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from Breakingviews:

Trafigura move tests Singapore’s fat-cat fatigue

By Wayne Arnold

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Trafigura’s move to Singapore could test Singapore’s fat-cat fatigue. The commodities trader is moving its HQ from Geneva to Singapore, where its CFO Pierre Lorinet will join Facebook founder Eduardo Saverin and a stream of bankers drawn by its low taxes and proximity to growing Asian markets. But a warm welcome may depend on new arrivals’ ability to create local jobs.

Hanging a shingle in Singapore has some obvious advantages, starting with its low corporate tax rate of 17 percent. Trafigura should be able to take advantage of tax incentives that cut its rate to 5 percent or lower. Like Switzerland, Singapore has no capital gains tax and allows companies to exempt income earned offshore. That could be particularly useful to a company like Trafigura whose $122 billion in business passes through 81 offices in 54 countries.

Personally, Lorinet and the 30-odd executives moving with him can look forward to their income tax rate going down from a maximum 51 percent in Geneva to below 20 percent.

Given Singapore’s growing role in global commodities trade, the only wonder is what took Trafigura so long. Situated along one of the world’s busiest shipping lanes, Singapore connects China with the Gulf, Africa and Indonesia. It is the world’s second-busiest port after Shanghai and Asia’s largest oil hub. Singapore’s international trade in commodities rose 46 percent last year to over $1 trillion, which explains why other traders including Anglo-American, BHP and Cargill have moved staff to Singapore.

The more companies move to Singapore, the more it will ask for something in return. Singapore’s attempts to lure well-heeled entrepreneurs, scientists and private bankers have helped push the population up by 65% in just 20 years. A third of its workforce is foreign. Angry with rising prices and income gaps, voters in last year’s elections handed the ruling People’s Action Party its lowest returns since independence in 1965. It has responded by raising the bar for foreigners setting up companies, and promised to lower limits on how many foreigners companies can employ.

from Breakingviews:

Miners can live with a not-so-super cycle

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The super cycle is turning and miners’ super returns are under threat. But they can probably avoid another period of value destruction like the one that preceded the decade-long materials boom.

The problem is slowing demand in China, which is expected to account for the bulk of demand growth for copper and iron ore this year. Chinese housing starts fell sharply year-on-year in April. Industrial production, domestic retail sales and exports also looked weak.

With production costs increasing at an annual double-digit pace, miners need prices to stay high if their egregious profitability is to be sustained. The likes of Rio Tinto, BHP and Anglo American enjoyed operating margins of 30-40 percent last year, on a par with Google. Margins in iron ore, which accounted for the bulk of the five biggest miner’s 2011 profits, were roughly double that, according to Rio.

Miners’ average return on capital was 19 percent in January, according to data from Aswath Damodaran at New York University. The industry’s average cost of capital in 10 percent. Fast back to 2000, before the China boom kicked off, and returns were at 6 percent.

Could single-digit returns become the new norm? Probably not. China’s appetite for raw materials is softening not ending, and momentum would pick up if Beijing eased off the monetary brakes. Fading demand for steel in construction should be partly offset as newly affluent Chinese urban-dwellers buy more appliances and cars. And after steel intensity peaks, later-cycle commodities like potash (used in fertiliser) and diamonds tend to pick up. Moreover, the western miners are generally the lowest-cost producers, so have a competitive advantage in a downturn, especially versus Chinese rivals.

from Breakingviews:

Debt markets may be good compromise for Dreyfus

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Commodity traders are finding it harder to maintain their privacy. Louis Dreyfus is the latest to step out of the shadows. The venerable agricultural trader needs to invest if it wants to stay relevant in a consolidating and increasingly capital-intensive industry. But a float or merger would dilute family control. For now, plans to tap debt markets mark a sensible compromise.

Dreyfus made a net profit of $735 million on revenue of about $60 billion last year, according to the Financial Times, making it the world number three. Expansion must be funded internally or via bank financing, although Dreyfus also raised $2 billion from the sale of a natural gas pipeline and storage business last year.

New sources of funding may be needed if Dreyfus is to maintain its edge. Asia’s growing appetite for grains has lured rival commodity traders into agriculture. Half a decade of high prices and a scarcity of targets have pushed up acquisitions prices. Peers are investing in strategic assets, like silos and ports, and value-added activities, such as food processing, to gain competitive advantage.

True, Dreyfus already enjoys scale. But to keep up, it reckons it needs to invest $7 billion over the next four years - 40 percent more than in the previous four. Rivals are moving even faster. Glencore, the Swiss trader, raised $8 billion in a float last year and recently agreed to pay more than $7 billion including debt for Canadian wheat trader Viterra. Japan’s Marubeni is reportedly eyeing an acquisition of U.S. grain trader Gavilon for $5.2 billion.

Moreover, Margarita Louis-Dreyfus, who became the trustee of a controlling stake in the company after her husband’s death in 2009, needs to be prepared for a curve ball from minority shareholders. Other family members with 35 percent of the business hold options that could require Dreyfus to buy their shares.

from Breakingviews:

Jewellers needed to ease gold bugs’ pain

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Gold has a dual personality. Many think it is the ultimate hard currency. Others like it because it looks pretty. And while its price climbed high as investors have sought shelter from the financial crisis, gold has behaved more like a risk asset recently.

