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Feb 13

When elephants go to war

rbjqs9

(picture looted from the Interwebs)

Snapshot, Monday:

Snapshot 2009-02-09 13-12-59

Snapshot, today:

Snapshot 2009-02-13 15-58-49

Agence France-Presse reports San Miguel: Not taking over Meralco which seems to be believed by no one. Whatever the news that emerges going into what’s expected to be a showdown for control of Meralco during it’s May stockholders meeting, the rise in Meralco share prices has become newsworthy in itself. In his column, Butch del Castillo has this to say:

Yesterday it hit P85, a 52-week high, at the close of trading. Stockbrokers are saying that Meralco shares may even rise further to P90 each by next week and retest a historic high of P105 in the next couple of months if the current trend holds.

It was only late last year when San Miguel Corp. (SMC) bought the entire 27-percent stake of the Government Service Insurance System (GSIS) for P30 billion. That was followed by the acquisition by a group headed by Inigo Zobel of another 7 percent of the voting rights in Meralco. Since then, Eduardo Cojuangco, Ramon Ang and two other nominees have been named directors of the utility’s 11-man board.

Considering that the equities market has been generally weak and sluggish for several months now, the upshot of Meralco shares on the stock exchange is nothing short of amazing.

To stockbrokers in the know, however, the share’s bullish behavior was not totally unexpected. They say what’s going on are only the rumblings of a looming proxy war between SMC and the Lopez group for control of the giant utility.

“This is the runup to Meralco’s annual stockholders’ meeting scheduled for May 26, 2009,” one broker says matter-of-factly.

Although there is no official confirmation from either side, recent developments on the PSE trading floor indicate that there is definitely an ongoing scuffle to amass as many Meralco shares as possible.

Right now, the two groups officially control roughly 34 percent each of Meralco. The Lopezes, through First Philippine Holdings, own 33.4 percent of Meralco. SMC holds exactly 34 percent, including the 27 percent it bought from the GSIS, plus the 7 percent that was lately acquired by an allied group led by Zobel from other government agencies…

The BusinessMirror quoted Gilbert Lopez, research head of Credit Suisse Group AG, as saying investors are speculating on a proxy fight between the Lopezes and the new entrant, which is SMC. “One of the two groups must have a clear edge to control the utility.”…

Obviously, both sides are playing coy and figuratively playing their cards close to their chests, but the stockbrokers know better.

A Bloomberg tally shows that 7.58 million shares changed hands as a block at midtrading the other day at P80 per share. Before that, three blocks totaling 16.7 million shares were bought and sold in three trading days.

What is clear from these developments is that certain groups are feverishly piling up as many Meralco shares as may be available in the open market a full three months before Meralco’s annual meeting.

As speculation would have it, most of the buying is being done by the SMC group headed by SMC chairman Cojuangco. The speculation is based on the well-known fact that of the two groups, it is the Cojuangco-Ang-Zobel team-up that has the kind of cash hoard that would be needed to buy up all the loose Meralco shares in the open market.

But whoever is doing most of the buying is certainly doing a swell job of helping to perk up the market, in general, and Meralco shares, in particular.

The Philippine Stock Exchange couldn’t ignore the movement of Meralco’s share price; but in the end, not much seems possible to do . While personally, the Meralco and San Miguel moves are of direct relevance to me (since I have a show on ANC and I own some San Miguel shares), what’s more relevant to this blog is the way big business and government seem joined at the hip in this particular case. Some of government’s losses have been made up by San Miguel acquiring government shares (helping buttress the bottom line of the government at a time when Moody’s gives RP no credit upgrade; the government is going to be hard-pressed to have cash on hand for patronage and running the government: see Government spending P7B to hire “temps” and State workers set rally vs layoffs ); on the other hand, government’s hostility to Meralco is also well served by San Miguel’s possible hostile takeover of Meralco.

