News brief: ArcelorMittal cancels pay cuts

Kazakhstan’s largest steelmaker has ended severe pay cuts that it had blamed on a weak global market for its products, according to news reports.  The incident may illustrate political pressures on foreign-owned firms here.

Trade unions had called for the government to investigate the legality of ArcelorMittal’s wage decreases to nearly 30,000 miners and metallurgists in Kazakhstan, announced in late January.  Officials of the Karaganda oblast (similar to a state in the US) said they had detected illegal pay cuts, according to the business weekly Panorama.  The firm’s Temirtau plant is the largest steel mill in Central Asia.

Foreign specialists at ArcelorMittal Temirtau faced a slash of 50%; domestic specialists, 25%.  The Indian-owned company said these reductions were temporary and were due to a lack of cash as well as to its “complicated situation” in sales, Panorama reported.  The main “complication” seems to be the fall since mid-2014 in resource prices; ArcelorMittal said it could no longer cover unit costs.  Weakening of the ruble since last summer had also reduced Russian demand for its steel, the firm said.

Monopsonies galore

Trade unions retorted that they had not agreed to the wage cuts and that ArcelorMittal should complete a pact-in-progress with them and with involved agencies.  This pact was agreed about two weeks ago, under pressure from oblast officials.  It was not clear from news reports whether ArcelorMittal would cancel the cuts in pay to foreign workers as well as those to domestic ones.

The steelmaker asserts that it has overpaid value-added taxes by 12 billion tenge (about $65 million) since 2010 and that repayment would help alleviate the need for wage reductions.  So far, the Kazakhstani government has agreed to refund at least 4.1 billion tenge, reported Tengrinews.               

In 2006, coal miners in the Karaganda region struck against ArcelorMittal for several weeks over pay and work conditions.  It narrowly avoided another strike in 2012 by raising wages to steel and coal workers by about a tenth, backdated six months.

Factory towns in Kazakhstan are often dominated by a single employer – a Soviet legacy.  Sans political interventions, the employer may be able to dominate the labor market more than is possible in a competitive, non-Soviet setting.  –Leon Taylor tayloralmaty@gmail.com

References

Panorama.  Profsouzi osporyly zakonnost’ snyzhenye zarplat v ‘ArcelorMittal’.  [Trade unions questioned the legality of pay reductions at ArcelorMittal.]  February 6, 2015.

Assel Saltubaldina.  ArcelorMittal Temirtau asks workers to yield to wage cuts.  Tengrinews.  February 9, 2015.  Online. 

Assel Saltubaldina.  ArcelorMittal Temirtau employees to receive full salary.  Tengrinews.  February 11, 2015.  Online.  

Assel Saltubaldina.  Kazakhstan to return 4.1 billion tenge of VAT payments to ArcelorMittal Temirtau.  Tengrinews.  February 13, 2015.  Online.  

Dmitry Solovyov.  ArcelorMittal agrees pay deal with Kazakh workers.  Reuters.  July 17, 2012.  Online.  

The midnight stomp

This weekend’s ceasefire pact in Ukraine led to last-minute fighting that may destroy the value of the eventual cessation.  This is no surprise.  Russia and Ukraine (plus Western allies) are stuck in the vicious game known as Prisoner’s Dilemma.

Each side can choose between two actions: To observe an early peace, or to continue fighting until the ceasefire.  Think of the game from Ukraine’s point-of-view.  If Russia keeps fighting, then Ukraine cannot gain by rolling over and playing dead, so it will continue combat, too.  If instead Russia lays down arms, then Ukraine can gain ground in the east by battle.  Thus, no matter what Russia does, Ukraine will fight.

A similar analysis holds true for the Kremlin: It will deploy arms regardless of what Ukraine does.  Although a general peace would benefit all, neither side will resort to it unless it believes that it will be heavily penalized should it wage war instead.  Judging from news accounts, the ceasefire agreement provided no such penalty.  –Leon Taylor tayloralmaty@gmail.com

Reference

Andrew E. Kramer.  Ukraine cease-fire goes into effect, but rebel leader in key town repudiates accord.  New York Times.  Feb. 14, 2015.

         

Fibs and glut

  

We all know that a glut has lowered oil prices.  We know this because the media has repeated it ad infinitum for six months.  The only problem with the assertion is that it's wrong.

As the Bank for International Settlements politely puts it, assertions of an oversupply “seem to fall short of a fully satisfactory explanation of the abrupt collapse in oil prices.”  The deviation from trend in demand and supply – that is, unexpected oversupply -- is only about an eighth as large as occurred in 1996 to 1998, when the world oil market really was awash; the annual Brent spot price -- the usual benchmark price for the global market -- fell below $13 in 1998.  The yo-yo nature of oil prices since summer is reminiscent of a financial asset, suggesting that speculation – not demand and supply – may be the real problem.  The BIS did not specify the oil price that it had examined. 

