Exports facilitate industrial sector revival

BY MORRIS R. BESCHLOSS
PVF and economic analyst

The one big wild card that could make a significant difference in the economic maelstrom of 2008 is exports. Only a few years ago, the idea of exports playing a significant role in America’s economic strength was considered impossible. Swamped by imports and a shrinking product export base, the U.S. was relegated to an also-ran in the global sweepstakes of outward bound shipments. In fact, the U.S. trade deficit grew ever larger, reaching the dangerous level of 6% of gross domestic product in 2003.

This scene is changing dramatically, however. Exports now look like a main driver of the American economy, trailing only Japan in revenue total. It’s expected that exports will comprise one-half of the U.S. gross domestic product increase next year, outdistancing imports for the first time since the early 1990s. The trade gap is expected to shrink to 3.8% of gross domestic product in 2008, the smallest share of gross domestic product in this decade. It’ll also be down substantially from this year’s 5%.

America’s global shipment growth -- two-thirds of which is composed of industrial products -- is facilitated by the weakest dollar in decades, coupled with soaring demand from the world’s emerging nations. This demand includes high technology, aircraft and motorcycles, military equipment, heavy machinery and a variety of mill supplies. Increases in such services as consultancy, travel, advertising and legal advice have been in surplus territory this decade.

Those who have written the obituary for America’s industrial sector may be surprised to learn that exports have helped revive the moribund U.S. industrial sector, which had seemed lifeless due to a spate of outsourcing. The industrial sector has now been further abetted by commercial and industrial construction, plus the beginning major overhaul of infrastructure -- bridges, dams, airports and highways.

The latest statistics tell the story. Exports to China are up 16% from the end of the third quarter last year. U.S. exports to Brazil have increased nearly 30% and, to India, an incredible 65%. Leading U.S. companies such as Caterpillar, Boeing, Cisco and Timken Roller Bearings are building huge markets abroad due to the end use markets to which they cater. The dollar/euro disparity has accelerated Boeing’s revenues, and decreased Airbus sales.

Together with the U.S. industrial sector’s greater productivity, the smokestack industries are experiencing an unexpected revival. Part of this surge, which has brought the manufacturing arena back to double digits of our gross domestic product, is due to the demand by U.S. end use industries that need commodities, as well as specialized products, quickly and can’t wait for overseas delivery.

Another recent factor that has abetted U.S.-manufactured products is quality. It is unsettling to learn that a few imported products and components are not up to required standards, especially in such end-use applications as power generation, oil refining, natural gas and the chemical industry. In any case, expect the industrial sector, as well as exports, to become a major offset to the decline of residential housing and the automotive sector. Exports alone provided such a balance to the housing decline during the third quarter.

Sovereign wealth funds wield increasing global influence

The meteoric rise of sovereign wealth funds, which have sprung out of the multi-trillions of dollars generated by the governments of new-rich Asian nations and oil producers, could be wielding increasing influence on the global scene.

This is increasingly worrisome to the U.S. Treasury, which is concerned over the clout these new giant financial heavyweights could wield over the recipients of this massive cash inflow.

Such funds, which we first wrote about a year ago, are just beginning to flex their financial muscles as their treasure troves are only beginning to be filled. So far, so good. An overview will disclose that at least some of their content is being invested in U.S. dollars, stocks and American fixed assets.

Since they are sovereign and functioning as moneymaking vehicles, these funds have as their mandate capital accretion. But as they continue to grow in financial girth, their output could increasingly be seen as attempting to influence the recipients’ governments or institutional direction. A good example is Saudi Arabia, which is only beginning to utilize its $250-billion fund. The Saudis are funneling an increasing amount of funds into financial centers such as Citigroup and into the building of mosque-centered educational centers in various parts of the country.

The issue of sovereign wealth funds dominated a recent meeting of the group of seven leading industrial nations. The G-7 invited counterparts from countries with sovereign wealth funds to participate in a post-mortem of these conversations. The G-7 -- Canada, France, Germany, Italy, Japan, United Kingdom and United States -- advocated the involvement of the International Monetary Fund and the World Bank in such issues as the funds’ infrastructure, transparency and accountability.

The reason for the World Bank’s concern is that the funds have now accumulated between $2 trillion and $3 trillion, and could reach $10 trillion within a decade. According to former imf chief economist Kenneth Rogoff, this could make these funds the centerpiece of the global financial system.

