialisation and urbanisation is set to continue. According to a report published by the Minerals Council of Australia, around nine million people per annum are added to urban areas, thereby propping up China’s electricity consumption and maintaining growing demand – albeit at a slower rate.