Good news: Prices are down
The best news about the so-called global recession is that prices of major commodities have declined dramatically in recent months.
Rice has dropped to about $735 per ton in price from the record $1,038 per ton for the Thai 100 percent grade B set on May 21, 2008.
This week, oil crashed to below $70 per barrel at $69.85, the lowest in 14 months. In just three weeks, oil has tumbled by $40 a barrel. Demand for energy will decline with the slowdown in economic production because of the so-called global recession. There is no recession actually. Global growth in 2009 will be 3.0 percent.
On July 17, oil hit a high of $147. Yet, the 52 percent drop has not been reflected by the local petroleum companies.
After hitting a high of P60 per liter, Manila gasoline should be priced around P30 per liter today. Assuming the peso has devalued against the dollar by 20 percent, the current price should be no more than P36 per liter. So if gasoline is priced at P48 per liter when it should be selling only at P36 per liter, the oil companies are making excessive profits of about 25 percent. What is the government doing about this obvious price gouging? Nothing.
In America, retailers have reflected the 25 percent price drop. Gasoline is now about $3.08 per gallon (3.8 liters in one gallon), down from $4.11 per gallon from last summer (July and August).
The cut in oil prices should also result in lower electricity bills, not higher. The Malampaya gas pricing is pegged to crude prices, as are coal used by local power plants operated by foreigners.
When oil exceeded $100 per barrel, energy began to cost more as a component cost of production than labor. Energy has eaten up about 15 to 20 percent of the cost of producing goods. For households, fuel, light and water (lumped as utilities) were burning up to 20 percent of total household bills, up from the eight percent average.
The sharp price cuts for rice and oil mean a dramatic fall in the inflation rate after hitting a 16-year record-high of 12.5 percent in August 2008. More than half of the consumer basket, measured by the consumer price index, is food (mainly rice) while another seven percent is utilities. The price declines for food and utilities should lop off at least 2.3 percentage points from the inflation rate in the coming months, bringing the rate down to 10 percent, if not lower.
Meanwhile, world prices for steel billets are down 70 percent since May. Major steel producers like ArcelorMittal of India, Severstal of Russia, and Boasteel of China are cutting back production by 10 to 20 percent beginning in the third quarter. Prices of iron ore, copper, and nickel have nosedived 50 percent and aluminum by 30 percent.
What these price cuts, dictated by the law of supply and demand, mean in the short and long run, are much, much lower prices of goods --- of cars, appliances, furniture, and construction materials. This Christmas season, then, when shopping for your long dreamt of plasma or LCD tv sets and DVD player, ask for a discount. Very likely, you will get it.
With prices of most goods down in the coming months, expect a robust Christmas shopping season, perhaps the best in many years.
***
Philamlife President Joey Cuisia called me up the other day (Oct. 16) to protest what I wrote in my previous column, claiming that Philamlife is, for all practical purposes, bankrupt. He said Philamlife is not bankrupt and that it is an institution in the Philippines. Philamlife is being sold by its mother company, the giant New York-based insurer AIG.
I made the bankruptcy remark based on what has happened to Philamlife’s mother company, AIG which went bankrupt on Sept. 15 just before the Federal Reserve took it over with an $85 billion bailout money, plus another $37.8 billion later. AIG has already used up $82.9 billion of the $122.8 billion bailout money.
In New York, AIG share prices have hit a low of $1.25 a share, 98 percent down from the 52-week high of $66.64. AIG’s market cap based on its Oct. 16 closing price of $2.43 per share, is $6.53 billion. At its low $1.25 a share price, AIG was worth only $3.17 billion. Philamlife, reports say, is claiming it is worth $2 billion. If this is true, you are better off buying the mother company, AIG. You get the mother and you get the subsidiary, Philamlife.
Bloomberg quotes analysts expressing doubt that AIG CEO Edward Liddy can garner enough from selling units to repay the government loan.
biznewsasia@gmail.com
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4 comments:
You said, "I made the bankruptcy remark based on what has happened to Philamlife’s mother company, AIG which went bankrupt on Sept. 15"
Do you have other explanations other than this one? Are you friends with ERAP? (Hehehe, joke!) Or is it an ERAP joke? Please clarify, Thanks! ;)
You said, "At its low $1.25 a share price, AIG was worth only $3.17 billion. Philamlife, reports say, is claiming it is worth $2 billion. If this is true, you are better off buying the mother company, AIG. You get the mother and you get the subsidiary, Philamlife."
