Coal Pricing Outlook (bloomberg)

Aug. 24 (Bloomberg) -- China’s unprecedented appetite for imported coal is about to be sated, jeopardizing a five-month rally in prices by adding to a global surplus of the fuel used in power plants from Perth to Chicago.After importing a record 48 million tons in the first six months, China is opening mines idled by worker deaths this year following safety upgrades in a bid to bolster economic growth. Huadian Power International Corp. expects China’s largest coal- mining province, Shanxi, to boost output by 60 percent in the second half of the year. That would mean an increase of 150 million metric tons, almost twice what Germany burns annually.

With little need to buy coal outside the country, prices may tumble, falling as much 7 percent in Europe alone, Barclays Capital says. China’s purchases will plunge 33 percent between June 30 and Dec. 31, based on the median estimate of four analysts surveyed by Bloomberg.
“In the first half, China really supported the market and put a pretty firm floor under the thermal-coal price because it was sucking in so many imports,” said Andrew Harrington, an analyst at Patersons Securities Ltd. in Sydney. “It’s difficult to be confident that it will continue at such a rate.”China’s July coal imports fell 13 percent to 13.9 million tons from 16 million tons in June, a record high, customs data shows today. Demand from China, which uses coal to generate about 80 percent of its electricity, helped ease a global supply glut that sent U.S. inventories to an 18-year high.

Earnings Hit
A retreat in prices may curb profit at Xstrata Plc, the mining company that is the biggest shipper of coal for power stations, said Nick Hatch, an analyst at ING Groep NV in London. Coal was the biggest contributor to operating earnings last year for Zug, Switzerland-based Xstrata, which boosted output of the mineral by 11 percent in the first half.“If China stops importing as much coal, it clearly may mean lower coal prices in the seaborne market, and that could have an impact on earnings,” said Hatch, who has a “buy” rating on Xstrata and mining companies Rio Tinto Group and Anglo American Plc, which also produce coal.Claire Divver, a spokeswoman for Xstrata, declined to comment. Murray Houston, the general manager for the company’s South African coal unit, said on Aug. 13 that shipments to China will increase “due to a tight domestic market.”Six-month supply contracts signed by Chinese buyers in February and March are expiring and aren’t likely to be renewed at the same amounts as global costs remain high and as domestic supplies rise, said Huang Teng, the general manager of Beijing LT Consultant Ltd., a coal consultant based in the capital city.

China Prices
Chinese provinces are accelerating the expansion of coal mines, the China Coal Transport and Distribution Association said in a statement on its Web site today. The reopening of small mines in regions including Shanxi will increase supplies and put pressure on prices. The benchmark price at Qinhuangdao port was unchanged for a third week at 570 yuan ($83.44) a ton on Aug. 24, according to the government-backed association.Coal futures for September delivery at Rotterdam, the benchmark for Europe, have risen 39 percent to $72 a ton on Aug. 21 from this year’s low of $51.75 on March 12. Prices rebounded from a 35 percent decline last year, when the recession slowed demand for electricity. Supplies for delivery in January are trading 7.6 percent higher than the September contract.

Shrinking Premium
That premium for delivery early next year may shrink because China won’t be buying as much of the world’s surplus, said Amrita Sen, a commodity analyst at Barclays Capital in London. Coal delivered at Rotterdam will fall to an average of $67.20 a ton from $72 in the first six months, she said.“China has been a key factor in providing a floor to prices and any softening in Chinese buying will pressure coal,” Sen said. “We will see a softening on a month-on-month basis in Chinese coal imports.”An end to the global recession may trim the surplus. China has spent 4 trillion yuan in a stimulus package designed to support its economy. The world’s third-largest economy grew 7.9 percent in the second quarter from a year earlier after expanding at the slowest pace in almost a decade the previous three months, the statistics bureau said July 16.
‘Extraordinary’ Measures“Price momentum and volume momentum are so strong, it’s difficult to see why the price should go down,” said Eugen Weinberg, a senior commodity analyst at Commerzbank AG in Frankfurt. “Measures to initiate demand are extraordinary.”
Drax Group Plc, the owner of western Europe’s biggest coal- fed power plant, has no plans to sell its surplus inventories of the fuel because the North Yorkshire, U.K.-based company expects the value of the commodity to increase.“We see the coal market rising,” Chief Executive Officer Dorothy Thompson said in an Aug. 4 conference call with reporters. “It does not make sense to sell coal now.”China, the world’s largest producer and consumer of coal, ordered the closure of almost all 10,000 of the country’s small pits during the Spring Festival in January, and plans to open some were delayed following a deadly accident in February.An explosion at a shaft in Shanxi killed 74 and injured as many as 114 miners, leading to more intense safety checks. Small mines that account for about 25 percent of China’s production were told to merge and those deemed unsafe were closed.

Most Deadly
The nation’s coal mines are the most deadly in the world, with 3,770 workers killed in 2007, more than 100 times the number of fatalities in the U.S., the second-largest producer, according to government data. Suppliers kept old pits open, ignoring safety rules and forgoing routine checks, to meet surging demand from the world’s fastest-growing major economy.
The mine closures and lower prices led to an increase in purchases from overseas. Imports surged to 16 million tons in June, bringing the first-half total to 48 million, according to customs data. Thermal-coal futures in Newcastle, Australia, the world’s largest coal port, have rallied 22 percent from a low in March to $72.90 a ton on Aug. 21, according to ICE Futures.
While most of the world’s output is used near where it is mined, export prices are determined by the remaining 16 percent bought and sold internationally, data from the London-based World Coal Institute show. Thermal coal used in power plants accounts for 92 percent of global production and 72 percent of international trade, according to the U.S. Energy Department. The rest is mostly used in steelmaking.

