Freeport digging deep for new Grasberg mine deal

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Freeport McMoRan Copper & Gold (FCX) chairman Richard Adkerson has twice flown to Jakarta this year as he tries to persuade President Joko Widodo’s administration to make an early decision on extending the American mining company’s contract over the fabled Grasberg mine beyond 2041.

Adkerson wants a guarantee of a 20-year extension in planning the future development of the four rich ore bodies comprising one of the world’s most lucrative mines lying 3,500 meters up in Papua’s rain-swept Central Highlands.  

Under production since 1988, the bottomless Grasberg still has proven and probable reserves of 15.1 million tonnes of copper and 28.3 million ounces of gold, making it the world’s third-largest copper reserve and biggest gold deposit.

Consolidated sales from the mine amounted to 4.2 billion pounds of copper and 1.7 million ounces of gold in 2022, the first year it returned to full production after converting from a vast open pit to a fully underground, rail-fed operation.

Adkerson and president and treasurer Kathleen Quirk met personally with Widodo on one of their two trips to Jakarta, an indication of the importance FCX attaches to retaining the glittering jewel in the Phoenix-based company’s crown.

Insiders describe the discussions as “fluid” and say they revolve around three conditions, which include boosting the government’s stake in PT Freeport Indonesia (PTFI) subsidiary from 51.2% to 61.2%, the completion of a long-delayed US$3 billion smelter at Gresik, East Java, and adding a second Papuan to the PTFI board.

FILE PHOTO: Freeport McMoRan Chief Executive Officer Richard Adkerson gestures during a press conference with Indonesia's Finance Minister Sri Mulyani Indrawati and Mineral Resources Minister Ignasius Jonan (not pictured) at the Ministry of Energy and Mineral Resources in Jakarta, Indonesia August 29, 2017. REUTERS/Darren Whiteside
Freeport McMoRan chairman Richard Adkerson gestures during a press conference in a 2017 file photo. Image: Agencies

Investment Minister has indicated progress is being made. “The discussions are nearly complete, and the focus is on ensuring that the state acquires the additional shares at the lowest possible cost,” he said earlier this month.

Lahadalia expects state-owned mining holding company PT Mineral Industry Indonesia (MIND-ID) to make the final payment of the $3.8 billion it laid out for its 51.2% stake in PTFI in 2024, five years after sealing the deal.

“It is personally gratifying to experience the markedly more positive attitudes there (in Indonesia) about Freeport than in the past,” Adkerson said in an upbeat presentation to a first-quarter earnings conference call last month.

Apart from the growth of the electric car industry driving a positive outlook for copper, he said FCX’s relationship with Indonesia had improved greatly since the government took the majority interest in PTFI in 2018.

Up until then, Freeport had been treated as public enemy No 1, under attack from environmental groups for its in-river tailings (rock waste) disposal system and often blamed for past human rights abuses committed by the Indonesian military in the mine’s vicinity.

It was also criticized for the cozy relationship between legendary Freeport CEO Jim-Bob Moffett, who died in 2021, and president Suharto, the authoritarian leader who was always grateful for the gamble Freeport took on Papua in the late 1960s.

In previous years as well, traffic on the steep 100-kilometer road between the lowland logistics center of Timika and Freeport’s high-altitude Tembagapura mining camp had been the target of sniper fire from Papuan rebels.

S&P Global estimates that Grasberg represents an earnings concentration for FCX of 35-40%, but the firm also owns more than 50% of each of its two less profitable copper assets in Peru and Chile and 72% of the Morenci copper mine in Arizona.

“As resource nationalism appears to be rising around the world, we believe the globally important Grasberg mine could be exposed to further changes in economics (for FCX), particularly as permits are reconsidered for extension in the next decade or two,” the ratings agency said in a note last month.

Although MIND-ID posted a $1.45 billion profit last year, Center for Energy and Mining Law executive director Bisman Bakhtiar feels the company will be taking on an unnecessary burden by buying a further 10% stake in PTFI.

Papuan students display placards during an anti-Freeport rally in front of the US giant Freeport-McMoRan office in Jakarta on April 7, 2017.The students demanded an end to mining by Freeport in Papua and the freedom of Papua from Indonesia. / AFP PHOTO / Bay ISMOYO
Whipping boy: Papuan students display placards during an anti-Freeport rally in front of the US giant Freeport-McMoRan office in Jakarta on April 7, 2017. Photo: AFP / Bay Ismoyo

FCX will continue to retain operational control of the world’s biggest underground hard-rock operation, and along with it the lucrative supply contracts that make it an enticing prize for political interests in Jakarta.

Sources familiar with the way the mine is operated say the government has no practical mining expertise at all to replace the existing Freeport team, despite an obvious divergence of objectives between Phoenix and the state.

Analysts say if FCX is not granted an early extension, considered unlikely at this stage, planners may be tempted to “high grade” the mine, giving priority to exploiting the more profitable ore deposits over the next 18 years.

Freeport’s new $3.4 billion smelter at the Java Integrated Industrial Park Estate (JIPE), north of Surabaya, was originally planned to be commissioned by mid-2024 but construction is reportedly running behind schedule.

When complete, the facility and Mitsubishi’s existing Gresik smelter, PT Smelting, which began commercial operations in 1999, will process the bulk of the three million tonnes of copper concentrate the Grasberg produces each year.

About 60% of PT Smelting’s output currently goes to overseas markets, but the Widodo government plans to impose a ban on all copper exports next year in line with its strict policy of adding value to its vast mineral wealth.

Nickel ore exports were banned in 2020 with official data showing that the three new Chinese-funded processing facilities in Sulawesi and Maluku had increased the commodity’s value from $1.1 billion to $20.8 billion in 2021 alone.

The Energy and Resources Ministry was forced to delay its plan to ban copper concentrate exports in June after Freeport warned it would have to cut back production until the new 1.7 million-tonne smelter is in operation.