Other financial factors may affect the price, notes the Bank.  The energy industry has borrowed steadily, and heavily, since 2007.  Low oil prices reduce the value of its collateral, so oil firms wind up selling crude at basement prices in order to raise cash.  This may be particularly true of oilers in emerging market economies (Kazakhstan, anyone?) who borrowed in dollars.  Since the buck has been strengthening for months, the interest payment in terms of the local currency has risen.  Finally, oil firms are finding it harder to hedge their financial bets, since no one wants to buy from them an asset with a falling price.  “The build-up of debt in the oil sector is a reminder that high debt levels can induce significant macro-financial interactions,” writes the BIS, which is effectively the central bank for central banks.  The full report is to appear in the BIS Quarterly Review next month.

The supposed glut was mainly a media event, I think.  Such newspapers as the New York Times, the Financial Times, and the Wall Street Journal intone relentlessly that the oil market is oversupplied by two or three million barrels per day.  They fail to note that this amounts to only about 2-3% of the global market and may well be in the range of a typical fluctuation (see the Notes below).  It wouldn’t kill a reporter to learn how to calculate a percentage change.

The problem is not that energy reporters ask the wrong questions.  The problem is that they don’t ask questions, period.  They are shills for their sources.  One example is the story in the Financial Times on the BIS report.  You would think that as a leading proponent of the glut theory, the newspaper would at least ask an analyst who believes in oversupply to comment on the report.  No such luck.  The Financial Times rewrote the first paragraph of the BIS report, and that was about it.  It should have just published the link and let it go at that. 

The economic reporting in Kazakhstani business weeklies, and in blogs that cover Central Asia, notably eurasianet.org, is even worse.  Skepticism is out of fashion among these journalists, and they are rarely worth reading.  --Leon Taylor tayloralmaty@gmail.com

Notes

Consider supply fluctuations given the Great Recession and its lingering effects.  From 2008 through 2013, the annual mean of world crude oil production was about 88 million barrels per day, according to data from the United States Energy Information Administration.  The standard deviation was about 2 million barrels per day, or 2.2% of mean output -- roughly equal to the excess supply reported for the past several months.  Or one could consider the periods of 2009 through 2013 (2.3%) and 2010 through 2013 (1.5%).  

References

Bank for International Settlements.  Box: Oil and debt (February 2015).  www.bis.org/statistics/gli/glibox_feb15.htm

Neil Hume.  BIS says financial flows partly to blame for oil collapse.  Financial Times.  February 7, 2015.  

United States Energy Information Administration.  International energy statistics.  www.eia.gov

      

The case of the forgetful stenographer

Plus ça change….

This week’s issue of Panorama has a front-page story on consumer inflation.  Don’t worry – you don’t have to spend your hard-earned tenge on this business newspaper.  You can download the press release from the National Bank of Kazakhstan for free.

Panorama (read: The central bank) reports that the annual rate of inflation rose to 7.4% in 2014, more than half higher than the 2013 rate, 4.8%.  The usual suspects are paraded:  The 19% devaluation of the tenge in February, which pushed up import prices and will cause the prices of domestic goods to levitate as well when export growth resumes; higher prices of gasoline and diesel fuel, as well as of some services, later in the year.  “The National Bank continues to take measures to keep inflation within the target corridor of 6-8%,” Panorama proudly announced.

As usual, the paper’s stenographer forgot a slight detail: The money supply.  Bank data paint a curious picture.  The forms of money that are easiest to spend – cash, checks, small savings accounts – shrank considerably over 2014.  Currency (the jargon is “M0 money”) was down 25.8% last December, relative to the previous December.  This won’t surprise anyone who has tried recently to make change at a grocery store.  But broad money – M3, which includes the less liquid forms of moolah as well as cash, checks and small savings – was up 10.5%.  The least liquid forms of money rose 60.1%.

Part of the new money in M3 just paid for new goods and services; the Bank estimates that output rose 4.1% in the first nine months of 2014, compared to the same period in 2013.  What remains of M3 could account for most of the year’s rise in prices, if it were spent.  So a long-standing question remains:  To what extent does illiquid money spur spending in Kazakhstan?  ---Leon Taylor, tayloralmaty@gmail.com

Notes

The phrase "least liquid forms of money" refers to M3 - M2.

References

National Bank of Kazakhstan.  Statistical Bulletin, December 2014.  www.nationalbank.kz

Panorama.  Dolia bankovskovo sektora vo vneshnem dolge strani snizilas’ do 7%.  [The banking sector’s share of the national external debt fell to 7%.]  February 6, 2015.