Safety Checks
After completing safety checks and consolidating small pits that had an annual capacity of 300,000 tons or less, the province of Shanxi is accelerating the pace of mine openings to revive the worst-performing provincial economy in China. The region’s gross domestic product contracted 4.4 percent in the first half, according to government data.“The province started approving restructuring plans in April and the process of consolidating mines has started,” said David Fang, the director of the international department at the China Coal Transport and Distribution Association. “Small mines are reopening gradually.”Of the 10,000 small mines in China, about 2,598 are in Shanxi, according to the China Daily newspaper. Output in Shanxi may rise to 400 million tons in the second half from 250 million tons in the first six months, said Chen Jianhua, the president of Huadian Power, the fourth-largest Hong Kong-listed Chinese electricity generator. Chen expects Shanxi production to reach 650 million tons in 2009.China produced 2.6 billion tons last year, according to the national bureau of statistics, which compiles data for the government. China is likely to cut imports by 33 percent in the second half of the year to 32 million tons, according to four analysts and industry officials in a Bloomberg survey.

Swelling Supplies
Reduced demand may swell global supplies that ballooned during the recession. Stockpiles held by electricity generators in the U.K., Europe’s biggest importer of coal, rose 68 percent in May from a year earlier to 17.4 million tons, the most since at least 1995, government data show.
“Europeans are fully stocked, but not reselling because they fear higher prices with an Asia-led economic recovery,” said Emmanuel Fages, a Paris-based commodities analyst at Orbeo. “The cost of carry for storing coal is cheaper than buying the coal for later delivery.”

U.S. Inventories
In the U.S., inventories jumped 15 percent in the first four months of the year, compared with a 1.1 percent gain in 2008 and 2.4 percent in 2007, Department of Energy data show. Stockpiles at the end of last year totaled 199.2 million short tons (180.7 million metric tons), the highest since 1991.Global supply of internationally traded thermal coal is forecast at 633 million tons next year, exceeding demand by 14 million tons, according to forecasts from Macquarie Group Ltd., Australia’s largest investment bank.The rapid increase in Chinese coal output may upset the calculations of producers in other countries, including the U.S., where exports rose 38 percent last year.St. Louis-based Peabody Energy Corp. sold 16 percent of its coal production outside the U.S. last year, regulatory filings show. The company’s sales outside the U.S. climbed 30 percent to 40.3 million tons, outpacing total sales growth of 8.2 percent to 255.5 million.“China has been an indirect market” for the U.S., said James M. Rollyson, an energy analyst at Raymond James Financial Inc. “It’s soaked up capacity from Australia, so it kind of makes waves into other markets.”

China 2 Trillion reserves and its constituents

China’s foreign-exchange reserves, the world’s biggest, topped $2 trillion for the first time as overseas investors became more confident that the nation’s economy is recovering.

The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People’s Bank of China said today on its Web site. That dwarfs a $7.7 billion gain in the previous three months.

The World Bank, BNP Paribas SA and Standard Chartered Bank have raised estimates for China’s growth and the Shanghai Composite Index has surged 74 percent this year as record lending and surging investment counter a slump in exports. The increase in the reserves highlights China’s concern that its $763.5 billion of Treasury holdings may fall in value as the U.S. sells record amounts of debt to fund stimulus spending.

“China has the strongest prospects out of all major economies, so it is not surprising that hot money is flowing back,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “China has certainly recovered from the downturn, and it is on a strong footing now.”

M2, the broadest measure of money supply, rose a record 28.5 percent in June from a year earlier, the central bank said, after a 25.7 percent gain in May. Outstanding yuan loans rose 34.4 percent to 37.74 trillion yuan ($5.5 trillion) at the end of June from a year earlier. The central bank also confirmed June’s new lending of 1.53 trillion yuan.

‘More Momentum’

“The capital inflows have driven up stock and property prices,” said Yang Shengkun, a currency analyst in Beijing at China Citic Bank Co. “Speculators are favoring China because the government’s stimulus package is working quite well, which will help the country to be the first to recover globally.”

Economic growth rebounded to 7.8 percent in the second quarter, according to a Bloomberg News survey of economists. That number will be released tomorrow.

The yuan traded at 6.8333 against the dollar as of 10:00 a.m. in Shanghai, from 6.8329 yesterday.

Central bank Governor Zhou Xiaochuan ruled out any sudden change in the management of the reserves last month after proposing that governments investigate setting up a supranational currency.

“It’s inevitable that China will continue investing in Treasuries because of the sheer scale of its reserves,” said Ken Peng, an economist with Citigroup Inc. in Beijing. “Diversification will happen at a slow pace, with commodities the favored alternative.”

Record Lending

This year’s record lending is stoking concern that the nation risks bad loans, asset bubbles and resurgent inflation. The government failed to attract enough bidders at two debt sales last week because of investors’ concern that the central bank will tighten monetary policy.

China’s reserves more than doubled in two and a half years as the trade surplus pumped cash into the economy, fueling claims that the nation’s currency is kept artificially low to help exporters. The International Monetary Fund may describe the yuan as “substantially undervalued” in a pending report, according to a person who has seen the draft.

The reserves are double those of Japan, the country with the second-largest holdings, and account for 29 percent of the global total, according to Bloomberg data before today’s announcement.

Speculative Capital

The bigger gain in China’s reserves was probably driven by higher valuations for non-dollar assets because of the U.S. currency’s weakness, and inflows of speculative capital, or so- called “hot money,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong.

The nation’s trade surplus was smaller in the second quarter than the first and foreign direct investment in China has slowed this year.