If, for example, the interests of Eduardo Cojuangco are served by a cozy relationship with the present administration, could it then possibly be a sign of a confluence of interests that extends to the 2010 elections?

The administration, unlike its enemies, has the resources (money and manpower) to keep game plans running on parallel tracks, to see which will prosper. Among its many options remain Charter Change, emergency rule, and holding presidential elections as scheduled in 2010. But the last option, if it’s to be viable, requires sinking in resources now, and reaching an agreement with potential candidates sooner rather than later. These potential candidates -and their backers- themselves have different options running on parallel tracks (the Cojuangco interests, for example, would be interested in the prospects for Charter Change, and in elections in 2010, and perhaps, apprehensive of emergency rule, and must consider which option to invest in most effectively). The more these tracks converge, the more it would seem logical to pursue an existing, and lucrative, relationship as far as it will go.

Much as I thought 2004 marked the passing into history of the Marcos era and its henchmen, I may have underestimated both their staying power and their ability to groom a successor generation (Enrile is at his apogee, and not nadir, as a public official; Cojuangco seems headed for new heights of economic and political influence; Ronnie Puno seems entrenched as ever; and Francis Escudero seems the Second Coming of Ferdinand Marcos himself).

So when the Philippine Stock Exchange also allegedly (the allegation bering made in Lopez-controlled media) acted selectively in backing down from imposing a fine on San Miguel for violating disclosure rules , it seems a return to the days of impunity of the early 1980s (but if so, they’re in good company, see HK tycoons up in arms over trading rule and HK backs down on trading blackouts; relevant readings are Roubini: Anglo-Saxon model has failed and High Noon: Geithner v. The American Oligarchs). Which only goes to show the clout of the country’s only home-grown multinational.

I’ve had a hunch for some time now that the real news -the real political news- is taking place in the business pages, where reporters and pundits both are least well-equipped to report and comment on things.

The other day, in Has the payoff begun? the Inquirer editorial cautioned against moving too quickly and too slowly on the case of the collapsed rural banks owned by Celso de los Angeles. The editorial points to the messy interlinked interests of the parties involved, in particular, the Speaker and the House of Representatives and the PDIC and even the Monetary Board (which has to authorize loans to bail out the PDIC as it bails out depositors in de los Angeles’ rural banks).

But an entry in Stuart-Santiago (reacting to a Dan Mariano column) points to another possibility altogether: that de los Angeles is undergoing a hatchetjob at the hands of the big national banks, and was the victim of a campaign to spook his depositors. The possibility of intraindustry rivalries is something worth considering.

On another note, compare the two views on the LPG shortage in the columns of Rene Azurin and Dean de la Paz. Actually, both believe that the shortage was more along the lines of a hiccup in the market.

Azurin says what happened was this:

I tried to ferret out an explanation. What I’ve come up with is simply a tale of market forces acting as they might be expected to act in a deregulated competitive environment.

To begin, high oil prices throughout most of last year caused the benchmark Saudi contract price for LPG to peak in July 2008 at $940 per metric ton. As can be expected, local LPG demand in that month was at its lowest - about 76,000 MT – as households restricted their use of LPG and switched to other available fuels like charcoal and kerosene.

But, after peaking in July, the Saudi contract price for LPG suddenly dropped steeply and hit its lowest level in November 2008, around $330 per MT. Expectedly again, the suddenly very low LPG prices stimulated demand as households switched back from other fuels. Local demand in November and December was estimated to average around 96,000 MT per month, the highest levels so far experienced.

Despite the sudden spurt in demand, however, there was enough supply to meet the surge because importers had already increased their importations. From an aggregate importation averaging 47,000 MT per month from January to October 2008, the six importers brought in 67,000 MT in November and 66,000 MT in December. They upped this further by importing 81,000 MT in January 2009. When you add beginning inventories of about 35,000 MT and Shell’s local production of about 10,000 MT per month - Petron had an emergency plant shutdown in December – one arrives at the conclusion that Energy Secretary Angelo Reyes was absolutely correct in telling congressmen and the public that aggregate LPG supply was still adequate to meet total demand.