Despite the fresh mess in the euro zone, gold dropped to a four-month low, below $1,600 an ounce. Scared investors are moving into dollars, Treasuries and Bunds. But not gold. With the greenback’s rise against the euro keeping gold bugs on the sidelines, it may fall to physical buyers to put a floor under the price. But jewellers and other buyers who like gold “because it’s pretty” are feeling the pinch too. Especially in India and China, the world’s biggest consumers of the metal.

Political upheavals in Greece and fresh pressure on Spanish banks have pushed euro zone policymakers back into crisis mode. In recent years that sort of pressure has been positive for gold, but this time there is little evidence that it’s led to an uptick of fear-driven buying.

Asian buyers may be attracted by the lower prices. Shanghai trading picked up as the price fell below $1,600. Gold demand in India was twice the usual daily average on May 9, according to UBS. But that was helped by the lifting of a controversial excise tax on precious trinkets and the Indian government’s attempt to shore up the rupee.

More aggressive physical buying may eventually put a floor under prices. But gold’s 18 percent slide from its September 2011 peak of $1,920 an ounce needs to be seen in proper context. Years of elevated gold prices have pushed jewellery demand down by a quarter over the past decade. The metal still trades at more than double what it cost before the financial crisis kicked into high gear in 2008.

from Breakingviews:

Hong Kong’s LME bid is big bet on China flows

By Wei Gu

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Hong Kong is playing the China card in the bidding for the London Metal Exchange. Proximity to the world’s largest consumer of metals might make up for the Hong Kong Exchange’s relative inexperience in trading commodities. But Beijing may open up regardless of who owns the LME.

For Hong Kong, the bid is a bold attempt to move beyond its main business of trading and clearing equities. A robust flow of listings from the mainland, and less intense price competition than that facing its rivals in the West, have made Hong Kong the world’s second-largest exchange by market value, behind CME Group. But the flow of new issues from China may have peaked. The LME could drive a new revenue boost.

There’s no question that China is under-represented on the LME. Though the country consumes 40 percent of the world’s metals, China-related trading is estimated to account for just 20 percent of LME volumes. If China-related ownership had helped lift that figure to, say, 30 percent, the LME’s 2010 revenue would have been boosted by roughly 10 percent.

Such a shift is largely in Beijing’s gift. The LME currently has just one Chinese member and a handful of companies which do business through other members, as Beijing restricts domestic firms from trading on foreign exchanges. Greater Chinese participation would also favour current LME members such as JPMorgan and Goldman Sachs, which make money from trading, financing and other services.

Hong Kong often stands first in the line when China opens up. But it’s unclear that the door for the LME will open faster under Hong Kong ownership. Chinese authorities are concerned that local firms’ risk controls aren’t up to global standards, after a few high-profile trading losses. They also want to give time for the Shanghai Futures Exchange to develop before allowing LME’s warehouses in.

from Breakingviews:

Markets threaten no growth, no austerity Europe

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Global equity and commodity and euro zone debt markets are at risk of a sizeable correction. French and Dutch political uncertainty and a worsening European recession will feed global concerns about growth and debt. The deepest worry is that as Europe’s economy weakens, the uncertainty about how to address the crisis only increases.

The economic data is painfully clear. The first statistics of April suggest the euro zone recession which began in the fourth quarter has extended to the second quarter and is worsening. Service activity in France contracted sharply and firms cut jobs there and in Germany. That’s bad but the euro periphery is worse, with output falling faster - in the eleventh month of decline.

The big question is what to do. France encapsulates the debate. Francois Hollande’s strong showing in the first round of the presidential election is taken as a popular endorsement of pro-growth policies. But voters are rejecting ’austerity’ when little has arrived. France’s fiscal deficit was 5.2 percent of GDP in 2011 and its public debt to GDP ratio 85.8 percent. The OECD put French government spending at 56.2 percent of GDP in 2011 - well above the whole euro zone’s 49 percent.

The periphery’s plight is worse. Although recession in Italy, Spain, Portugal and Greece is set to be deep, pleas for less austerity seem certain to be rejected by Germany. That matters, because the periphery governments need Germany’s support to stay afloat. But the periphery’s crisis is not just fiscal - it is also one of competitiveness and growth. The easiest remedy may be a messy exit from the euro.

Euro zone fears seem set to rise again. The European Central Bank has flooded banks with cash and is ill-placed to intervene in the same way, though it ought to cut rates. A modest sell off seems likely in French debt and that of The Netherlands, as it faces an autumn election. The risks for Spanish and Italian debt are much greater.

from Breakingviews:

Qatar plays merger-maker at Glencore-Xstrata

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Qatar is playing merger-maker for Glencore-Xstrata. The Gulf state’s sovereign wealth fund has already proved it can act as a successful arbitrageur in M&A situations. It hasn’t revealed its intentions for the 5.5 percent stake in Xstrata built in the two months since Glencore agreed to merge with the Anglo-Swiss miner in a $90 billion deal. But the bold $2.7 billion investment could be another win.

