blogs.salon.com By Miguel Octavio The Devil's Excrement

During the last week, there have been what people abroad consider to be positive news surrounding PDVSA activities, specially in believing taht the fiscal picture has improved dramatically. In particular, crude oil production has increased significantly from the beginning of the month. This has been done by emphasizing younger wells with natural flow, which require no injection. Moreover, these wells are mostly located in the Eastern part of the country, rather than in the more “militant” area of Zulia State where Lake Maracaibo is located. As of yesterday, production was up to 1.044 million barrels a day, of which 692 thousand comes from the East, only 269 thousand from the West and 92 from the South. The Western area has about two thirds of the capacity of the country, but they are mostly older wells.

            Gas compression on the other hand, has not increased as much, going from 2.7 billion cubic feet per day in early January to 3.9 billion cubic feet per day now. Total production is normally roughly 9.4 billion cubic feet per day. Where things have change little is in refining capacity. The Puerto La Cruz refinery remains at the same level as the beginning of the month with 75 thousand barrels a day out of a capacity of 120 thousand. Paraguana is barely producing 50 thousand out of a capacity of 800 thousand and El Palito is not producing, due to an accident that took place earlier in the month. Sources in PDVSA suggest that without the return of oil workers, it will be extremely difficult to increase oil production beyond 1.8 million barrels and the likely steady state level will be closer to 1.5 million barrels. Additionally, there is little maintenance going on in any of the areas of business.  To understand the implications of the numbers above better, it is interesting to consider what the “true” fiscal contribution of current or prospective oil production may be. Under normal circumstances, Venezuela consumes 230,000 barrels of gasoline a day, which given current conditions is down to roughly 100,000 barrels per day. Of these, only 20,000-30,000 is being produced locally at the Puerto La Cruz refinery, with the balance being imported. However, imported gasoline is purchased at international prices of roughly $38 per barrel and is being sold in the local market at a price of approximately $5 per barrel. Thus, the net 70,000 barrels that need to be imported are paid with the funds obtained from exporting 532,000 barrels of crude. This currently leaves less than 500,000 barrels that have a fiscal contribution. However, those that result from the production of the operating agreements, approximately 250,000 barrels a day, have a much lower contribution given the conditions under which this exploration tracts were sold. Essentially, the fiscal contribution of these exports is much less, since depreciation and amortization costs can be deducted directly from the fiscal contribution. Note that this calculation assumes the current level of gasoline consumption, so that any easing of the general strike, without PDVSA going back to work, actually goes against the Government, since gasoline consumption may actually increase dramatically. Thus, barely a quarter of a million barrels a day has a full fiscal contribution today.

            Looking into the future another 400,000 barrels of heavy crudes from the Orinoco Belt joint ventures could come on line, if the natural gas situation is normalized and workers could be found to replace those that refuse to go back to work. Once again, the fiscal contribution from these projects is smaller since they pay only a 1% royalty but they do have the usual tax contribution. Thus, any news on the oil front has to be interpreted with care. The country could quickly move up to 1.5 million barrels of production a day, without having a large impact in terms of fiscal contribution. It is only above 2 million barrels of oil a day that the fiscal constraint would ease, but such a level may not be reached in 2003 if maintenance efforts are not sustained.

www.theledger.com

WASHINGTON If President Bush gets his way, investors will receive their dividends tax-free. You'd figure that one sector to benefit would be gas and electric utilities, which, through the years, have offered consistently high dividends.

Right now, the yield on the average utility stock is 4.5 percent. Compare that to the 2.9 percent yield on a five-year Treasury note. Now imagine that the utility's dividends, which historically have risen a bit each year, aren't taxed. Investors in an average tax bracket would be able to put about 21Ú2 times as much money in their pockets with the utility as with the Treasury security.

"The timing of a dividend tax change could not be better for the utility sector," wrote Steven Fleischman, of Merrill Lynch, in a letter to clients. There's no guarantee Bush's proposal will pass Congress, but, even so, utility stocks ought to be soaring. They're not.

Franklin Utilities A (FKUTX), a mutual fund that invests mainly in U.S. electric companies, is down 2 percent this year. Exelon Corp. (EXC) of Chicago, the only Midwest or Eastern utility that's rated above-average by the Value Line Investment Survey, has dropped 4 percent, and Dominion Resources (D) of Virginia, the only utility among the 43 stocks in Morgan Stanley's U.S. model portfolio (and a favorite, as well, of Fleischman's), is down a few cents.

What's wrong with utilities? A lot. Many investors view them as downright toxic, and even the prospect of tax-free dividends doesn't seem to help. But it is the very fact that utilities are being shunned that makes them attractive. It's no accident, for example, that Berkshire Hathaway Inc. (BRK), chaired by super-investor Warren Buffett, has purchased Mid-American Energy, with 5 million gas and electric customers.

But most investors want nothing to do with such companies, and for apparently sound reasons. The main problem is that utilities are no longer safe, defensive stocks, producing a secure stream of income. They are something else, but no one is quite sure what.