About 65 percent of China’s reserves are in dollar assets, with the rest mostly in euros, yen and sterling, estimates Wang Tao, an economist with UBS AG in Beijing. It is “difficult to stop buying U.S. Treasuries when markets for most other assets are too small and too illiquid,” she said in a report last month.

For China to hold 5 percent of its reserves in gold, it would need to buy more than 3,000 tons of the metal, the equivalent of about a year’s global production, Wang said.

Japan should consider diversifying its foreign reserves away from the dollar and buying IMF bonds, the top finance official in the opposition party said.

‘Economic Turbulence’

“In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9.

Demand for U.S. Treasuries is rising on expectations that the world’s biggest economy may recover at a slower pace. The yield on the benchmark 10-year note fell 20 basis points, or 0.2 percentage point, last week to 3.30 percent in New York, according to BGCantor Market Data, as an auction of $19 billion of the securities drew the most demand ever.

China will continue to buy Treasuries because alternatives are too risky or won’t soak up enough money, Kowalczyk said. He also highlighted political opposition around the world to direct Chinese investment, citing miner Rio Tinto Group’s rejection of Aluminum Corp. of China’s proposed $19.5 billion investment. The scrapping of the deal was followed by Chinese allegations that Rio staff stole state secrets.

China Petrochemical Corp. is spending $7 billion to acquire Geneva-based Addax Petroleum Corp. and secure oil reserves in Iraq’s Kurdistan region and West Africa. China’s sovereign wealth fund, meanwhile, has lost money on investments in Blackstone Group LP and Morgan Stanley.

Beware of pitfalls in property deals

A couple recently lost out on a property deal because their agent sold off the unit without their knowledge.In another case, a couple paid cash for a deal that did not materialise.
In every property downturn, some agents will get 'creative', though a deal can fail for many other reasons, property agency bosses said.
Buyers should always take precautions and do their homework when presented with what seems like a really good deal, they said.
Case 1
A couple thought they had bought a unit at Yishun Emerald when they paid $5,000 cash for the option to purchase, as well as another $20,000 upfront to the seller, of which $8,000 went to the agent.
The seller let them move in early while they waited for the $550,000 sale to complete. They held their housewarming party and settled in.
But the deal fell through. The condo's management could not transfer the unit to them because of the seller's debt arrears.
The $12,000 upfront cash was for the seller to pay that debt. Not only did he not pay it, he also asked to borrow money from the couple on a few occasions, said the husband, MrJumari Osman, 34.
'We realised the seller was also defaulting on his housing loan and that his flat was later repossessed by the bank,' he said.
By then, the couple had forked out nearly $40,000, including legal fees and the bank mortgage penalty fee. The agent refused to return his commission to them and the seller said he was flat broke.
'It was a negative sale, so we knew the seller wasn't going to get anything out of it, and that he had a debt with the condo's management,' said Mr Jumari.
'But we were not told at all that the unit was in danger of being repossessed.'
The agent, Mr Jumari said, claimed that he did inform them of the problem. In any case, he was the one who instructed them to pay the $20,000 to speed up the sale, said Mr Jumari.
In this case, 'the buyer should have made the cheque out to the MCST (management corporation) instead of the seller, knowing that the seller has debts', said Mr Chris Koh, director of Dennis Wee Properties.
What the agent should have done was to get a lawyer to add a clause in the standard option to purchase document, saying the $12,000 is for the payment of the MCST debts, he said.
As an added precaution, the clause could have also said that the $12,000 was conditional to the sale, he said.
As a sign of goodwill, the agent should refund the commission, agency bosses said.
In general, buyers should avoid paying more than 1 per cent option money in a resale deal, said PropNex chief executive Mohamed Ismail.
This way, their exposure will be limited if the deal gets terminated for various reasons, such as the death of the seller or if the seller becomes bankrupt, experts said.
Case 2
Mr Kenneth Chia and his wife were so keen on a Spring Grove unit in Grange Road that they were prepared to offer a cheque on the spot.
They offered $990,000 - $10,000 more than the previous offer - and were willing to raise it if there was more competition.
The seller's agent told them not to bother with the cheque (the asking price was $1.08 million) and later sold the unit to another party for $1 million in a co-broke deal.
The couple's beef was that the agent did not inform them of another higher offer that came later.
When confronted, the seller's agent said she was not bound by duty to tell them about it, said Mr Chia, 32.
'We bought a much better unit for a bit more ($1.08 million). But if we had known about the $1 million offer, we could have bid at $1.05 million and the seller would have got $50,000 more.'
In hindsight, everyone may be willing to pay a bit more, experts said. 'What keen buyers should do is to make an immediate offer that is close to the seller's expectations,' said PropNex's Mr Ismail.
In this case, if the couple did not raise their offer on the spot, it meant their offer was only $990,000, said ERA associate director Eugene Lim.
'If another buyer later offers a cheque at a higher price that the seller agrees to, it will be a done deal. The agent is not obligated to inform the previous home-hunter of the higher offer,' he said.
The key is whether buyers are serious about their offers, experts said. 'When the buyer makes an offer to the seller through our agent, we do it officially through a document called the offer to purchase. It is never verbal,' said Mr Lim.
Case 3
There are sellers out there desperate for cash, and agents may thus structure an attractive deal for the buyer.
In these cases, the buyer may be tempted by the extra discount, which is all right as long as precautions are taken, said Mr Ismail.
Let's assume a seller is willing to sell his $1 million property for $950,000 on the condition that the buyer gives him 10 per cent of it in cash immediately.
Typically, the buyer pays 1 per cent, and a further 4 or 9 per cent within four weeks, to the seller's lawyer. The money will be transferred to the seller when the deal is completed three months later.
So if the buyer agrees to give him 10 per cent cash, it means that only 90 per cent, or $855,000 is going towards the property purchase.
Problems will arise if the seller's housing loan is more than that amount. 'If the seller cannot redeem the loan, the property will not be transferred to the buyer,' said Mr Ismail.
To avoid this problem, a buyer should get his lawyer to check on the seller's outstanding loan on the property, he said.
Another risk is that the seller becomes a bankrupt within the three months it takes to complete the deal, said Mr Ismail.
A buyer should therefore also check to see if there are any pending legal suits against the seller to ensure he won't be made a bankrupt before the deal is sealed, he said.
This article was first published in The Straits Times.

