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FACTBOX: OPEC still standing among the ruins of former cartels

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<span class="focusParagraph articleLocation”>OPEC’s sway over the global oil price has diminished in the last few years, but analysts say it is a long way off suffering the same fate as commodity cartels that fell victim to anything from technological advances to macroeconomic shifts.

On Thursday, the Organization of the Petroleum Exporting Countries failed to reach an agreement on output policy at its meeting in Vienna.

OPEC is not the first cartel that has sought to manage the global price of a commodity and serve the interest of its members, but at 56 years old and still going, it has outlived all of them.

The twentieth century is riddled with examples of other commodity cartels, from tin to natural rubber and coffee, that tried their hand at managing global prices only to be overtaken by market forces and the advent of new technologies.

“At the beginning, it was easy to achieve their objectives, but then, as time went by, those organisations were going against the wind,” senior economist at the World Bank John Baffes said.

“They were trying to fight the market and you cannot really fight the market,” Baffes added.

But after nearly two years of letting the market determine global prices, and of members failing to agree on any production targets or cuts, the future of OPEC has come into question, leading some of its own members to pronounce it dead by turning it into a talking forum.

“Managing in a traditional way as we did in past may not come back again,” Saudi Arabia’s Energy Minister Khalid al-Falih said in Vienna.

Analysts argue that it is too early to suggest the group is irrelevant. After all, OPEC says its members hold 80 percent of the world’s proven oil reserves, and the de facto group leader Saudi Arabia hold’s the world’s only significant spare capacity.

Below are examples of other commodity cartels in recent history which have lost their price-setting powers.

TEXAS RAILROAD COMMISION (TRC)

* Established in 1891, the TRC effectively set global oil prices in the forty years to 1971 after the U.S. government put it in charge of the country’s spare capacity.

* But as U.S. crude production declined and spare capacity dwindled, the TRC abandoned its quota system and allowed U.S. producers to pump at full capacity in 1971.

* OPEC, set up in 1960, effectively inherited the role of the TRC because of the group’s spare capacity, and would apply the same production controls to influence oil prices.

* “I’ll continue to assess its [OPEC] value and stop attending if and when I see that it has gone the way of the Texas Railroad Commission (TRC) –in existence, but an irrelevant group for the global oil market,” Jaime Webster, senior energy director for IHS, recently wrote.

COFFEE

* The London-based International Coffee Organisation (ICO) was set up in 1963 and sought to influence global prices through an export-quota system for its producing members.

* The system collapsed in 1973 due to “changes in the pattern of supply and demand,” according to the ICO, but was reintroduced in 1980s.

* By the early 1990s, members of the organization failed to agree on enforcing a new quota system and the ICA turned into “a forum for international cooperation on coffee matters”.

* The ICO still hosts a series of events every year in London, but pricing policy is not on the agenda. Instead, they hold sessions that “aim to drive interest in coffee quality, to improve standards and to shorten the distance between farmer, roaster, barista and consumer.”

TIN

* The International Tin Council (ITC), established in the mid-1950s, regulated tin prices through maintaining a buffer stock: buying inventories when prices rose and selling when prices fell.

* But a sustained period of stable and favourable prices allowed non-signatory countries, particularly Brazil, to ramp up their tin production and flood the market. The development of a substitute product, aluminium, which captured market share by becoming more appealing to the beverage can producers, Baffes said.

* The ITC maintained its buffer policy until it could no longer afford it, and went bankrupt in 1985.

NATURAL RUBBER

* The International Natural Rubber Agreement, which also operated through maintaining a buffer stock, collapsed in 1999 in light of the Asian financial crisis as currency woes undermined the role of its top Asian producers.

* Thailand, Malaysia and Indonesia then set up the International Tripartite Rubber Council in 2001, to implement measures supporting rubber farmers in the three countries mainly by restricting exports to shore up prices.

* Last Feb., the council announced export cuts equivalent to 6 percent of global natural rubber output for a six-month period beginning in March.

* The cuts helped lift benchmark Asian prices but, like previous measures, the boost was only fleeting.

(Compiled by Ahmad Ghaddar in London, additional reporting by Amanda Cooper in London and Manolo Serapio Jr. in Singapore, editing by William Hardy)


Source: R-Business

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Apple, energy stocks drag down Wall Street

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<span class="focusParagraph articleLocation”>U.S. stocks fell on Thursday morning, weighed down by a fall in Apple as well as a drop in energy companies after OPEC failed to agree on output policy.

Oil prices dropped about 2 percent and the S&P energy index .SPNY tumbled 1.13 percent. Major oil producers Exxon (XOM.N) and Chevron (CVX.N) were down about 1 percent.

Apple (AAPL.O) was down about 1.3 percent after Goldman Sachs cut its price target on the stock, citing lower growth expectations for the smartphone industry. The stock was the biggest drag on all three major indexes.

The European Central Bank kept its negative interest rates unchanged and President Mario Draghi said inflation would likely remain very low or negative in the next few months.