Amman Mineral, a subsidiary of Indonesian-owned conglomerate Medco Energy, may be in worse shape because it exports all its concentrate from Sumbawa’s Batu Hijau copper and gold mine.

Executives said in an October 2022 presentation that Amman’s $1.4 billion smelter, with a production capacity of 220,000 tonnes of copper cathode, would not be operational until the end of 2024.

Bauxite is on the export ban list next month, with mining officials confident the country’s four existing bauxite smelters are sufficient to absorb 12.5 million tonnes of bauxite and produce 3.9 million tonnes of alumina.

Eleven new plants are also under construction. They will eventually churn out a combined 12.6 million tonnes of chemical and smelter-grade alumina, the precursor for the manufacturing of aluminum.

The ministry puts total bauxite reserves at 1.27 billion tonnes, or about 4% of the world’s total, mostly concentrated in West Kalimantan. That places Indonesia in sixth place among the countries with the largest reserves.  

China’s state-owned ENFI Engineering Corp and PT Rasamala Metallurgy Indonesia (RMI) have signed a preliminary deal to build a fourth, $2.3 billion copper smelter at Fakak in Papua’s western Bird’s Head region.

Trucks haul raw earth materials from copper mine site. Photo: AFP, PT Newmont Nusa Tenggara
Trucks haul raw earth materials from a copper mine site in Indonesia. Photo: AFP

PTFI and MIND-ID have been cited as strategic partners, but PTFI president-director Tony Wenas told Asia Times that the company had yet to talk to ENFI about where it would source its concentrate from.

Fakfak lies 550 kilometers west of Timika and only a short distance overland from BP’s Tangguh LNG complex in Bintuni Bay, a potential source of power for both the new plant and to replace Freeport’s current coal-fired generators.

Only known up to now for its auto-cleaning and courier services, PT RMI is making its first venture into minerals. It is headed by Hence Carlos Kaparang, a member of the Suharto family’s Berkaya Party which failed to gain a seat in the 2019 legislative elections.

State power utility Perusahaan Listrik Negara (PLN) recently signed an MOU with a French technology company to build a hydrogen manufacturing plant in Fakfak as part of the proposed industrial complex. 

Bintuni Bay is also the site of Genting Oil and Gas Ltd’s Kasuri block, which will supply 230 million cubic feet (MCF) of gas a day to a floating LNG terminal, the first time the process will be used in Indonesian waters.

A further 101 MCF will go to a $1.5 billion ammonia and urea plant to be built by state-owned fertilizer company PT Pupuk Kalimantan Timur on the south coast of Bintuni Bay in Papua’s Bird’s Head region.

Discovered in 2011, Kasuri contains proven reserves of 2-3 trillion cubic feet (TCF) and is expected to come on stream in 2025, adding to Indonesia’s existing LNG production of 32.2 million tonnes a year and giving West Papua another economic anchor.

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India surging up the industrial robot ranks

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After a slow start, India is beginning to realize its potential as a promising market for industrial robots and as a developer of robot technology.

According to International Federation of Robotics (IFR) data, industrial robot installations in India increased by 54% in 2021 to 4,945 units. This put India in 10th place worldwide, behind Mexico but ahead of Canada, Thailand, Singapore and Spain. Data for 2022 is not yet available.

The auto industry is the largest buyer of industrial robots in India, accounting for 31% of total installations in 2021. Other large user industries include metals and machinery, plastics and chemicals, electrical and electronic equipment, and pharmaceuticals and food.

In a May 3 statement, IFR President Marina Bill noted that “India is one of the world’s fastest-growing industrial economies. Within five years, the operational stock of industrial robots has more than doubled to reach 33,220 units in 2021. This corresponds to an average annual growth rate of 16% since 2016.” 

Since the “Make in India” program was launched by Prime Minister Modi in 2014, the operational stock of industrial robots in India has tripled. But it is still a drop in the bucket compared with the 1.2 million units installed in China and nearly 400,000 units in Japan.

China, long known as the “world’s factory” as Western economies shipped manufacturing off-shore, is so far ahead of other countries in the deployment of industrial robots that comparisons are almost meaningless. In 2021, more industrial robots were installed in China (268,000) than in the rest of the world combined (249,000).

Japan ranked second (47,000), followed by the US in third (35,000), South Korea (31,000), Germany (24,000) and Italy (14,000). Realistically speaking, India should be able to triple its annual installations and catch up with Italy and then Germany in the near-term future.

China also ranks high in industrial robot density as measured by the number of robots per 10,000 employees in manufacturing. In 2021, mainland China ranked fifth after South Korea, Singapore, Japan and Germany. Hong Kong and Taiwan ranked seventh and eighth Sweden was sixth. The US ranked ninth, down from seventh the previous year.

The robot density in India’s auto industry was 148 robots per 10,000 employees in 2021. The figure for China’s auto industry was 772, compared with 332 for all Chinese manufacturing. The scope of the challenge and the opportunity for India are both evident.

South Korea set a record high of 1,000 robots per 10,000 manufacturing employees in 2021. This was a function of the country’s large and technologically advanced electronics and auto industries.

The figure for Singapore, which has a concentration of advanced industries, was 670. The figures for Japan and Germany, which have much broader industrial bases, were 399 and 397. In the US, the figure was 274.

As is the case in China, the largest industrial robot vendors in India today are the world leaders: Fanuc, Yaskawa and other Japanese companies as well as Universal Robots, ABB and Kuka. Universal Robots is a Danish company owned by Teradyne of the US. ABB is headquartered in Switzerland. Kuka is a German company owned by China’s Midea Group.