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China buying more US Treasury bonds

(WASHINGTON) China is pumping more money into US Treasury bonds, recent data show, despite concerns expressed in Beijing in recent months over the safety of dollar-linked assets.
Mainland China's holding of Treasury securities jumped to US$767.9 billion in March from US$744.2 billion the previous month, according to US Treasury data.
The figure does not include those of Hong Kong, China's special administration region, which climbed to US$78.9 billion from US$76.3 billion.
The statistics showed China sitting comfortably as the top purchaser of Treasury bonds despite years trying to diversify its reserves from the US dollar.
Chinese Premier Wen Jiabao had expressed rare official concern in March over the safety of Beijing's huge US bond holdings but in the same month, according to monthly US Treasury data, Beijing scooped up US$23.7 billion of Treasuries, the largest inflow since November.
'This flies in the face of the 'China is diversifying' stories,' said Andrew Busch, analyst at BMO Capital Markets, commenting on the fresh Treasury data.
Mr Wen's concerns came amid frustration in Beijing that the nearly US$800 billion huge US stimulus measures to prop up the world's largest economy could drive down the value of dollar-based assets.
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In addition, China was concerned that a US Federal Reserve move to buy up to US$300 billion in long-term US Treasury bonds to ease credit flows could dampen returns on its future bond purchases.
'As much as China is whining about the impact of quantitative easing on the US dollar, their purchases of dollar denominated assets was the strongest since November,' said Kathy Lien, director of currency research at Global Forex Trading.
Being the top holder of US Treasury bonds, China is automatically the largest creditor to the United States.
It is also the world's biggest holder of dollar reserves, at nearly US$2 trillion dollars - roughly double that of Japan, and four times more than either Russia or Saudi Arabia.
'Note that in the first quarter of 2009, China's holdings of US Treasuries have increased by US$40 billion, whereas its foreign exchange reserves have increased by only US$7 billion dollars, indicating a continued preference for US Treasuries,' said Barclays Capital analyst Chirag Mirani. - AFP

How the Libor is determined

May 18 (Bloomberg) -- The cost of borrowing in dollars between banks dropped by the most in two months as record low interest rates and rising customer deposits quicken the thaw in lending.
The London interbank offered rate, or Libor, for three- month loans fell four basis points to 79 basis points today, the biggest decline since March 19, according to British Bankers’ Association data. It declined 11 basis points last week, the most since January.
“The rate of decline has increased the last few days and it seems there’s more money around,” said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment- banking unit of Credit Agricole SA. “Things are progressing nicely. It’s looking positive.”
The availability of credit has improved as the Federal Reserve committed $12.8 trillion to stem the longest recession since the 1930s and central banks around the world cut interest rates to near zero. Libor, used to set borrowing costs on about $360 trillion of financial products globally, according to the BBA, has declined from as high as 4.82 percent in October, after the collapse of Lehman Brothers Holdings Inc.
The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, narrowed one basis points to 66 basis points, the lowest level since August 2007, when the credit crisis began. The Libor-OIS spread, another gauge of banks’ reluctance to lend, narrowed five basis points to 58 basis points, the least since March 24, 2008.
Still Wary
Libor has dropped more than two basis points for the past four days. The last time it fell so much was in the four days through Jan. 13.
Some measures show financial institutions are still wary of lending after banks racked up more than $1.4 trillion of writedowns and losses since the start of 2007.
The difference between the Fed’s target rate for overnight bank loans between banks and three-month Libor was 53 basis points today, compared with an average of 22 basis points in the five years before credit markets froze.
“People have become a bit more relaxed now because we haven’t had any bad news recently,” said Jan Misch, a money- market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany’s biggest state-owned bank. “On the other hand, I doubt the turnover has increased at the same pace. We’ve now reached a level where I wouldn’t expect further declines.”
Rising Deposits
The drop in Libor has less to do with rising confidence among financial institutions than it does with surging customer deposits, Jim Vogel, an analyst at FTN Financial said last week. Deposits at U.S. banks jumped by almost $400 billion in the past six months, contributing to reduced demand for loans in the interbank market, Vogel wrote in a note to clients May 11.
Libor is derived from a survey of banks conducted by the BBA each day in London. Institutions are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. The BBA then calculates averages, throwing out the four highest and lowest quotes, before publishing them before noon.

