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THE WALL STREET JOURNAL: A Commodity Crunch Boosts Prices and Profits

A Commodity Crunch
Boosts Prices and Profits
May 9, 2006 6:47 a.m.

The Earth itself seems to be playing an ever-growing role in its inhabitants' economic affairs, as global manufacturing growth exceeds the current human capacity for extracting needed commodities from the sea and soil. Resulting market speculation only magnifies the problem.

Just this morning, platinum prices reached a new record in European trading, rising 1.6% to $1,205 an ounce, as Reuters reports. This comes ahead of a key report due next week on the precious metal out of London, but platinum is hardly alone in its escalating price. Last month, investors and speculators held more than $120 billion of what Bloomberg describes as “bets in U.S. commodity markets” — the second-highest amount on record, according to Citigroup. Natural gas and oil accounted for 47% of those bets, but gold and copper also figured strongly as investors try to beat the returns of stocks and bonds by seeking out commodity-linked indexes and futures whose values have been bolstered by concern about shortages of raw materials, as Bloomberg notes.

Manufacturers have had to factor the rise in supply costs into both their earnings guidance and provisioning practices. Airbus, for example, will confirm as early as today that it has signed $1.4 billion in contracts to secure its supply of titanium through 2015, The Wall Street Journal reports. Titanium and other light alloys are being used by Airbus and rival Boeing to develop new planes that burn less fuel — in turn an example of where high petroleum prices are affecting the choices of their airliner customers. Timothy Rupert, CEO of Ohio-based titanium producer RTI International Metals — one of Airbus's suppliers — tells the Journal that prices have roughly doubled in the past 18 months.

It has become formulaic in economic discussions to acknowledge the role China's economic growth has in affecting commodity demand — second only to the U.S. in its thirst for petroleum and some other materials — but this could already be seen as early as mid-2003 in how much Chinese demand was boosting the revenue of Australian miners like Rio Tinto and BHP Billiton. Mining companies now are as hot as the oil giants, as evidenced in yesterday's unsolicited offer by Teck Cominco for its fellow Canadian miner Inco. The $15.35 billion cash-and-stock bid would create a mining giant that ranks among the world's largest producers of zinc, nickel and metallurgical coal, as well as a major supplier of copper, gold and other metals, the Journal says. It comes amid an industry boom that has been intensifying and triggering a slew of takeover battles for companies with mine production, and the Toronto Globe and Mail says it also set the stage for a global bidding war for Inco.

On the same day, Shell Canada agreed to acquire BlackRock Ventures for $2.17 billion to boost its future oil production from the country's oil sands — once a wasteland whose petroleum was deemed too difficult and expensive to remove. But as the Journal points out, with Royal Dutch Shell and its rivals under so much pressure to find new stockpiles, the Canadian oil sands “are increasingly regarded as a sound bet” for their long-term prospects.

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The Ever-Suspect Bottom Line
As any observer of WorldCom, Enron or Computer Associates will tell you, accounting gives economics a pretty good run for its money in the claim to be known as the dismal science. Yesterday brought two bits of earnings news that highlighted just how hollow a corporation's bottom line can be. General Motors received permission from the Securities and Exchange Commission to revise how it accounted for the health-care deal it struck with the United Auto Workers union, turning a previously reported first-quarter loss of $323 million into a net profit of $445 million, as The Wall Street Journal notes. These revised results mean Chairman and CEO Rick Wagoner can tout a profitable quarter at the struggling car maker's annual meeting next month. But to at least one Wall Street analyst who spoke to the Journal, it's just “accounting mechanics.” And as the Chicago Tribune reports, United Airlines parent UAL, which emerged from bankruptcy protection in February, reported a $23 billion profit for the first quarter. But the shedding of liabilities tied to its Chapter 11 exit provided a one-time $24.6 billion gain, and UAL otherwise would have suffered a disappointing $306 million loss.