But there are numerous Indian robot companies – so many with outstanding characteristics that the top ten and other leading company lists published by various market research companies overlap but are not the same. Among those that appear on these lists and that illustrate the range of Indian robot manufacturing and technologies are:

  • Precision Automation & Robotics India (Wipro PARI), a large integrated industrial robot and factory automation systems supplier headquartered in Pune, Maharashtra, with operations in India, Europe and the US.
  • Hi-Tech Robotic Systemz, a supplier of autonomous mobile robots used in factories and warehouses headquartered in Gurgaon, Haryana. It also supplies autonomous and driver assist systems to rationalize and improve safety in industrial vehicle fleet management on public roads.
  • Gridbots, a manufacturer of industrial, military, space and nuclear power plant robotics, driverless military vehicles and machine vision inspection systems headquartered in Ahmedabad, Gujarat.
  • Asimov Robotics, a provider of robotics hardware, software and robotics consulting services headquartered in Kochi, Kerala. Focused on medical and healthcare with particular expertise in autonomous transport between patients in intensive care/isolation and clinical labs. It also serves R&D and implementation projects in surgery, space and defense, and makes service robots used in hazardous and other challenging environments.
  • DiFACTO Robotics, a worldwide supplier of industrial robots and other factory automation equipment and services headquartered in Bengaluru (Bangalore), Karnataka.
  • Systematics, headquartered in Bengaluru, the first company to completely design and produce collaborative robots (cobots) in India. Products include 6-axis robotic arms that can share workspace with humans without a safety fence.
  • Invento Robotics, a producer of humanoid service robots for retail, bank office, healthcare, events and other applications using speech recognition, face recognition, indoor navigation and fleet management algorithms.
  • MCI Robotics, a designer and producer of materials handling, assembly, welding, grinding, milling, polishing, painting, sealing and dispensing robots headquartered in Chennai, Tamil Nadu.
  • CynLr (Cybernetics Laboratory), a provider of machine-vision technology based on machine learning that enables assembly, logistics and other robots to identify and handle objects without training.

Tracxn Technologies Limited, a global start-up data platform headquartered in Bengaluru that works with venture capital and other finance companies worldwide, has identified 47 industrial robotics start-ups in India. Given the country’s high educational standard, industrial momentum and entrepreneurial bent, there are bound to be a lot more in the future.

The All India Council for Robotics & Automation (AICRA) is a not-for-profit organization dedicated to making India a leader in robotics, the internet of things (IoT), and artificial intelligence (AI). It provides technical and other assistance to its more than 3,500 member organizations and professionals. AICRA’s mission statement is:

  • Upgrade Robotics, IOT and AI skills to international standards through significant industry involvement and develop necessary frameworks for standards, curriculum and quality assurance.
  • Enhance, support and coordinate private sector initiatives for technical skill development through appropriate engagement models; strive for significant operational and marketing involvement.
  • Play the role of a “market-maker” by bringing financing, particularly in sectors where market mechanisms are ineffective or missing.
  • Establish India as a hub for innovation, products and technology start-ups.
  • Be an industry platform for sharing and building best practices and collaborative engagement.

AICRA has established Technology Governance Steering Committees (TGSCs) for defense, healthcare, agriculture, startup, education and aerospace. It has also signed an MoU with the Chandigarh Group of Colleges (CGC) in Punjab to establish an Industry 4.0 Center of Excellence to provide students with ideas, learning materials, training and hands-on experience in robotic process automation, robot operating system (ROS) open-source software and other technology.

The All India Robotics Association (AIRA) is a not-for-profit organization established to develop and support robotics ventures in areas including regulatory approvals, funding, imports of electronic components, production technologies and skill development.

AIRA aims to create the ecosystem required to make India a global hub for robotic production and technology.

That is a project for the next two decades years, one that is likely to change India and the world economy beyond recognition.

Follow this writer on Twitter: @ScottFo83517667

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EU carbon limits to pinprick Vietnam export boom

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Beginning in October 2023, the EU intends to implement the first carbon border adjustment mechanism( CBAM ).

The program will mandate that buyers disclose the amount of embedded coal in their imported goods during the transition period. To close the gap between the EU’s coal price and the price in exporting nations, extra fees will be imposed on imported goods starting in 2026.

Iron and steel, concrete, metals, manure, electricity, and hydrogen will be the initial targets of the CBAM. The CBAM is anticipated to have a significant effect on emission-intensive markets like Vietnam, which export goods to the EU. It has the potential to reduce trade attrition from the government’s affected sectors by about US$ 100 million.

According to estimates, the EU’s CBAM in its present form has had the greatest impact on the Vietnamese metal industry. An extra cost of about US$ 80, or 10 % of the trade price, could apply to a tonne of metal that is exported to the EU.

Steel’s import value could drop by up to 3.7 %. Some industries that are impacted include cement and aluminum. Additionally administrative costs associated with testing, monitoring, and verifying the embedded emissions in their exported products may be incurred by exporting businesses.

As a result, the CBAM may hinder Vietnam’s trade profitability. Risks are present in the EU’s CBAM as it evolves. If embedded emissions boundaries are extended to include the entire value chain of production inputs, its effects may increase quickly. The effects may also increase if some nations, like the United Kingdom, Canada, and Japan, follow the EU’s lead and implement their own CBAMs.

Therefore, it’s crucial to prepare for the CBAM later. The eleventh-largest producer to the EU is Vietnam. Vietnam will need to lessen the effects of the CBAM in order to increase its exports and wholly reap the significant advantages of its trade, agreements, andnbsp with the EU. This can be partly accomplished by lowering the emissions levels of Vietnam’s exported goods.