10 things to note to start a business right

SO YOU - a budding entrepreneur - have finally decided to start your own business. But bear in mind the common pitfalls everyone should avoid at all cost. There are 10 things one should take heed of when starting a business.
Related story:» The 4-step guide in starting your own business
1. Don't constantly change your business model
As a new business owner, you cannot afford to spend time reinventing every process in your business.
Your resources are probably limited and your focus should be on revenue generation. Stick to standard business processes and improve on them along the way. Avoid experimenting with processes if they are already working for you.
2. Being on the job rather than taking care of business
Many entrepreneurs get too bogged down with the operations, rather than in the management of the whole business. It is only natural that you would want to work in areas of your business that you understand best.
Yet as an entrepreneur, your job is not to specialise in any one aspect of your business but to manage your company. While it is important to get involved operationally, your ultimate goal is to grow your business.
3. Don't leave the running of your business to others
It is common for business owners to delegate key areas of their businesses to experienced partners or employees. However, key decisions must still be made by the owner.
The responsibility of running the business is still yours. You are accountable for the success or failure of your business. You can pass on work, but not leave it to others to make important decisions for you.
4. If you think small, you will remain small
If you model your company to sustain only your income, you will never grow big and expand your business. Many entrepreneurs start a business with the sole purpose of creating that dream job for themselves.
True entrepreneurs always have big visions that go beyond their limit. They imagine how they can make the world a better place with their product or service - and work towards it every day.
5. A cheaper price doesn't mean more customers
Competing on price will not garner more sales. Offering a lower price does not mean that customers will switch from your competitors to you; it's product or service quality that people look for.
By offering lower prices, you will have smaller profit margins, translating into a smaller budget for product research and development.
Fighting over low prices will never benefit you in the long run. Solely banking on price adjustments as a competitive edge can be your fastest route to bankruptcy.
6. You get what you pay for
Cost-cutting on every aspect of your business, especially for staff, can be detrimental to your business.
Hiring employees on the cheap may appear to save you cost now. But you will be paying more in the long run by losing the opportunities you could have obtained with the right people supporting you.
Talented and capable staff would not want to be paid less than their market value. Don't compromise on the quality of your staff.
7. Cost-cutting damper efficiency
The key is not about cost savings, but to balance out a cost-benefit ratio on everything you do.
Instead of paying people to help you, you choose to do it all by yourself. You avoid using new technology that is deemed too expensive and prefer to keep that old machine, not counting that it actually costs more than buying a new one due to high maintenance cost.
Being efficient is a must for every start-up company where resources are limited, but you should not focus on cost-cutting as a business growth strategy. Instead, you should focus on bringing in more revenue that will cover your cost.
8. Don't focus on just one aspect of your business
Every business needs three legs for it to run: marketing and sales; administration and finance; and operations.
Entrepreneurs who are born salesmen will believe that sales is the most important aspect of their business. Entrepreneurs with experience in operations may believe that a solid business process is the key success factor for companies.
Every business requires marketing and sales, finance and administration, and operations. All of these areas are equally important and it is up to you, the entrepreneur, to balance them, regardless of your field of expertise.
9. Have a proper yardstick in place
Without proper reviewing processes, a business will not have a clear view of its current strengths and weaknesses.
Many business owners rely solely on their instincts to make business decisions. The true entrepreneur takes advantage of data available to help him set appropriate goals, measure the company's performance and implement necessary measures to bring the business to the next level.
10. Work towards a long-term relationship with customers
Relationship management is essential to the survival of any business. Entrepreneurs often make the mistake of chasing after new customers, seeing potential only in new, untapped markets.
Previous customers can often bring in repeat or referral sales which are just as important. Building a good customer relationship management system in your business can help generate additional sales from existing customers.
Having a good business relations framework is also important as it upholds the image of your company for long-term success.
The writer is founder and managing director of Talentpreneur Hub, an independent company that promotes entrepreneurship in Singapore.

Potential Pitfalls in Property investment

IF YOU are looking to buy a property, beware of potential pitfalls, including those related to getting a housing loan.

In the past, most home buyers would pay the one per cent option to secure the property before looking for a housing loan. If you do this now, you might regret it and here's why.
It has been clear over the past few months that property prices in Singapore have turned down. And with global economies expected to weaken further, the trend for property prices is more likely to be down than up in the months ahead.
So, even before you put money down on your option, check the market valuation of the property. There have been instances where buyers checked the market valuation of a property with the bank only to get a nasty surprise some weeks later when they finally write out a cheque for the option. That's when they find out that the bank's valuation of their property has gone down.
Latest valuation
We know an instance where someone purchased a property for $2 million and then found out some months later that the valuation had fallen by about 10 per cent to $1.8 million. In other words, he ended up having to fork out an additional $160,000 in cash as the bank was only willing to grant a loan of $1.44 million, or 80 per cent of the revised valuation of $1.8 million, rather than the original loan of $1.6 million.
The buyer could have avoided this pitfall if he had gotten a mortgage broker to check the latest indicative valuation within a few days of buying the property.
Another problem can arise with deferred payments. In 2007, properties were selling like hot cakes and many people had bought them from developers under the deferred payment scheme. That's where buyers were only required to come up with 10-20 per cent of the purchase price and pay nothing more until the property obtains its temporary occupation permit (TOP) about three years later.
According to estimates, more than half the buyers who bought property under the deferred payment scheme have yet to apply for a housing loan. In the past year or so, many properties have seen their values fall by 10 per cent to 30 per cent, so when these buyers finally apply for a home loan, they are likely to have to cough up an additional 10-25 per cent of the purchase price.
For example, someone who bought a property for $1 million in 2007 would see the current valuation of the property drop to about $800,000. In other words, he would probably be able to get a maximum loan of 80 per cent of $800,000 - or $640,000. That's $160,000 extra that he would have to foot in cash or CPF savings. In effect, he is putting up 36 per cent of his purchase price upfront.
With global stock markets falling further in recent weeks as economic conditions deteriorate, property valuations might drop further. Thus, if you have bought a property under a deferred payment scheme but have yet to apply for financing, I strongly advise you to get financing as soon as possible.
There are housing loan packages out there which offer free loan conversions. If you apply for a housing loan now and a better loan package comes along when the property reaches TOP, you can always convert to a more attractive package without penalty.
Getting financing earlier is safer too, should there be any adverse change in a home buyer's financial position, such as a pay cut, or deteriorating credit standing due to delays in paying existing loans. Then, the home buyer might not be able to obtain any financing for his property at all!
To mitigate the risks of falling collateral value, banks have become more cautious in granting financing for properties. Very few banks are willing to offer 90 per cent financing, and if they do it would primarily be for first-time home buyers.
Banks are also more stringent in assessing the borrower's ability to service and repay debt. There are instances where property speculators might only obtain financing of 70 per cent for properties bought for investment purposes. For borrowers who have a slightly weaker credit profile, financing might even be capped at 60 per cent of the purchase price or valuation, whichever is lower.
Prudent step
To be prudent, property buyers should approach a mortgage broker to help secure a prior bank loan approval before committing to a property. By doing so, you would avoid the danger of being unable to obtain sufficient bank financing for your property.
The silver lining in all this is that interest rates are also dropping. Over the past year, the Singapore inter-bank offered rate (Sibor) - the interest rate at which banks borrow from one another - has fallen from over 2 per cent to about 0.7 per cent currently.
If you had taken a home loan one to two years ago, chances are you might be paying an interest rate of 3-4 per cent. It is possible for you to refinance your loan today and end up paying as low as 1.65 per cent, from say, 3.5 per cent. Assuming an outstanding loan of $300,000 and a remaining loan period of 20 years, by refinancing, you might save as much as $5,500 in the first year alone! Even after deducting the cost of refinancing of about $1,000, you are still $4,500 better off.
Thus, refinancing your existing housing loan now might be one of the best ways to 'create money' for yourself by cutting down on your interest expenses.
You can also take advantage of cheaper mortgage rates by borrowing more if your property has appreciated from its original price. If you had bought your property a few years ago, chances are its current valuation is still much higher than your purchase price.
Say, you had bought a property costing $1 million five years ago and have an outstanding loan of $500,000 on it. The current valuation might be $1.5 million. Thus, even if you take out an additional loan of $500,000, bringing the total loan amount to about $1 million, it works out to just 67 per cent of the property valuation and well within the 80 per cent financing limit for a property.
The good news is that the additional loan of $500,000 comes at a low interest rate of about 2 per cent, which is possibly the cheapest loan a typical consumer can obtain.
Securing a housing loan has become more tricky with fast-changing circumstances in terms of property valuation and loan-approval criteria. One's financial situation might also change due to pay cuts and threat of retrenchments. So to be safe, get your home loan approved before you commit to buying your property.
The writer is a Certified Financial Planner with 15 years of experience in bank lending. He co-founded an independent mortgage consultancy portal www.HousingLoanSG.com in 2003.