Why then was there a perceived shortage? Apparently, consumers who experienced difficulties in getting LPG were customers supplied by certain independent refilling plants mostly supplied by Liquigaz. Liquigaz supplies about 35% of the local market and is the largest importer of LPG but buys its supplies from the spot market. Presumably, in September and October 2008, Liquigaz (like any astute trader) tried to take advantage of projected falling prices by delaying the placing of its orders until LPG prices had hit expected lows. This - coupled with unexpected disruptions in LPG flow from Russia to Europe that upset the delivery timetable of Liquigaz – caused Liquigaz to be unable to fully supply its refilling plant customers during the critical December-January period.

This is why LPG dealers and retailers dependent on Liquigaz-supplied refilling plants were screaming shortage. In the battle for market share, Shell, Petron, Total, and other importers who had available stock naturally supplied only their own refilling plants and dealers, and refused to supply others. Customers of the LPG brands of Liquigaz refilling plants could therefore buy LPG but only if they were willing to shift to another brand or to another dealer. There is no supply shortage if some dealers and retail outlets have no stock, but others do.

Despite the problems that arose from its decisions, Liquigaz was of course justified in timing the placing of its orders to try and maximize its profits. Similarly, in a deregulated, competitive environment, Shell, Petron, Total, and others were justified in their refusal to supply those who were not their regular dealers in order to try and grab market share from rivals.

In a deregulated, competitive environment, government authorities like the Department of Energy and the Department of Trade and Industry cannot make output or pricing decisions for industry players. In fact, a policy of deregulation “to ensure a truly competitive market” requires that government authorities ensure that the industry participants are actually competing and not colluding with each other. In the current situation, not sharing supply with rivals so as to grab their market share is indicative of competition. Sharing supply with rivals so that market shares remain unchanged might be evidence of collusion.

While de la Paz says this is what happened:

In the run-up to December, global oil prices fell sharply and such crashes in values affect how oil companies manage inventory. Hoarding would have been stupid. In a temporary regime of falling prices, it would be imprudent to store large quantities as they would be forced to sell at lower prices than that from which inventory was accumulated. As a seasonal increase in demand of 50 percent is rather expensive given falling prices, the oil companies kept inventory at its economic quantity levels to sell at reasonable margins.

Because the LPG producers kept lower inventories, the burden to respond to the increased demand fell on importers. Of these, there is only one that can supply the inventory slack.

Importers service refillers from whom most of the lower-income market relies and where prices are more elastic. Without the same kind of distribution network owned by the major oil companies that produce LPG, a distribution problem can occur leading to marketplace shortages readily felt by those sensitive to incremental costs.

True shortages ensue severely aggravated officials threatening to prosecute dealers that sold over an imaginary price parameter that did not reflect true costs and the effect of prudent inventory management.

In such a situation, by importing only as needed and gradually raising prices to reflect economic realities, the shortages were soon alleviated in markets serviced by the top three suppliers. In niches serviced by refillers, shortages could still be felt as these outside the mainstream distribution networks.

In this rather revealing episode, if there is one thing evident, it is that we really need officials who understand the profound vagaries of the business and do not aggravate it by appearing clueless, running after scapegoats and imposing unrealistic demands.

Both seem to suggest that the current Secretary of Energy is not up to scratch.

The Warrior Lawyer comments on the Supreme Court’s decision on who gets custody of that convicted American soldier. The Inquirer editorial, Time to talk, says the Philippine government ought to be negotiating from a position of strength on this one, as it can call the bluff of the new American administration. But it seems the government is inclined to drag it out, doing Uncle Sam a favor even before it’s been asked for one.

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  1. manuelbuencamino

    Dan Mariano seems to forget that De Los Angeles was in similar trouble in the 80s.

    Another thing about those legacy banks is it had about 100k depositors who deposited more than 10B but funny how all of them kept their deposits within the 250K insured limit.