This picture taken on December 3, 2015 shows Vietnamese workers riding motorcycles as they leave the site of the Taiwain-owned steel plant Formosa in the central province of Ha Tinh.This picture taken on December 3, 2015 shows a couple riding a motorcycle pulling a cart on a road past a newly developped residential area for resettled families who were displaced from the site of the Taiwain-owned steel plant Formosa in the central province of Ha Tinh. / AFP PHOTO / HOANG DINH NAM
Workers from Vietnam leave the location of the Taiwain-owned steel plant Formosa in the Ha Tinh western province on motorcycles. AFP / Hoang Dinh Nam image

Decarbonizing the light field will significantly contribute to emission reductions in the CBAM sectors because they use a lot of electricity. Luckily, Vietnam has a lot of ability to harness solar and wind energy and nbsp to speed up the renewables of electricity. Nearly 46 times greater than the nation’s installed capacity in 2022 is the combined future of solar and wind energy.

Vietnam may concentrate on increasing its penetration of solar and wind energy. To remove current barriers to the adoption of renewable energy, such as the reduction of solar and wind outputs due to & nbsp, the constrained grid capacity, it is crucial to track the upgrading of grid systems quickly.

If constructed, a South-North home high-voltage clear present subsea cable could help with grid management and make sure that the most affordable electricity generation opportunities are taken advantage of.

Industries would be able to purchase solar and wind power directly from independent renewable producers if the electricity market were to be reformatted, including allowing & nbsp and direct power purchase agreements. The public would then have less to worry about maintaining energy security because the competition would be more active in promoting renewables.

In the upcoming seventh National Power Development Master Plan, ambitious goals for solar and wind power could be set as additional steps to encourage the adoption of renewable energy sources.

This enormous potential source of renewable power, of which Vietnam has the largest possible in Southeast Asia, may be unleashed by enacting regulations to force and lease onshore wind power projects andnbsp. Increasing energy efficiency through industrial best practices and technical advancements could also aid in achieving this objective.

Phasing out unabated coal power would also contribute to reducing emissions. Imposing a carbon price would reduce CBAM certificate payments. Carbon pricing could enable the revenues to be recycled in the Vietnamese economy and used to support initiatives like technological renovation to improve energy efficiency and promote the uptake of renewables.

Asian businesses covered by CBAM will gain from using coal capture, utilization, and storage technologies as well as later switching production inputs from fossil fuels to renewable sources like natural hydrogen. However, these systems are still in their infancy and are not yet price-competitive.

In the short term, Vietnam will need to improve its capacity for testing, monitoring, and identification as well as participate in constructive dialog with the EU to find CBAM-favorable problems.

At the Phu Lac weather land in the Binh Thuan state of southern Vietnam, there are solar panel deployments and a wind turbine. AFP / Manan Vatsayana, a portrait

In addition to lessening the effects of the CBAM, accelerating the switch to solar power would make Vietnam achieve its ambitious goal of peaking its energy emissions by 2030, which it pledged in December 2022 under the Just Energy Transition Partnership.

Contributing to Vietnam’s climate and national emissions goals, such as achieving net zero emissions by 2050, lowering local air and pollution levels, and creating a & nbsp, domestic renewable energy industries, are additional advantages of the energy transition.

Vietnam can lay a solid foundation for pursuing natural and green growth by increasing its uptake of renewable energy.

At the Crawford School of Public Policy and the Institute for Climate, Energy, and Disaster Solutions, The Australian National University, Thang Nam Do is a Fellow in the Zero-Carbon Energy for the Asia-Pacific Grand Challenge Program.

This andnbsp, post, and was originally published by East Asia Forum and are being reprinted with permission from Creative Commons.

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New Qantas chief can’t charge sky-high prices forever

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After the epidemic and border closures shuttered much of the regional aviation industry in 2020, Vanessa Hudson will take over as CEO of Qantas Airlines in November. She inherits a company that is still having trouble getting back to operations.

The good news for Qantas is that it can impose higher tickets because of the airline’s increased demand for air travel. In the second half of 2022, it even managed to report a profit ofA$ 1.43 billion( US$ 963 million ).

But these circumstances didn’t persist. As Hudson, an officer who joined Qantas in 1994 and has been the company’s general business officer since 2018, deals with the extremely different short-term difficulties that come with recovery, she did increasingly need to focus on all the long-standing problems that existed for the Australian flagship airline prior to 2020.

Demand for air travel is recovering more quickly than provide for two main reasons.

The first is the time and effort required to return to service the plane that were parked at nearby interior airports and aircraft storage facilities during the pandemic. About 100 of Qantas’ 126 aircraft were put into storage, six aging Boeing 747s were retired, and the delivery of the new Airbus A321neo and Boeing 77 – 9 aircraft was postponed.

Airlines have never had to hold this numerous aircraft in the history of civil aircraft. Restoring them to support necessitates thorough construction inspections and tests. Just a small number of skilled protection personnel can prepare so many aircraft to resume flight.

Which brings up the second, more crucial problem: the need to replace positions.

The economy was dealing with a global lack of skilled aircraft even before the pandemic. Since borders were closed in 2020, it has been struggling to replace every employee, including the air and ground crowd.

Nearly a third of Qantas’ 30, 000 individuals were fired, including nearly 2, 000 ground crew members who were forced to retrench illegally. By the end of 2024, it hopes to hire almost 2,000 people, with a number of 8,500 by the year’s side.

A Qantas plane parked at Southern California Logistics Airport in Victorville, California, in December 2022.
In December 2022, a Qantas aircraft was parked at Victorville, California’s Southern California Logistics Airport. a flickr

Most people who have found work in various fields are never coming back. Some in the field worry that air is no longer a desirable profession. Additionally, all of the aircraft, flight technicians, and technicians who are being re-employed need refresher training before being allowed to work.

The whole air offer chain, including producers, is being impacted by labor shortages. On different aircraft shipments, Qantas is currently experiencing difficulties of around six months.

vying for clients

As Qantas struggles to keep up with demand, competition for clients will be a fairly small issue. However, this won’t take as airlines expand their ships and the current high cost of air travel starts to drop. For instance, at the end of 2022, tickets in the US market returned to their pre-pandemic quantities( in inflation-adjusted terms ).