Jim Rogers on US aid and future oil prices

March 17 (Bloomberg) -- The U.S. risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital, investor Jim Rogers said.
“The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist.” “That’s bad economics.”
The U.S. government should let American International Group Inc., whose fourth-quarter loss was the worst in corporate history, go bankrupt, Rogers added in a Bloomberg Television interview today. Congress approved a $700 billion bank bailout package in October, and President Barack Obama’s administration has suggested it may need an additional $750 billion.
The U.S. is repeating the mistakes made by Japan in the 1990s and risks creating “zombie banks” by rescuing failed financial services companies that should have been allowed to go under, Rogers said.
New York-based AIG has received $173 billion in government aid, and had earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave.
The Treasury this week intends to provide more information about a $1 trillion plan to remove distressed mortgage assets from banks’ balance sheets. The Federal Reserve is also scheduled this week to start the first phase of a $1 trillion program to revive the market for securities backed by consumer and business loans.
Oil Prices
Oil prices may rise to record levels in the future because of depleting reserves and a lack of major field discoveries, Rogers said. Crude oil in New York hit a record $147.27 a barrel in July and traded at $46.98 at 12:13 p.m. Singapore time.
“Reserves of oil are going down all over the world,” Rogers said. “The price of oil has to go much, much higher. I don’t know if the oil price will go up to record level in three years or five years. I don’t know when but I know it is.”
People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure, Rogers said.
“We’re going to have serious, serious inflation down the road,” said Rogers, who owns gold and silver. “I wish I knew when.”
Calls to return to the gold standard, when currencies were backed by bullion owned by governments, are flawed because it is “not going to solve our problems,” he also said.