In the past, utilities accepted strict regulation in return for geographic monopoly franchises. They generated not just electricity but a delightful flow of cash, dispensing about 80 percent of their profits to shareholders. When the economy was good, demand for power increased, so profits rose; when the economy was poor, demand fell, but, since borrowing costs dropped, too, utilities maintained decent profits.

In the early 1990s, this cozy little world began to change with deregulation. Ending monopolies, allowing utilities to expand beyond local borders and into new businesses, and reducing price controls -- all of those steps are ultimately good for consumers and for the economy. But the steps also threw this conservative industry into turmoil.

Suddenly, as Vincent Muscolino wrote in a recent letter to clients at the Cambridge, Mass., investment firm of David L. Babson & Co., companies gained the authority to "unbundle and repackage the three basic components of service: power generation, transmission and distribution." Especially with a rash of mergers, it became hard for investors to determine the strategic direction each utility company would take, or the competition and continuing regulatory obstacles it would meet along the way.

In addition, utilities lost much of their financial security. Instead of being content to disgorge their profits as dividends, they were pressured to reinvest them in new plant and equipment to achieve the double-digit earnings increases that investors were now expecting from a transforming industry that had gained sex appeal.

Despite these uncertainties (or maybe because of them), utility stocks started to rise powerfully in the mid-1990s. They were behaving almost like technology stocks. The Dow Jones Utility Average rose 129 percent between the start of 1995 and the end of 2000, then lost all of its gains by October 2002. The stocks rallied over the next three months, but they have since leveled off or dipped. The utility average today remains nearly 50 percent below its high.

Here's what happened: In the early years of deregulation, Wall Street was impressed. New capital arrived, and -- not surprisingly -- the industry became overbuilt. Supply exceeded demand; profits dried up. Old-fashioned managements couldn't handle the changes. As Fleischman says, the industry is "still digging out of excess leverage, a difficult credit environment, and a spending binge on power plants."

Meanwhile, the angry political reaction to electricity shortages and manipulation in California in 2000 and the Enron scandal in 2001 (which involved a pipeline company that decided to make a living trading energy futures and anything else it could get its hands on) added still more regulatory uncertainty.

It's a miserable situation, but that's precisely why you should pay attention. Many of these stocks are absurdly cheap. In a recent roundup, Dow Theory Forecasts found that 14 of 62 electric utilities had price-toearnings (P/E) ratios of 9 or less. The average was 12, or slightly more than half the P/E of the Dow Jones Industrial Average.

Of course, many of these companies deserve their low valuations. Aquila Inc. (ILA), for example, earned $2.35 in 2001 but trades today at just $1.85(down from $37.80) after a disastrous year. Stay away.

On the other hand, Wendell Perkins, who manages the Johnson Family Small-Cap Value Fund (JFSCX), which has returned an annual average of 8 percent over the past three years (whipping the S&P by 22 points), has lately been buying shares of Alliant Energy (LNT), a utility that also suffered a big drop in earnings last year. Alliant made what Perkins calls "some dumb, dumb international purchases," particularly in Brazil, but the company, with a solid Midwest franchise, is returning to its senses.

For total return (that is, dividend plus potential price appreciation), Dow Theory Forecasts recommends Duke Energy (DUK), a battered North Carolina-based electric utility yielding 6.4 percent; KeySpan (KSE), a Brooklyn-based gas utility with a yield of 5.2 percent; Questar (STR), a solid company whose stock has actually doubled over the past three years; and Vectren (VVC), which distributes natural gas in Indiana and Ohio and yields 5 percent. With the potential for so much volatility among the 80-plus electric and gas utilities, diversification is essential. Unfortunately, most mutual funds with "utilities" in their names are loaded with telecommunications stocks -- another sector entirely. Franklin may be the best pure play. The "A" shares carry a 4.25 percent load but has annual expenses of only 0.8 percent. Average annual return for the five years ending Dec. 31, 2002, was 1.5 percent, about two points ahead of the S&P.

No, utilities aren't what they used to be. The idea of sitting back and enjoying a tax-free dividend of 5 percent really isn't in the cards. These companies, undergoing massive changes, carry major risks. But where there are major risks, there are often major rewards.

James K. Glassman's book, "The Secret Code of the Superior Investor," was recently published in paperback. His e-mail is jglassman@aei.org. He invites correspondence, but cannot answer everyone.

Last modified: February 02. 2003 12:00AM

www.theaustralian.news.com.au By Robin Bromby February 03, 2003

RIO Tinto and BHP Billiton are certain this year to win back most of the iron ore price concessions they made to European and Japanese steel mills in 2002, thanks to booming demand from China, according to a report.

Sydney-based AME Mineral Economics said last night the iron ore sector was gearing up for boom times in 2003 while most of the rest of the business world was gripped by trepidation.

China's thriving steel industry was driving unprecedented levels of demand for iron ore in international markets.

That country's iron ore imports in 2002 smashed the previous year's record of 92 million tonnes, coming in at about 112 million tonnes. This year, China would import close to 130 million tonnes, surpassing Japan and becoming the world's top importer of iron ore.