    Now under PDIC rules, the 250K insurance is per depositor not per account. So someone with say 18M in deposits will lose all his money except for 250K unless he opened a bunch of “in trust for” accounts because those accounts are technically not his.

    But why would anybody do this if he were certain of the banks’ stability? Why open dozens of ITF accounts unless you want to have your cake and eat it too – i.e. get the double your money thing and be able to collect from PDIC in case the bank fails. Is this the kind of thing one would do with the leading commercial banks?

    When a bank gets into double your money schemes the first question to ask is where will the bank make that kind of money to pay out?

    The standard answer is from micro lending, credit cards, home, motor vehicle financing and standard placements. De los angeles’ rural banks took your money lent it to his financing companies which would then extend you credit for a card, a home, a car, or a motorcycle and then he would pay the interest on your deposit from the interest he earned from lending you money on your card, home, car or motorcycle. The only way you can keep this going is by taking in more and more deposits.

    Unfortunately, the BSP is a signatory to international conventions that make banking safe. BSP adheres strictly to solvency ratios. In short your bank may be liquid but it may no longer be solvent. That’s what happened to de los angeles.

    Now congress, many of whose members invested in de los angeles’ banks, tried to pass a bill that would suspend solvency requirements for three years. The BSP and the rural bankers association of the Philippines opposed this plan by Congress. They submitted papers explaining why the proposed solvency suspension would have negative consequences for the rural banking sector. Congress listened. Now they want PDIC guarantee doubled to 500K.

    Mariano is right. The rural bankers, the BSP and leading commercial banks wanted de los angeles’ banks closed not because he gave them stiff competition but because he was stiffing depositors, something that would undermine the faith and trust of the public in the entire banking industry.

  2. UP n grad

    The last paragraph of the Inquirer editorial’s Time to Talk is revealing:

    On the other hand, to refuse to negotiate the matter swiftly or to dilly-dally on the transfer of custody to Filipino hands might provide the firmest basis yet for impeaching President Arroyo later this year.

    If “Cpl Daniel Smith” provides the firmest basis yet for a “Talsik Diyan”, then GMA might as well do a Hugo Chavez where she/GMA gets an extra 6-year-term. The anti-GMA is running on empty.

  3. mlq3

    Care to explain further, UPn? What has happened is the antis have run up against a brick wall -2010. while the Palace has seen its supermajority in Congress into an exercise in herding cats.

  4. Bert

    UP n,

    GMA do a Hugo Chavez? And where, pray tell, will she get that 70% of the masa to back her up in the event that push comes to shove? Or, do you think SWS has a new stat different from the previous ones?

  5. UP n grad

    but mlq3: I think you just affirmed what I said. One who sits in a position of power who “can herd the cats” can take the lack of energy among the anti’s as a signal to proceed with desiured changes.

    “Corporal Smith” is much less important than BJE-MOA/Ad. To categorize ‘soldja-boy” as “firmest basis” to impeach is to shine light on a problem for the anti-GMA. The anti’s can not throw up a serious-enough barricade […. my opinion]
    —————————-
    to Bert… Hugo Chavez against a weak-opposition is pushing to remove the constitutional-provisions that prohibit him from another term.

  6. UP n grad

    but GMA …. with her and husband with only a few years of strong knees to see places, for sure she’ll leave Malacanang come 2010. Only communists like Castro and others want to sit in the throne of power until they die.

  7. supremo

    This case should have been settled out of court. An Obama stalker with no imagination and pretending to be President did nothing to prevent this Daniel Smith rape case from blowing out of proportion. The government could have step in and told the victim that she should settle the case and write everything that she wants on a piece of paper. I believe that the US government will cooperate and grant whatever she wants just to get out of this mess. Now everyone is in deep shit.

  8. supremo

    CHA-CHA Philippine style is like PBA basketball and CHA-CHA Venezuela style is like NBA basketball.