I anticipate that Qantas may be dealing with many of the same competitive pressures that motivated its pre-pandemic cost-cutting and outsourcing by the end of 2023 or original 2024. It is partially attribute this to the service provided by the global government to airlines, which had the unfortunate side effect of fewer flight falls in 2020 than in 2018 or 2019.

While Qantas made a return for every year between 2015 and 2019, profit margins were very slim.

There is a lot of discussion about how the crisis permanently altered the air travel industry. For instance, company journey might never return. In February 2021, consulting company McKinsey predicted that the post-pandemic competition for business travel may be 20 % smaller.

The problem for Qantas and some airlines will be to arrange and adapt services appropriately while the jury is still deliberating on this issue and others.

In the long run, Qantas needs to lessen its economic impact.

The Carbon Offsetting and Reduction Scheme for International Aviation of the International Civil Aviation Organization has established a requirement that all foreign steam ships must set off the carbon emissions associated with airlines starting in 2027.

More often, stricter domestic economic requirements are very good as a result of the drive to decarbonize financial aviation.

Due to the airline’s comprehensive network of moderate and long-haul flights( which use more gasoline ) and aging, less fuel-efficient fleet, this will be more difficult for Qantas than rivals.

Even over 15 years old on average, more than twice as old as competitors like Singapore Airlines. Ships replacement will be a difficult task.

Volodymyr Bilotkach is Associate Professor, Purdue University

Under a Creative Commons license, this story has been republished from The Conversation. Read the original publication.

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How Twitter brought down Silicon Valley Bank

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Due to Silicon Valley Bank’s March 10, 2023, crash, investor discussions about the institution spiked on Twitter, which fueled the SVB banks run. These tweets also caused some financial institutions with poor balance sheets to collapse, as we explain in our latest working paper,” Public media as a lender run catalyst.”

The bank’s stock ticker,” SIVB ,” was mentioned in a significant number of tweets on March 9 around 9 am EST. Before posts mentioning” SVB” or” Silicon Valley Bank,” which were aspect of a more general-interest word, started, it had been about 2.5 years.

The rapid decline in the company’s share price on March 9 coincided with that spike in trader tweets, which persisted in after-hours trading and before the market opened the following morning. On March 10, the day the bank failed, trading in SVB’s property was halted.

We categorized US businesses, along with a number of other acquaintances, based on the volume of tweets that were sent about them and their susceptibility to potential bank runs.

We multiplied loses the bankers incurred as a result of the series of interest rate increases that started in March 2022 by the percentage of their payments that were below the Federal Deposit Insurance Corp. ‘ s security cap of US$ 250, 000 per account to determine risk.

We discovered that in March, stock of banks with significant Twitter engagement in January and February experienced significantly greater declines. The collection of institutions that were most vulnerable experienced a stronger impact. First Republic Bank was one of them, but it failed on May 1.

The one-third of businesses with the most posts saw drops in their share prices that were, on average, around twice as large as those of the other businesses when we examined what happened to the assets of all those with susceptible balance sheets between March 6 and March 13.

Why is it important?

Social marketing may have contributed to Silicon Valley Bank’s death, according to US politicians.

The Great Depression-era bank crisis is primarily responsible for the current understanding of bank functions. Back again, panic among banks customers was spread by word-of-mouth, media coverage, and social signals like lengthy lines outside of banks.

For US businesses, Silicon Valley Bank’s problems may be the tip of the iceberg. Screengrab, Twitter, and TechCrunch images

Since traditional media outlets primarily rely on one-way transmission from legal resources to the general public, the size of the reader and the quick spread of ideas set social media apart from newspapers and broadcast message.

Banks will undoubtedly continue to be concerned about this, especially in light of the problems that some financial institutions are currently experiencing.

What additional research is being conducted

Many of the ideas we raised in our documents were emphasized in a statement on SVB’s loss that the Federal Reserve released on April 28. It highlights SVB’s poor risk management and a sizable portion of Silicon Valley startup neighborhood savers, who are frequently very energetic and well-connected on social media.

Another group of academics, under the direction of Itamar Drechsler, a finance professor at the University of Pennsylvania, found that the subsequent rise in insured deposit accounts may weaken banks.

The development of perfectly modern businesses and mobile banking apps may increase this risk even more, according to ongoing research from a team of researchers at Columbia University and the University of Chicago.

What is unknown

According to reports, lenders who quickly withdrew money from SVB already used telephone calls, group email messages, Slack, and WhatsApp to express their worries.

However, since there is no content that is readily available to the public, it is difficult to determine what part those some, less formal dialogues played in causing the SVB bank run.

Tony Cookson is Associate Professor of Finance, University of Colorado Boulder and Christoph Schiller is Assistant Professor of Finance, Arizona State University

Under a Creative Commons license, this story has been republished from The Conversation. read the article in its entirety.

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First Republic collapse signals wider US bank ills

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First Republic Bank became the second-biggest bank failure in US history after the lender was seized by the Federal Deposit Insurance Corp. and sold to JPMorgan Chase on May 1, 2023. First Republic is the latest victim of the panic that has roiled small and midsize banks since the failure of Silicon Valley Bank in March 2023.

The collapse of SVB and now First Republic underscores how the impact of risky decisions at one bank can quickly spread into the broader financial system. It should also provide the impetus for policymakers and regulators to address a systemic problem that has plagued the banking industry from the savings and loan crisis of the 1980s to the financial crisis of 2008 to the recent turmoil following SVB’s demise: incentive structures that encourage excessive risk-taking.

The Federal Reserve’s top regulator seems to agree. On April 28, the central bank’s vice chair for supervision delivered a stinging report on the collapse of Silicon Valley Bank, blaming its failures on its weak risk management, as well as supervisory missteps.