AME expects Japanese and European steel makers to agree to price rises between 2 per cent and 3 per cent in 2003 after forcing through a 2.4 per cent reduction last year.

Producers were expected to start the negotiations by asking for a price increase of between 5 and 10 per cent.

"While the tight supply situation might support a rise of this magnitude, the increasingly consolidated steel majors in Japan and Europe, with an eye on their uncertain bottom lines, are unlikely to agree," the report said.

Rio, BHP and Brazil's CVRD are the world's three big iron ore producers. AME said the scale of Chinese demand would force the pace on new projects, as well as on mine expansions in the pipeline such as BHP's Mining Area C, Rio's West Angelas and CVRD's capacity upgrades in Brazil.

These companies between them control 70 per cent of the world seaborne trade. They have also slashed costs over two years by 13 per cent by using their size to impose labour force rationalisation. The growing ownership concentration opened the doors to reducing overheads, saving back office costs, and exploiting operating synergies.

These three companies had, since 1998, expanded their production by 40 per cent. In the longer term, the iron ore industry was facing some big mining problems.

AME said these included ever deepening mines, having to pull out growing percentages of waste material to extract the ore, longer hauling distances and the depletion of higher grade ores.

Ore transport and port costs continued to burden the producers.

In 2002 transport and port expenses alone made up 52 per cent of the cost of getting the ore into the holds of ships - compared to the mining process's 21 per cent.

Australia ranked as 2002's lowest cost producer, mainly due to removal of restrictive labour practices.

www.indianexpress.com Press Trust Of India

New Delhi, February 2: With WTO negotiations on Trips and public health hitting a road block over EU’s proposal, member countries are mooting a ‘cooling off period’ even as host nation Japan has prepared a new proposal to be tabled at the Tokyo mini-ministerial later this month.

Official sources told PTI here that this suggestion follows the failure to accept EU’s proposal to give the world health organisation (WHO) a role in assessing additional coverage of diseases at a special session held in geneva recently.

But the issue is expected to figure prominently at the forthcoming WTO mini-ministerial at Tokyo starting on February 14 where Japan would submit the proposal.

WHO has already indicated that it is not willing to take on the responsibility of assessing additional diseases. Sources said india supported the stand of Brazil, China and the African countries who questioned the diseases classified by EU’s trade commission Pascal Lamy in his letter dated January 7, addressed to all trade ministers.

Lamy had in his letter said that roping in the WHO could “produce an overall WTO decision with comprehensive scope but differentiated modalities of application”.

www.theaustralian.news.com.au From The Sunday Times February 03, 2003

THE myth of overpopulation this century is to be buried by a UN report that will show that average fertility rates will decline to Western levels by 2050. Fears of a population time bomb have dominated environmentalists' and demographers' predictions for decades. Malthusian doom-mongers will be disconcerted by the UN findings, out later this month, which will reveal that women are likely to bear an average of only 1.85 children in all countries by the middle of the century.

Families in developing countries are beginning to limit the number of their offspring as much as those in the West.

"All the evidence suggests fertility is falling rapidly in developing countries with no sign it is going to stop at the magical number of two," said Larry Heligman of the UN population division. "Countries are changing, society is changing."

In Thailand in the 1970s, women were bearing an average of five children. The most recent figures, for 2000, put the number at just under two.

Jintana Aromdee, 33, comes from the rural northeast of Thailand, where big families were the norm until her generation. She has chosen to have only two children.

Infant mortality and childhood diseases previously made it imperative for families to raise sons to work in the fields, while daughters did manual work and household chores.

But as prosperity grew, clean water and basic healthcare meant children were more likely to survive. At the same time, family planning education gave parents new options. "Children are expensive," said Aromdee, who now lives in Bangkok. "All my sisters and cousins, we have only small families."

Women bear on average 2.7 children worldwide, but figures for the West are much lower. In Britain, the fertility rate is 1.61 per woman. In Italy, where the Pope appealed to his flock to produce more babies, the figure stands at 1.2. In Spain it is 1.13 and Russia 1.14.

The real surprise, however, has been the rush towards Western birth rates in previously exploding populations. In Iran, where women bore on average 6.5 "soldiers for Islam" at the height of the Khomeini revolution in the early 1980s, family planning has brought the figure down to just 2.75. Similar downward trends can be seen in Indonesia, India, Tunisia and Brazil.

The UN releases an authoritative report on population trends every two years. In 2000 the average fertility figure for 2050 was estimated at 2.1 children – the replacement level – but recent shifts have been so remarkable that the forthcoming report for 2002 will reduce this projected world average to 1.85. The current Western average stands at 1.6.

Alarmist predictions of a world population of more than 10 or 11 billion by mid-century would not be reached, said Mr Heligman. By 2075, the population could have shrunk by half a billion.

Environmentalists who have predicted famine and scarcity will be confounded by these figures, said Ron Bailey, author of Ecoscam: the False Prophets of Ecological Apocalypse.

"Their fears have been driven mostly by biologists, who compare human beings to antelope or deer," he said. "Animals turn more food into offspring, but countries with the most food don't have more offspring."