You cannot compute the value of the company by its share price alone. How can something you own buy you?
If, because of your low understanding on financial markets cause your readers lose confidence in you, and in result, value you to $1.25 a share, can your car worth $20,000 own you instead? Hehehe!
Tell me, is it an ERAP joke again? Please make me laugh, say yes please!
Acknowledging your good observation about price drops not (yet) handed down to the consumer level, I must also say that there is a slight edge to the criticism uttered about your understanding of financial markets.
Price decreases are actually not good news, but bad (very bad) news - a phenomenon called deflation. The effect of deflation is that producers are forced to sell their goods at prices below production cost, which can go so far that they go into bankruptcy if they failed to have some savings from good times. This in turn has the effect that people lose their jobs when their employers do this en mass. And here is we are seeing the main pillar of economy to show signs of crumbling to dust: the work force, the value producers, the simple people in sweated T-shirts and worn out tsinelas. The guys that creep on their knees all day long pulling rice out of the soil sometimes with fertilizers coming from their kids' lower part. Yes, even these kids are value creators. (Let's talk about their education another time).
From a short sighted consumer level however, of course low prices are terrific, and the horrow show of a real crisis starts showing, when consumer fun is at its peak. They go unemployed when they just spent all their financial bullets for cheap but useless stuff. Bang! Merry x-mas.
You might have a look at current spikes in unemployment or the drop in forex rates with commodity driven currencies (AUD, CAD). Feel the fear? Understand?
But you know what is a good sign? When unemployment is peaking. It marks the end of crisis. Believe it or not..
Well, we are not there (yet).
Anyway, enjoy the ride.
You said that Mr Joey Cuisia called you up to protest about your general and sweeping statement that Philamlife is FOR ALL PRACTICAL PURPOSES,bankrupt.
Hard nosed critics like you surely will not retract what you have written, because that would mean acknowledging your mistake and a drop in your imagined journalistic credibility.
My take is that, I will bet my penny to what Mr Cuisia had been saying all over media than to believe in your obvious lack of knowledge on the subject matter, the state of financial health of Philamlife.
FOR ALL PRACTICAL PURPOSES, Philamlife as stated by the Insurance Commission, remains to be the undisputed industry leader with the biggest capitalization(PHP1.65billion) far higher than the statutory requirement of only PHP50million and with a reserve of over PHP76billion. How on earth can you call that company bankrupt?
The Insurance Commission is the governing body of all insurance companies in our country, in essence, IC is like the doctor in a community. In your irresponsible view and assessment, Philamlife is sick even if the doctor is already telling you that it is not and in fact is in the best state of health. Unless you are a faith healer and would want to compete with a competent doctor by discrediting his realistic findings, then I don't know what you're up to?
Philamlife is a subsidiary of AIG which means, it is operating in the Philippines based on its own merit and strength and is incorporated and regulated under Philippine laws. Every year the Insurance Commission subjects all insurance companies to evaluation to determine its strength and viability. In all occasions, Philamlife submits to IC financial books of accounts of its own and not of AIG. The continued leadership of Philamlife in the industry is based purely on its own merit and not of its mother company. Conversely, the problems and weakness of its mother company cannot be blamed and be associated with its subsidiary.
Let me give you a simple analogy. You know very well that Jollibee Foods Corporation also owns several food companies like Greenwhich, Chowking, Delifrance, Red Ribbon etc., If for example in a regular check up by the BFAD, they found out some contaminations in majority of jollibee stores, POTENTIALLY, BFAD can order for the closure of Jollibee. Any such order however will not affect and result in similar closure to its subsidiaries like chowking,delifrance etc. because subsidiaries are distinct legal entities in the eyes of our laws. In our local lingo "Ang kasalanan ng ama ay hindi kasalanan ng anak". Clear enough?
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