We are professors of economics who study and teach the history of financial crises. In each of the financial upheavals since the 1980s, the common denominator was risk. Banks provided incentives that encouraged executives to take big risks to boost profits, with few consequences if their bets turned bad. In other words, all carrot and no stick.

One question we are grappling with now is what can be done to keep history from repeating itself and threatening the banking system, economy and jobs of everyday people.

S&L crisis sets the stage

The precursor to the banking crises of the 21st century was the savings and loan crisis of the 1980s.

The so-called S&L crisis, like the collapse of SVB, began in a rapidly changing interest rate environment. Savings and loan banks, also known as thrifts, provided home loans at attractive interest rates.

When the Federal Reserve under Chairman Paul Volcker aggressively raised rates in the late 1970s to fight raging inflation, S&Ls were suddenly earning less on fixed-rate mortgages while having to pay higher interest to attract depositors. At one point, their losses topped US$100 billion.

Paul Volcker in a file photo. Image: Twitter

To help the teetering banks, the federal government deregulated the thrift industry, allowing S&Ls to expand beyond home loans to commercial real estate. S&L executives were often paid based on the size of their institutions’ assets, and they aggressively lent to commercial real estate projects, taking on riskier loans to grow their loan portfolios quickly.

In the late 1980s, the commercial real estate boom turned bust. S&Ls, burdened by bad loans, failed in droves, requiring the federal government take over banks and delinquent commercial properties and sell the assets to recover money paid to insured depositors. Ultimately, the bailout cost taxpayers more than $100 billion.

Short-term incentives

The 2008 crisis is another obvious example of incentive structures that encourage risky strategies.

At all levels of mortgage financing – from Main Street lenders to Wall Street investment firms – executives prospered by taking excessive risks and passing them to someone else. Lenders passed mortgages made to people who could not afford them onto Wall Street firms, which in turn bundled those into securities to sell to investors. It all came crashing down when the housing bubble burst, followed by a wave of foreclosures.

Incentives rewarded short-term performance, and executives responded by taking bigger risks for immediate gains. At the Wall Street investment banks Bear Stearns and Lehman Brothers, profits grew as the firms bundled increasingly risky loans into mortgage-backed securities to sell, buy and hold.

As foreclosures spread, the value of these securities plummeted, and Bear Stearns collapsed in early 2008, providing the spark of the financial crisis. Lehman failed in September of that year, paralyzing the global financial system and plunging the U.S. economy into the worst recession since the Great Depression.

Executives at the banks, however, had already cashed in, and none were held accountable. Researchers at Harvard University estimated that top executive teams at Bear Stearns and Lehman pocketed a combined $2.4 billion in cash bonuses and stock sales from 2000 to 2008.

A familiar ring

That brings us back to Silicon Valley Bank.

Executives tied up the bank’s assets in long-term Treasury and mortgage-backed securities, failing to protect against rising interest rates that would undermine the value of these assets. The interest rate risk was particularly acute for SVB, since a large share of depositors were startups, whose finances depend on investors’ access to cheap money.

When the Fed began raising interest rates last year, SVB was doubly exposed. As startups’ fundraising slowed, they withdrew money, which required SVB to sell long-term holdings at a loss to cover the withdrawals. When the extent of SVB’s losses became known, depositors lost trust, spurring a run that ended with SVB’s collapse.

Silicon Valley Bank’s troubles could be the tip of the iceberg for US banks. Image: Screengrab / Twitter / TechCrunch

For executives, however, there was little downside in discounting or even ignoring the risk of rising rates. The cash bonus of SVB CEO Greg Becker more than doubled to $3 million in 2021 from $1.4 million in 2017, lifting his total earnings to $10 million, up 60% from four years earlier. Becker also sold nearly $30 million in stock over the past two years, including some $3.6 million in the days leading up to his bank’s failure.

The impact of the failure was not contained to SVB. Share prices of many midsize banks tumbled. Another American bank, Signature, collapsed days after SVB did.

First Republic survived the initial panic in March after it was rescued by a consortium of major banks led by JPMorgan Chase, but the damage was already done. First Republic recently reported that depositors withdrew more than $100 billion in the six weeks following SVB’s collapse, and on May 1, the FDIC seized control of the bank and engineered a sale to JPMorgan Chase.

The crisis isn’t over yet. Banks had over $620 billion in unrealized losses at the end of 2022, largely due to rapidly rising interest rates.

The big picture

So, what’s to be done?

We believe the bipartisan bill recently filed in Congress, the Failed Bank Executives Clawback, would be a good start. In the event of a bank failure, the legislation would empower regulators to claw back compensation received by bank executives in the five-year period preceding the failure.

Clawbacks, however, kick in only after the fact. To prevent risky behavior, regulators could require executive compensation to prioritize long-term performance over short-term gains. And new rules could restrict the ability of bank executives to take the money and run, including requiring executives to hold substantial portions of their stock and options until they retire.

The Fed’s new report on what led to SVB’s failure points in this direction. The 102-page report recommends new limits on executive compensation, saying leaders “were not compensated to manage the bank’s risk,” as well as stronger stress-testing and higher liquidity requirements.

It comes down to this: Financial crises are less likely to happen if banks and bank executives consider the interest of the entire banking system, not just themselves, their institutions and shareholders.

Alexandra Digby is Adjunct Assistant professor of Economics, University of Rochester; Dollie Davis is Associate Dean of Faculty, Minerva University, and Robson Hiroshi Hatsukami Morgan is Assistant Professor of Social Sciences, Minerva University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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US Fed weighs mixed signals in next crucial rate call

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Is the Federal Reserve finished raising interest rates now that inflation has decreased and the US market has cooled? After all, the central bank’s goal when it started jacking up prices more than a year later was to gradually lower the direction of prices without crashing the economy.