How Banks are assessed for financial soundness

Bank Stocks Are Hated, So Here Are Four I Like: John Dorfman
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Commentary by John Dorfman
March 2 (Bloomberg) -- Banks are unpopular these days, as President Barack Obama observed in his address to Congress last week. Even more despised are bank stocks.
In the 12 months through Friday, the diversified banks group within the Standard & Poor’s 500 Index fell 54 percent. Regional banks fell 49 percent.
For investors courageous enough to swim against the tide, now may be a good time to pick up bargains in the rubble of the banking industry. How can you tell which banks are on the safest footing?
The newly mandated federal stress tests for banks haven’t been run yet. Still, investors can get a pretty good idea of a bank’s viability based on two traditional financial-strength measures.
Start with the Tier 1 capital ratio, sometimes called the core capital ratio. Tier 1 capital is basically a bank’s book value, or corporate net worth. Banks are required to have Tier 1 capital equal to at least 4 percent of their assets. Assets for a bank usually consist mainly of the loans they have outstanding and can also include Treasury notes, bills and bonds held by a bank, and other investments.
While 4 percent is the required Tier 1 capital ratio, some banks have considerably more. Of the 119 publicly traded banks in the U.S. with a market value of $250 million or more, 73 have a Tier 1 capital ratio of 10 percent or better.
Grading on Risk
Next, turn to the risk-based capital ratio. In assessing this ratio, regulators grade the safety of assets held by a bank. The safest assets such as cash and Treasury bills are given a multiplier of zero. Those deemed to be moderately safe such as (ironically) mortgage loans have a multiplier of 0.5. Those considered riskier, such as commercial loans, carry a multiplier of 1.0.
If Gravel City Bank hypothetically had $30 million in Treasury bills, $40 million in mortgage loans, and $50 million in commercial loans, its risk-weighted assets would be $70 million (zero times $30 million, plus 0.5 times $40 million, plus 1.0 times $50 million).
A bank’s total capital is supposed to be at least 8 percent of the risk-weighted asset total. Total capital includes Tier 1 capital plus loan-loss reserves and certain types of debt.
Among the 119 publicly traded banks mentioned above, 22 have a risk-based capital ratio of 16 percent or better, as of their latest filings.
If one takes the intersection of the 73 banks that have better than a 10 percent Tier 1 capital ratio, and the 22 that score 16 percent or better on the risk-based capital ratio, the field narrows to 17.
Four Good Banks
Last week I looked at those 17 banks to select a handful that I think are good investment candidates now.
The ones I like are not household names, and many of them are small. They include the likes of Republic Bancorp Inc. of Louisville, Kentucky (with a market value of $392 million), SVB Financial Group of Santa Clara, California ($547 million) and Washington Federal Inc. of Seattle ($1 billion).
Republic Bancorp traded above $30 a share as recently as September. Lately the stock is about $19, trading at 12 times earnings and 1.4 times book value. No Wall Street analyst follows it; the only brokerage house that does is a Louisville regional firm, Hilliard Lyons, which rates it a “buy.” SVB Financial Group is the parent to Silicon Valley Bank. With its Silicon Valley location, it is heavily exposed to the ups and downs of the technology industry. In the fourth quarter it earned only 9 cents a share, down from 96 cents a year earlier.
Attractive Fundamentals
I like SVB nevertheless, partly because it trades at less than $17 a share, down from more than $50 as recently as October. That is only seven times earnings and 0.7 times book value.
Washington Federal is participating in the U.S. Troubled Asset Relief Program. It sold preferred stock and warrants to the Treasury Department in return for about $200 million. The stock, trading below $12, has been cut in half from a year ago. It trades at nine times earnings and 0.7 times book value.
For those who prefer a somewhat larger bank, I recommend BB&T Corp. of Winston-Salem, North Carolina (market value $10 billion). So far, BB&T has weathered the recession well. For example, earnings in the fourth quarter were 55 cents a share, down from 76 cents last year.
BB&T stock fetches about $16 a share, down from about $31 a year ago. It trades at 6 times earnings and 0.55 times book value. The dividend may need to be cut this year, but in the meantime the stock yields more than 11 percent in dividends.
The banking crisis seems as if it will go on forever, but it won’t. I suspect investors will make good money in selected bank stocks purchased now and held for two years or more.
Disclosure note: Neither I nor my clients currently own the banks discussed in this column.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

Citibank - GIC cuts loss by converting preferred share to common stock

THE Government of Singapore Investment Corp (GIC) will convert all its preferred shares in Citigroup into common stock to cut its losses. The swop will give it an 11.1 per cent stake in the troubled US bank, which yesterday announced a sweeping plan to boost its common equity base. The conversion will pare GIC's paper loss on its original US$6.88 billion investment in Citi from 80 per cent or US$5.5 billion to 24 per cent, or US$1.67 billion, based on Thursday's closing price of US$2.46 for Citi shares.
Separately, Citi said yesterday that it plans to swop up to US$52.5 billion of its preferred stock, including US$25 billion of the US$45 billion held by the US government, for ordinary shares.
Citi also recorded a massive US$10 billion charge for impairment of goodwill and other intangible assets in the fourth quarter, resulting in an additional net loss of US$9 billion for the final three months of last year.
For GIC, the decision to convert its shares appears to have been the lesser of two unpalatable choices. Citi yesterday suspended dividend payments on its preferred shares as well as common stock, which means that GIC would lose the 7 per cent annual dividend that it has been receiving if it chose not to convert its holdings.
The conversion will make GIC the second-biggest shareholder in Citi with a stake of about 11 per cent, compared to about 4 per cent at the time of its original investment. The US government will be Citi's largest shareholder, owning 36-38 per cent of Citi's common equity. The final stakes will depend on how many investors in the publicly held tranche of Citi's preferred stock decide to participate in the share conversion.
One thing is certain: Existing ordinary shareholders will suffer massive dilution of more than 70 per cent. Citi shares plunged 37 per cent to US$1.55 at the start of US trading yesterday after the bank's announcement. At that price, GIC's unrealised loss on its Citi investment would be US$3.6 billion. The profitability of US banks 'is likely to be impaired in the next two years', said Ng Kok Song, GIC's group chief investment officer in a statement.
'GIC's view is that with this latest move, Citigroup's capacity to weather the severe economic downturn will be strengthened.'
Before yesterday's announcement, the market value of the preferred shares held by GIC had already slumped 80 per cent to just US$1.376 billion since its initial investment in Citi, as mounting losses made it less likely that the bank would be able to keep up its dividend payments.
The US government, GIC and other investors that bought Citi preferred stock alongside GIC in January last year will receive common stock at a price of US$3.25 a share. Those investors, including Saudi Arabia's Prince Al-Waleed bin Talal, have agreed to the exchange, said Citi.
At the conversion price of US$3.25, GIC will get some 2.12 billion common shares in exchange for its US$6.88 billion in preferred stock. Based on Thursday's closing price of US$2.46 a share, GIC's stake after conversion is worth US$5.21 billion.
That puts GIC's unrealised loss on its original US$6.88 billion investment in Citi at US$1.67 billion after the conversion, compared to US$5.5 billion before.
Under the original terms of GIC's investment in Citi, it would have had to pay a much higher conversion price of US$26.35 for each common share, GIC said. That would have translated into a stake of just 261.1 million shares, worth a mere US$642 million at Thursday's closing price for Citi shares.
But the conversion also means that GIC will now bear greater risk than before, as an ordinary shareholder. It also gives up for good the 7 per cent annual dividend that it previously earned on its preferred shares.
Citi chief executive Vikram Pandit said that the conversion plan had just 'one goal' - to increase the bank's tangible common equity or TCE. Converting its preferred shares into ordinary equity will boost its TCE ratio - the focus of stress tests by US regulators starting this week as a key measure of the bank's ability to withstand further losses if the recession is worse than expected.
Ordinary shareholders are the first to suffer any losses, so common equity is seen as the highest quality of capital that a bank holds, and the size of a bank's common equity base relative to its assets is considered the purest measure of its buffer against losses.
The hope is that by raising its TCE ratio, Citi will be able to weather the worst recession that the US has seen in decades. The plan is expected to increase its TCE as a proportion of its risk-weighted assets from less than 3 per cent now to 7.9 per cent.
Crucially, it does so without the need to inject more money from the public purse. That makes it unnecessary for the US government to seek the approval of lawmakers for more funds amid growing public fury over the use of taxpayers' money to bail out large banks.
But the US government could still inject more capital into Citi - in the form of mandatory convertible preferred shares - if the stress tests show that the bank's capital cushion still needs bolstering. That would mean further dilution for ordinary shareholders, including GIC, when the shares are eventually converted to common stock.
'As a shareholder, GIC supports the initiative by Citigroup and the US government to strengthen the quality of the bank's capital base in view of the challenging economic environment,' GIC said in a statement.