As well as uncertainty over the OPEC decision, contrasting data from the United States and abroad over the past two days led traders to lower their expectations of the Federal Reserve raising interest rates as soon as this month.

The ADP National Employment report on Thursday showed U.S. private payrolls increased a less-than-expected 173,000 in May. But, as the economy nears full employment, job creation would slow, said Mark Zandi, Moody’s Analytics’ chief economist.

The data comes ahead of the U.S. Labor Department’s more comprehensive non-farm payrolls report on Friday, which includes both public and private-sector employment.

The number of Americans applying for unemployment benefits unexpectedly dropped last week, pointing to a tightening labor market.

“Obviously there are several major events that the market is going to focus on and could cause a bumpy ride for stocks today,” said Peter Cardillo, chief market economist at First Standard Financial in New York.

At 9:45 a.m. ET the Dow Jones Industrial Average .DJI was down 44.07 points, or 0.25 percent, at 17,745.6.

The S&P 500 .SPX was down 5.36 points, or 0.26 percent, at 2,093.97 and the Nasdaq Composite .IXIC was down 9.41 points, or 0.19 percent, at 4,942.84.

Eight of the 10 major S&P sectors were lower, led by the energy index.

Mining equipment maker Joy Global (JOY.N) rose 13.5 percent after it reported a surprise adjusted profit for the latest quarter.

Cloud storage provider Box (BOX.N) fell 9.1 percent to $11.64 after the company reported a slowdown in billings growth in the first quarter.

Declining issues outnumbered advancing ones on the NYSE by 1,674 to 957. On the Nasdaq, 1,198 issues fell and 1,049 advanced.

The S&P 500 index showed 13 new 52-week highs and no new lows, while the Nasdaq recorded 26 new highs and six new lows.

(Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Savio D’Souza)


Source: R-Business

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Carmakers seek alternatives to UK steel as Tata looks for buyers

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LONDON Carmakers in Britain are making plans to get more steel from continental Europe, putting pressure on Tata Steel to secure a sale of its troubled UK plants before it loses customers.

India’s Tata Steel has serious offers on the table after putting its entire UK business up for sale in March to stem heavy losses, blaming costs, market weakness and cheaper imports from countries such as China.

Carmakers, which make up around 60 percent of Tata UK’s customers, are nevertheless making contingency plans for alternative sources for the speciality steel they need.

“If Tata fails, our purchasing teams are already working to find alternative sources in Europe,” said a spokesman for General Motors-owned Vauxhall, which sources 60 percent of its steel from the UK.

Vauxhall and five other carmakers built almost 99 percent of Britain’s 1.6 million cars last year.

Honda, which sources 10 percent of its steel from the UK, said “there is a contingency plan in place if the situation with Tata changes”. It gave no further details.

Nissan, which operates Britain’s biggest car plant in northern England, said this year it bought 45 percent from Tata’s Port Talbot plant, but the amount changes every year.

And Jaguar Land Rover (JLR), owned by Tata Motors, gets around 30 percent of its steel from Tata’s Port Talbot plant. They previously told Reuters they make their “own purchasing decisions based on the right commercial reasons”.

A spokesman for BMW, which sources some steel in the UK and produces 9 percent of total volumes here, said “as a rule we always make sure we have more than one supplier to prevent us from becoming too dependent on any single company”. He declined to comment on future supply plans.

Tata Steel acknowledged a speedy sale is crucial for both customers and employees.

“One of the reasons why we’ve been keen to conclude this process as quickly as possible is because uncertainty is not good for customers and it’s not good for employees,” a Tata Steel spokesman said.

    “Customers do want certainty from us and that’s one of the reasons why we’ve made clear the sales process needs to be time bound.”

In the automobile industry steel customers typically work on a three-month supply arrangement, John Leech, head of automotive at KPMG, said.

“A customer can walk away quite quickly, the steel producer at any one time has only up to three months’ protection,” Leech added.

Some three months after the sale process started, Tata has yet to give a shortlist of bidders, highlighting the tough market conditions the industry is facing, with cheap Chinese imports exacerbating the impact of a collapse in demand and prices following economic crisis.

“Tata is evidence that this is an increasingly global market and therefore, where cost is an issue, people who use steel will look at the affordability of UK-sourced steel, European–sourced steel and steel sourced elsewhere,” said Alasdair Reisner, chief executive of the Civil Engineering Contractors Association.

“Increasing issues such as lower carbon solutions are also very important for our members and that supports UK sourcing but equally they have to be affordable against their competitors and if using UK steel means that they are not, that represents a challenge.”

The UK is the fifth-largest crude steel producer in the European Union, supplying almost 11 million tonnes in 2015, and the 18th biggest in the world, according to data from the World Steel Association.

(Additional reporting from William James and Pratima Desai in London and Edward Taylor in Frankfurt; editing by Veronica Brown and Susan Thomas)


Source: R-Business

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