According to data released on April 27, 2023, the gross domestic product— the most comprehensive indicator of an economy’s output — expanded at a rate of just 1.1 % annually in the first quarter, down from 2.6 % during the last three months of 2022. Additionally, the most recent customer premium data from March indicates that inflation is slowing to 5 % annually, which is the lowest level in about a year.

However, the Fed hasn’t most finished raising rates just yet, which is bad news for consumers and businesses who are tired of skyrocketing borrowing costs. When the Fed meets for a two-day meet that ends May 3, 2023, commercial businesses are forecasting another quarter-point increase. Additionally, there might be additional changes in the future.

But this does bring up another crucial question: Is the Fed getting close to creating the” soft landing” it’s been hoping for with all the recent, frequently contradictory data and narratives about inflation, bank failures, and layoffs in the tech sector?

The market oscillates between zigzags.

The GDP facts offers some hints to the solution despite being a mixed bag.

Ultimately, the most recent GDP figures point to a good economic slowdown in the future, which is largely attributable to an increase in inventories, meaning that rather than ordering new goods, businesses are relying more on items that are already in storage.

Companies appear to be more likely to sell what is already available than to purchase different goods, probably in anticipation of a decline in consumption. Additionally, business investment fell 12.5 % during the quarter.

Consumer spending, which makes up about two-thirds of GDP, increased at a healthy 3.7 % rate at the same time that investment in machinery like computers and robotics increased by 11.2 %. However, this category is quite volatile and could easily change in the coming quarters.

A decline, such as a decrease in new purchases for manufactured goods, is also indicated by some data. This, along with the decrease in stock in the GDP report, may imply that companies are bracing themselves for a decline in consumer demand for goods and services.

Job openings have been declining when we consider the labor market, despite the fact that job growth has been strong( 334, 000 over the past six months ). According to the Bureau of Labor Statistics, holes decreased to about 9.9 million as of February 2022 from a peak of around 12 million.

Is the price of prices high or low?

We can also see opposing figures in terms of prices.

Since its peak in June 2022 at 9.1 %, the headline consumer price index has in fact been steadily declining. The Fed’s preferred solution of inflation, the primary preferred eating index, has nevertheless remained obstinately elevated.

The index, which excludes volatile food and energy prices, was up 4.6 % in March from a year earlier and has barely budged in months, according to the most recent data, released on April 28, 2023.

a grocery store in Washington, DC, selling fruits and vegetables. AFP portrait by Brendan Smialowski

However, wages increased at an annual 5.1 % in the first quarter, also in line with data released on April 28. Income, when rising, can have a significant upward thrust on price. Even though it’s down from its 5.7 % peak in the second quarter of 2022, wage growth is still moving at the fastest rate in at least 20 years.

More excursions are coming.

What does all of this mean for the Fed’s interest rate policy, then?

The market chances strongly favor another 0.25 amount stage increase, making it the 10th straight increase since March 2022, when the next meeting is scheduled to start on May 3.

The central bank is probably not finished raising rates because the inflation rate is still well above the Fed’s target of about 2 %, along with continued job growth and a low unemployment rate. I concur with the competition conflict pricing for a quarter-point increase for the meeting in May. Future content will direct any rate increases that come after that.

The good news is that, in my opinion, the higher price changes have historically occurred.

landing gently, or at least slowly

That brings us full circle to the crucial query: How near is the Fed to implementing a soft landing in which the US business is able to control inflation without erupting?

Unfortunately, it’s also soon to tell. Political and international functions, such as potential impasse on debt ceiling deals or further escalation of the Ukraine combat, you turn things upside down. Work businesses can be very unstable. Having said that, a development or mild recession is what we are anticipating.

What makes them different? A growth recession indicates a poor economy, but not enough to cause unemployment to rise drastically. This is preferable to an even mild recession that results in multiple quarterly GDP declines and significantly higher unemployment.

Simply put, we are unsure of which is more plausible. However, I believe that a severe downturn has been avoided, barring any fatal and unexpected events.

Christopher Decker, Professor of Economics, University of Nebraska Omaha

Under a Creative Commons license, this article is republished from The Conversation. Read the original publication.

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Decoupling or not, China still opening wide its economy

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The private sector and foreign investors have become increasingly skeptical about doing business in China since Covid-19. The risks of shutdowns, travel restrictions, disruptions to normal operation and supply chains, and liquidity shortages resulting from China’s zero-Covid policy have significantly shaken their confidence.

China has engaged in a multi-pronged regulatory crackdown on a wide range of sectors, from platform economy to online finance to real estate. The crackdown signals that Beijing values loyalty from the private sector and financial stability over growth and access to capital. Beijing’s advocation for “common prosperity” and opposition to “unconstrained economic growth” has only heightened business concerns regarding China’s aggressive redistribution policies.

The increasing antagonism and decoupling between China and the West as well as China’s decision to develop “self-reliance in technology and science” have created enormous uncertainties for business operations and lowered companies’ confidence. Many have questioned whether China is adopting a state-centric and inward-facing economic development strategy and whether the reform and opening-up era has come to an end.

With the termination of China’s zero-Covid policy at the end of 2022 and the recent announcement of a new line-up of top government leaders, 2023 is a crucial year for China to restore business confidence. China will need to demonstrate to the world that it still places a premium on opening up and pro-business policies, particularly for the private sector, in the post-pandemic era.

Chinese leaders have reiterated their determination to open the country up. The 2022 report of the 20th National Party Congress of the Chinese Communist Party emphasizes that China will remain “committed to reform and opening up”, “promote high-standard opening up” and “facilitate the healthy development of the non-public sector.”

During the first plenary session of the State Council’s new term, the new Chinese Premier Li Qiang told his colleagues that advancing opening up, empowering private sectors and attracting more foreign investment are their top priorities.

Li highlighted the importance of the private sector in upgrading China’s manufacturing by visiting the facilities of Build Your Dreams, one of the country’s largest electric vehicle makers and a private company, on his first trip out of Beijing after he became the premier.