Outlook on the economy

March 2 (Bloomberg) -- Billionaire Warren Buffett said the economy will be “in shambles” this year, and perhaps longer, before recovering from the reckless lending that caused the worst “freefall” he ever saw in the financial system.
The economy and stocks will rebound, and the best days for the U.S. are ahead, said Buffett, chairman of Berkshire Hathaway Inc., in his annual letter to shareholders Feb. 28. Buffett said he’ll spend the recession shopping for new investments for Omaha, Nebraska-based Berkshire.
“The economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond,” said Buffett. “Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so.”
Buffett, an informal adviser to President Barack Obama, said the consequences of the U.S. housing bubble are now “reverberating through every corner of our economy.” Gross domestic product shrank at a 6.2 percent annual pace from October through December, the most since 1982, the Commerce Department said last week.
Late last year, “the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country,” said Buffett, 78. “Fear led to business contraction, and that in turn led to even greater fear.”
Berkshire’s fourth-quarter net income fell 96 percent to $117 million, the firm said Feb. 28. Book value per share, a measure of assets minus liabilities, slipped 9.6 percent for all of 2008, the worst performance under Buffett’s watch, on the declining value of derivatives and the stock portfolio. Berkshire shares have plunged 44 percent in the 12 months through Feb. 27.
‘Socks or Stocks’
The Standard & Poor’s 500 Index will probably gain in three-fourths of the next 44 years, just as it did in the period since Buffett took over Berkshire in 1965, he wrote. The benchmark dropped 38 percent last year, the most since 1937.
“We enjoy such price declines if we have funds available to increase our positions,” Buffett wrote. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” Berkshire’s cash hoard was about $25.5 billion at year-end, down from $33.4 billion on Sept. 30.
Buffett disclosed increased holdings of Posco, Asia’s third-largest steelmaker, and Sanofi-Aventis SA, France’s biggest drugmaker. Berkshire sold $4.77 billion of equities in the fourth quarter to help fund private deals for preferred shares in Goldman Sachs Group Inc. and General Electric Co. The sales included shares of Johnson & Johnson, Procter & Gamble Co. and ConocoPhillips, holdings that, Buffett wrote, “I would have preferred to keep.”
‘Major Mistake’
Buffett said he made a “major mistake” in buying shares of oil producer ConocoPhillips when oil and gas prices were near their peak last year. Berkshire paid $7.01 billion for its remaining stake, which was valued at $4.4 billion as of Dec. 31.
Among his other errors for the year, Buffett listed the purchase of shares in two Irish banks that he didn’t name for $244 million. Berkshire wrote down the stake by 89 percent.
Buffett’s analysis and wit earn attention from professional money-managers and individual investors alike because of his success as a stockpicker and businessman. Named the richest American by Forbes magazine in October, he transformed Berkshire from a failing textile maker into a $120 billion company with businesses ranging from ice cream to power plants.
Berkshire’s profit was hurt by writedowns on derivative bets tied to four of the world’s stock markets, while the insurance and utilities businesses fared well because their prospects aren’t correlated with the economy, Buffett said. Liabilities on the derivatives widened 49 percent to $10 billion in the fourth quarter, though the contracts don’t require Berkshire to pay out until at least 2019, if at all.
‘Venereal Diseases’
Buffett decried the way financial companies allowed their derivatives to make them too dependent on each other, and said Berkshire’s contracts are different -- in part, because his firm usually isn’t required to post collateral when assets drop.
For others, “a frightening web of mutual dependence develops among huge financial institutions,” he wrote. “Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal diseases: It’s not just whom you sleep with, but also whom they are sleeping with.”
Firms with too many derivatives can “infect the entire neighborhood,” he said, and require government help to avoid a wider collapse.
Strong Action
Buffett endorsed efforts by the U.S. to prevent the failure of financial firms including Bear Stearns Cos., which was sold to JPMorgan Chase & Co. The U.S. is being called to commit more capital to ailing companies after the $250 billion in aid it originally allocated last year failed to staunch losses on soured loans at regional lenders and the biggest banks.
“Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown,” Buffett said. “Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”
Buffett predicted bailouts will cause “unwelcome aftereffects” including inflation.
“Major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests,” he said. “Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”