  9. Carl

    To clarify, Hugo Chavez doesn’t have the support of 70% of the people in Venezuela. He lost a referendum to extend his term just a year ago. It must be said that, numerically, opposition to his regime is not weak. But it is splintered. That’s why Chavez looks so strong by comparison. Chavez knows can take advantage of this lack of unity. That’s why he scheduled another referendum so soon, hoping to wear down the opposition and catch them off guard. He needs to move quickly. With oil down, Chavez may not have the luxury of spending petrodollars to appease everybody.

    In a rather strange twist, while the leadership of most countries are losing support because of the global financial crisis (the U.S. already brought down the Republicans), the leadership in the Philippines appears to look good by comparison. All this talk about our state of “blessedness” in the face of economic turmoil only reinforces this.

    On a lighter note, it’s not only Communists like Castro who want to sit on the throne until they die. The Queen of England, no communist by any stretch of the imagination, seems to be of a similar frame of mind. And for, perhaps, similar reasons: they want to be sure their legacy is passed on to capable hands in order to ensure continuity. Poor Prince Charles! Or I should say, poor Camilla!

  10. The EQualizer

    “Francis Escudero seems the Second Coming of Ferdinand Marcos himself”MLQ3

    Agree 100%.Well trained by his dad,Marcos’s Agricultrue secretary.

    I bet Chiz will be Boss Danding’s presidential bet.

  11. J_AG

    “Why then was there a perceived shortage? Apparently, consumers who experienced difficulties in getting LPG were customers supplied by certain independent refilling plants mostly supplied by Liquigaz. Liquigaz supplies about 35% of the local market and is the largest importer of LPG but buys its supplies from the spot market. Presumably, in September and October 2008, Liquigaz (like any astute trader) tried to take advantage of projected falling prices by delaying the placing of its orders until LPG prices had hit expected lows. This — coupled with unexpected disruptions in LPG flow from Russia to Europe that upset the delivery timetable of Liquigaz — caused Liquigaz to be unable to fully supply its refilling plant customers during the critical December-January period.”

    Something wrong with this analysis. Firstly no one but no one simply buys his supply from the spot market. Most especially if he controls 35% of the market. He most naturally will hedge his supply. The shortage in Europe was Russia cutting off natural gas supplies not LPG. If prices of LPG spiked due to that then all suppliers of LPG would have adjusted their prices accordingly.

    You have market share of 35% and you will allow your tanks to run dry? My guess is Liquigaz made option bets and got caught with the wrong side of the bets.

    Cathay Pacific made wrong way hedge bets when jet fuel prices dropped. They lost hundreds of millions.

  12. J_AG

    ” The standard answer is from micro lending, credit cards, home, motor vehicle financing and standard placements. De los angeles’ rural banks took your money lent it to his financing companies which would then extend you credit for a card, a home, a car, or a motorcycle and then he would pay the interest on your deposit from the interest he earned from lending you money on your card, home, car or motorcycle. The only way you can keep this going is by taking in more and more deposits.”

    “Unfortunately, the BSP is a signatory to international conventions that make banking safe. BSP adheres strictly to solvency ratios. In short your bank may be liquid but it may no longer be solvent. That’s what happened to de los angeles.”

    In the U.S. and certain parts of Europe they essentially did the same thing with selling sub prime mortgages and started giving out credit like they were selling girl scout cookies so major banks would then package these cookies into securities. Then these banks would go out and sell these higher interest paying securities.

    Lehman sold some of them here to the local banks.

    Give that guy de los Angeles a medal. He proved that our bankers are as good as those high flyers on Wall Street.

    Baka galit si Teganco kasi wala siyang balato? Tetangco bailed out his friends so why not de los Angeles?

  13. J_AG

    “Unfortunately, the BSP is a signatory to international conventions that make banking safe. BSP adheres strictly to solvency ratios. In short your bank may be liquid but it may no longer be solvent. That’s what happened to de los angeles.”