The fund’s track record in special situations has improved. Interventions in UK retailer Sainsbury and London Stock Exchange in 2007 both backfired. But when Qatar bought 10 percent of European Goldfields last year and offered the cash-strapped miner cheap financing in return for warrants over more of the company, its interest teased out a premium bid for the entire company - and a quick buck for Qatar. The emirate is also in the money on the Volkswagen shares purchased when the car group was trying to marry with Porsche in 2009.

Qatar is doubtless betting that Glencore will raise its offer for Xstrata. Institutions that hold at least 8 percent of Xstrata shares are holding out for more, and Qatar’s stake potentially gives these naysayers more leverage over Glencore to bump up the terms. The deal can be blocked by just 16 percent of Xstrata shareholders because Glencore can’t vote its own 34 stake when the deal is put to a scheme of arrangement. Qatari opposition would almost certainly kill the deal.

In reality, the situation is more probably nuanced. Qatar wouldn’t want to get a reputation for being difficult by voting down a deal. Equally, Glencore would doubtless be keen to get it on board as a supportive long-term investor.

Qatar may have paid an average price of 1,144 pence per share for its stake, based on the average price of Xstrata shares in the last two months. Xstrata shares currently trade at 1,098 pence. But if Glencore ups its proposed share exchange ratio only to 2.9 from the current 2.8, Qatar could be more than made whole at current share prices.

from Felix Salmon:

The gold price tells us nothing about inflation

Matthew Bishop and I have a fundamental disagreement when it comes to gold. There's a "canary in a gold mine," says Matthew: when the price of gold goes up, "it tells you we should worry about why it's going up, and what it tells you about the value of paper currency."

Whereas I think it tells you no such thing.

Essentially, we're looking at two different things. Here's a chart of the gold price, in green, versus the 30-year bond yield, in orange, over the past five years.

The long bond currently yields just 3.36%, which is the clearest way that the market knows of saying that there's not going to be any nasty inflation in the future. If you want, you can even get an exact number, by subtracting the 30-year TIPS yield of 0.94%: the market is saying that over the next 30 years, inflation is going to work out at just 2.42%, on average. Which is not anything to get worried about.

Now TIPS are not a foolproof guide to future inflation, but gold certainly isn't. Indeed, the bond market does more than undermine the gold price as a guide to future inflation: it actually provides a much more credible explanation for the gold price than an inchoate fear of future price increases. After all, if you want to protect yourself against inflation, you buy assets which throw off income which goes up when prices go up, like TIPS, or companies, in the form of stocks. Gold, on the other hand, throws off no income at all, and its price is just as crazy and volatile in real terms as it is in nominal terms.

from Global Investing:

Market exhaustion?

It's curious to see so many asset managers reaffirm their faith in a bullish 2012 for world markets just as a buzzing first quarter comes to a close on Friday with hefty gains in equities and risk assets.  Whether or not there is a mechanical review of portfolios at quarter end, it's certainly a reasonable time for review. The euro zone crisis has of course eased, the ECB has pumped the banks full of cash and the U.S. recovery continues.  So, no impending disaster then (unless you subscribe to the increasingly-prevalent hard-landing fears in China). But after 11+ percent gains in world equities in just three months on the back of all this information, you have to wonder where the "new news" is going to come from here. The surprise factor looks over and we're highly unlikely to get 10%+ gains in global stocks every quarter this year.  So, is it time for tired markets to sober up for a while or maybe even reconsider the risk of reversal again? Strategists at JPMorgan Asset Management, at least, reckon the economic news has just lost its oomph.

There are broad signs of exhaustion in markets, which is coinciding with a softening in the data, suggesting that in the short term the moderation in the “risk on” environment may continue.

JPMAM cite the rollover in the Citigroup economic surprises indices, shown below, and also say their own propietary Risk Measurement index -- a 39-factor model built on data from money markets, equities, economic data, commodities etc -- is flagging more caution.

Time for a pause and bit of a think then, at least until the first-quarter corporate earnings season kicks in next month. And it's here the next leg of any equities story may have to play out, rather than in the corridors of central banks and finance ministries. Gavyn Davies, Fulcrum Asset Management chairman and formerly BBC chairman and Goldman Sachs economist, reckons the valuation case for equities is pretty strong after a lousy decade -- even if government bond yields continue rising. What's less certain, he says, is whether the historically high share of nominal GDP commanded by after-tax corporate profits can persist. This requires a paradigm shift, one he reckons is bridged by globalisaton trends. One quarter won't solve that puzzle, but attention may shift in that direction over the coming weeks.

from Global Investing:

Three snapshots for Monday

The NAHB U.S. homebuilder sentiment index held at 28, below economists' expectations for 30.

Apple will initiate a regular quarterly dividend of $2.65 a share in July and will buy back up to $10 billion of its stock starting in fiscal 2013.

Energy leads the way for commodities this year, but with a big divergence between the components - gasoline sitting at the top while natural gas sits near the bottom.