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Reward and Punishment for Cooking the Books
And on the intentionally-skewed-accounting front, a federal judge ordered the former chief executive of Gemstar-TV Guide International to pay $22.4 million for misleading investors by inflating the company's revenue, what the Los Angeles Times notes is one of the largest fines ever meted out against an individual for accounting fraud. The ruling from U.S. District Judge Mariana Pfaelzer came three years after the SEC filed suit against Henry Yuen, and it also permanently barred him from serving as an officer or director of a public company. Mr. Yuen had promised investors that “the coming explosion in interactive television would turn his company into a gold mine,” as the Journal points out, and at the height of the dot-com boom Gemstar had a market value of more than $20 billion. But when the technology didn't take off, Gemstar acknowledged revenue had been inflated. The SEC said that during the period of the fraud Mr. Yuen collected close to $100 million in salary, bonuses, and profits from Gemstar stock transactions.

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Also of Note…

Wall Street Journal: Senior House members from both parties, including Majority Whip Roy Blunt, have drafted legislation to tighten rules on foreign investment in the U.S., amid security concerns after the Dubai ports controversy. The measure, expected to be unveiled as early as tomorrow, would require enhanced notification to Congress of administration decisions regarding foreign investment and require all transactions involving entities controlled by a foreign government be subject to a special 45-day investigation — beyond the standard 30-day review that applies to all deals.

Washington Post: A former senior aide to Republican Rep. Robert Ney who left Congress to join Jack Abramoff's lobbying team pleaded guilty yesterday to conspiring to corruptly influence Mr. Ney's official actions by showering him with gifts and trips. Neil G. Volz joins Mr. Abramoff and three of his other former associates in agreeing to cooperate with the government and testify against Mr. Ney in the unfolding public corruption scandal on Capitol Hill.

Los Angeles Times: Extending Hollywood's tradition of converting enemies to allies into the digital age, Warner Brothers today is expected to announce plans to use file-sharing technology to distribute movies and television shows online. By the summer, technology from BitTorrent will allow users to download and watch “Harry Potter and the Goblet of Fire,” “Dog Day Afternoon” and other Warner titles on their computers.

Houston Chronicle: Midway through its 53rd day, testimony in the Enron trial ended abruptly with little fanfare and resulted in an unexpected break for jurors who will return next week to begin to decide the fate of Jeff Skilling and Ken Lay.

Austin American-Statesman: Dell's stock dropped sharply late yesterday after the company warned that its first-quarter profit will be less than expected and that revenue will be at the low end of previous forecasts.

San Jose Mercury News: Silicon Valley is steadily gaining status as a leading center of innovation for green technologies — especially solar. Yesterday saw Innovalight, a Santa Clara solar company, announce it has raised an additional $7.5 million in venture financing, while Piper Jaffray said it has created the first fund to invest dollars solely into venture-capital firms that invest in clean technologies.

Seattle Post-Intelligencer: Sony plans to launch its PlayStation 3 video-game console in two versions, at prices just under $500 and $600 — betting that consumers will think enough of its capabilities to spend at least $100 more than for Microsoft's Xbox 360.

New York Times: More than four million newborns world-wide die each year in their first month of life because of the lack of simple, inexpensive items like sterile blades to cut the umbilical cord, antibiotics for pneumonia and knit caps to keep them warm — comparable to the number of babies born in the United States annually, Save the Children said.

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Quote of the Day
“This is the irony of ironies. … We have chosen to lock up our resources and stand by to be spectators while these two come in and benefit from things right in our own backyard,” Charles T. Drevna, executive vice president of the National Petrochemical and Refiners Association, tells the New York Times about Cuba's collaboration with China and India in the Florida Straits. The U.S. and Cuba signed a treaty in 1977 evenly dividing the waters — and the oil and gas fields there — to preserve each country's economic rights. Cuba has recently signed on China and others to extract the resources, but a decades-old U.S. ban on drilling in coastal waters is preventing American efforts there.

Write to Joseph Schuman at [email protected]

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