    Liquid but insolvent?????? Please explain

    Why did the BSP suspend mark to market or fair market value accounting rules for our local banks????????

    If that happens what happens to capital ratios?

  14. magdiwang

    When Ping de Jesus was elevated by the Lopezes to be the new President and CEO of Meralco. It was a last ditch effort by the Lopezes to hold control of the giant company. They are hoping that with him at the helm, the Cojuanco group will stop the inevitable.
    There is nothing new on how political and economic power is played in the Philippines. Look at the current board of directors of both Meralco and San Miguel. They are dominated by tagalog and kapampangan personalities. No wonder people are screaming for federalism.

  15. The EQualizer

    “We have already suffered and sacrificed for seven years, what is two years?”Escudero

  16. UP n grad

    …better not be 8 more years…..

  17. anthony scalia

    Marcos was his own guy. Chiz is like the Cayetanos and Pangilinan – his shine is lunar

    he’d better do an Erap – be a VP first

  18. mlq3

    UPn well, the idea is that herding cats is an impossible task, I believe that’s the meaning of the term. But I agree, it should be a goldne opportunity for finally ramming things through, since the ideological basis was laid for it with the President declaring we live in a dysfunctional political system. The question is if, first, she truly believes it, second, if she has the nerve to attempt to do away with it, and third, if other can be convinced to permanently extend the status quo. At the heart of deciding whether to go ahead with it is an iron-clad belief that your luck will not run out, and that you truly have everything figured out. The conventional wisdom having been repeatedly disproven since 2005, all signs point to her being able to tell her allies this is a golden opportunity to bring things back to the Golden Age of the KBL or the prewar NP where everybody politically was pretty much happy. But seems to me there’s a certain hesitation, and insecurity at work in official circles.

  19. Bert

    “I bet Chiz will be Boss Danding’s presidential bet.”-The Equalizer

    My youngest daughter, a computer programmer, she and her gangs will jump with joy when they hear this, they rooted for him in the senatorial election.

  20. Bert

    “At the heart of deciding whether to go ahead with it is an iron-clad belief that your luck will not run out, and that you truly have everything figured out.”

    mlq3′

    That’s the ‘conundrum’ of GMA, heheh.

    My personal take is that it’s going to be a very risky venture for her if she do go ahead with it.

  21. Bert

    do, or did, i’m not sure, sorry.

  22. Pochero

    When SMC takes over Meralco, ERB will, upon Malacanang’s behest, start to increase power rates. This will enrich SMC and some of this wealth will of course find its way to the Palace. Otherwise, why would SMC be interested in Meralco at all? Therefore, we can anticipate a future media campaign under the theme: KALIMUTAN ANG PRESYO NG KURYENTE, MAG BEER MUNA TAYO!

  23. manuelbuencamino

    jag,

    from the BSP position paper on proposed bill tp suspend solvency ratios for two years

    “Liquidity and solvency are two different things. While the former ensures that on a regular basis the bank is able to meet the withdrawals of its depositors and pay its obligations as they fall due, the latter ensures that the value of the bank’s assets are at least equal to its liabilities plus a sufficient buffer for contingencies. A liquid but insolvent bank means that it only survives because of continued flow of deposits and borrowings that ultimately cannot be paid. And the longer such a situation is allowed to persist, the bigger the potential hit for the public when the music finally stops.”

  24. J_AG

    Mr Buencamino: So much for BSP position papers.

    Bank regulators are supposed to check on the quality of bank assets regularly. Banks also have the interbank window for sourcing funds. Also banks are allowed to float bonds and issue CD’s. How can a bank suddenly be insolvent when they are under regulatory oversight of the BSP? The assets are the collaterals in exchange for the loans they give.

    “The first is that banks enjoy a state-supported licence to create money. No strictly private business can make a credible promise to do that. Banking is a utility in which taxpayers bear much risk. Regulators have to represent the interests of these risk-bearers of last resort.” Martin Wolf FT

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