Some of the largest funds are owned by countries such as China, Saudi Arabia, Russia, Kuwait and United Arab Emirates which are considered least-trusted by U.S. and European publics. Although primarily invested in government debt so far, which is helping financial stability, especially in the U.S., China’s acquisition of a nearly 10% stake in private equity firm Blackstone Group this spring is the start of a new wave of financial risk-taking.

It’s even suspected by some experts, such as Securities and Exchange Commission chairman Christopher Cox, that government investment funds could use the “vast amounts of covert information available to them by their spy agencies, giving them superior insider trading status.”

According to Mr. Rogoff, the global trading system has even handled major political disputes involving financial markets. Future approaches would require such bi-national interest groups to work out a common position on such issues as:

• Should government funds be limited to financial stakes?
• Should defense, media and other industries be off limits to any investments?
• Should countries whose funds are invested in specific investment sectors, such as financial services, be required to open these same sectors at home to foreign investment?

Yale professor Jeff Garten fears that non-conformance to such restraints would play one country’s offer against another to get a richer package of tax cuts for the host country. In such a scenario, the governments of the funds participating would be their interest in maintaining the freest possible access to the world’s richest markets. If the countries don’t reach a deal, the U.S. and Europe, for instance, could impose their rules unilaterally.

This might eventually lead to trade rounds similar to the present trade talks, which involve 150 nations. Whatever evolves, it’s certain that the satisfaction of financial goals will be the ultimate measuring stick of their success. The big difference between today’s laissez faire way of doing business and the governmental consortiums focusing on target nations and their markets is the eventual leverage that surplus-laden nations could use to enforce their possibilities.

Sasol accelerates the future of coal & gas to oil

If you’ve never heard of Sasol before, imprint it indelibly into your memory blank. It may become the world’s final answer to coal gasification and liquefaction. This major South African company represents 3% of South Africa’s gross domestic product and specializes in turning gas and coal into liquid fuel. It has become the most realistic answer in the oil sector since becoming listed on the New York Stock Exchange in 2003. Due to its dynamic future, its American depositary receipts (ssl) have soared about 400%, recently eclipsing $50 and riding the crest of booming oil prices and increasing shortages.

Sasol traces its history back to two German scientists, Fischer/Tropfsch, who developed synthetic fuel in the 1920s, eventually providing 100% of Germany’s gasoline and other derivatives when other sources were no longer available to the Nazi armies in 1944.

This method kept South Africa’s infrastructure humming after all OPEC countries declared a boycott against the Afrikaner state due to its apartheid policies. At present, Sasol generates 160,000 barrels a day of jet, diesel and other distilled fuels for the South African market. The company converts 45 million tons of coal yearly, resulting in 37% of South Africa’s liquid-fuel needs, and is planning to lay the groundwork to be a major player worldwide as it plans similar facilities in other countries.

Coal-rich, oil-poor countries like the U.S., India and China have only recently turned to Sasol to help lessen their reliance on high-priced crude imports.

Although by multi-national oil giant standards, Sasol is still a $30-billion market value midget, but it’s becoming a giant on its home turf. Its liquid fuel and refining operations are growing by leaps and bounds. Second only to the tar sands operations in Canada’s Alberta Province, Sasol is becoming the pathfinder that may eventually prove to be the ultimate answer to OPEC’s geopolitical domination of the Western and Asiatic worlds.

Although its $14-billion revenues and $2.5-billion net profits still seem puny by Exxon/Mobil and British Petroleum standards, its world leadership of coal-to-oil could multiply manifold the volume the company generates in jet, diesel and other distilled fuels for the South African market. Its coal-to-oil business is increasingly supplemented with other energy and chemical operations, both at home and abroad.

If the world price of oil stays above $70 per barrel as expected, Sasol could post a 23% increase in earnings per share in fiscal 2008. This would bump up its earnings in the present fiscal year from $3.55 to $4.38. Even currency exchange rates are trending in the company’s favor. A $1 gain in the price of oil adds $43 million in pre-tax profits to Sasol, while a 10-cent drop in the value of South Africa’s rand adds $87 million.

Although highly optimistic evaluations of the company’s stock call for $70 a share next year, it may be several years before significant numbers of gas-to-liquid and coal-to-liquid facilities are built outside of South Africa. Commercialization of the technology remains costly; many global companies are scrapping plants due to cost overruns.

Management is bullish, however, because Sasol’s technology has been at it since 1950. Its biggest fear is a precipitous drop in prices. Present trends hardly make this concern a viable reality. Only a worldwide recession could succeed in creating such a circumstance. That is why this progressive energy company’s motto is “Full Steam Ahead.”                   

Morris R. Beschloss, a 51-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.