China’s newly-elected Premier Li Qiang takes an oath after being elected during the fourth plenary session of the National People’s Congress (NPC) at the Great Hall of the People in Beijing, China on March 11, 2023. Image: Pool / Twitter / Screengrab

During this trip, he also met with a number of heads of big enterprises. Among these heads was the CEO of Xiaomi, one of China’s largest smartphone manufacturers and a privately held company in China.

During the meeting, Li promised to create a business-friendly environment. In addition to sending a message to the domestic private sector, the Chinese government has used international conferences to reassure foreign investors. For instance, Chinese President Xi Jinping sent an unprecedented congratulatory letter to this year’s China Development Forum, reiterating that opening up is China’s fundamental national policy.

During the Forum, both Li and Chinese Vice President Han Zheng met with CEOs of numerous multinational corporations and promised to promote high-quality opening up. Li clearly stated in his opening remarks at the Boao Forum of Asia’s annual meeting that China will continue to increase market access with new measures and improve the business climate for state-owned enterprises (SOEs), private Chinese firms and foreign businesses.

China has taken a whole-of-government approach to addressing the concerns of the private sector. Xi emphasizes that the operation of SOEs must follow the market. This could be interpreted to mean that SOEs should not enjoy privileges and should compete in the market. The central government has taken steps to ease up on the regulatory crackdowns on businesses.

For instance, it granted publishing licenses to 44 foreign games for domestic release and approved over one hundred new video game licenses for domestic companies and Didi Chuxing, a domestic ride-hailing company, has been allowed to register new users.

Ministries of the Central government and local governments have taken steps to promote the development of the domestic private sector and expand opening up. In collaboration with provincial governments, the Ministry of Commerce has launched “The Year of Investment in China” to attract more foreign investment through exhibitions and forums.

The provincial governments of Hebei, Shaanxi, Hainan and Hunan have issued policy measures to support the development of the private economy. Their measures include reducing government intervention in the operation of the private sector, providing financial and credit support to private companies through multiple channels and awarding cash to outstanding private companies.

A Chinese worker at a spinning factory in Xingtai City, Hebei province. Photo: Xinhua

Provincial leaders have also traveled abroad to entice foreign investment and broaden the opening of their respective provinces. Guangxi Party Secretary Liu Ning, for instance, traveled to Vietnam, Singapore and Malaysia in March and April 2023, signing contracts with a total value of 89.1 billion RMB (US$12.9 billion).

The Chinese government has sent a clear message that it is fully committed to opening up and improving the business environment, especially for the private sector. In the post-pandemic era, it is nearly impossible for China to overthrow its opening up and support for the private sector.

It would be unfeasibly expensive for Chinese leaders to retract their support for the private sector after making statements at high-profile international events. The path-dependence of China’s outward-looking economy also means that any actions against opening up or the development of private sectors would have enormous negative effects not only in economics but also in politics and society.

Xirui Li is a PhD candidate at the S Rajaratnam School of International Studies, Nanyang Technological University, and a Research Fellow at the Intellisia Institute, Guangzhou.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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Welcome to the age of AI inequality

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On November 30, 2022, OpenAI launched the AI chatbot ChatGTP, making the latest generation of AI technologies widely available.

In the few months since then, we have seen Italy ban ChatGTP over privacy concerns, leading technology luminaries calling for a pause on AI systems development, and even prominent researchers saying we should be prepared to launch airstrikes on data centers associated with rogue AI.

The rapid deployment of AI and its potential impacts on human society and economies is now clearly in the spotlight.

What will AI mean for productivity and economic growth? Will it usher in an age of automated luxury for all, or simply intensify existing inequalities? And what does it mean for the role of humans?

Economists have been studying these questions for many years. My colleague Yixiao Zhou and I surveyed their results in 2021, and found we are still a long way from definitive answers.

The big economic picture

Over the past half-century or so, workers around the world have been getting a smaller fraction of their country’s total income.

At the same time, growth in productivity – how much output can be produced with a given amount of inputs such as labor and materials – has slowed down. This period has also seen huge developments in the creation and implementation of information technologies and automation.

Better technology is supposed to increase productivity. The apparent failure of the computer revolution to deliver these gains is a puzzle economists call the Solow paradox.

Will AI rescue global productivity from its long slump? And if so, who will reap the gains? Many people are curious about these questions.

While consulting firms have often painted AI as an economic panacea, policymakers are more concerned about potential job losses. Economists, perhaps unsurprisingly, take a more cautious view.

Radical change at a rapid pace

Perhaps the single greatest source of caution is the huge uncertainty around the future trajectory of AI technology.

Compared to previous technological leaps – such as railways, motorized transport and, more recently, the gradual integration of computers into all aspects of our lives – AI can spread much faster. And it can do this with much lower capital investment.

This is because the application of AI is largely a revolution in software. Much of the infrastructure it requires, such as computing devices, networks and cloud services, is already in place.

There is no need for the slow process of building out a physical railway or broadband network – you can use ChatGPT and the rapidly proliferating horde of similar software right now from your phone.

A photo of a phone showing ChatGPT on the screen.
Unlike great technological innovations of the past, many AI tools will be instantly available to anyone with an internet connection. Photo: Shutterstock via The Conversation

It is also relatively cheap to make use of AI, which greatly decreases the barriers to entry. This links to another major uncertainty around AI: the scope and domain of the impacts.

AI seems likely to radically change the way we do things in many areas, from education and privacy to the structure of global trade. AI may not just change discrete elements of the economy but rather its broader structure.

Adequate modeling of such complex and radical change would be challenging in the extreme, and nobody has yet done it. Yet without such modeling, economists cannot provide clear statements about likely impacts on the economy overall.

More inequality, weaker institutions

Although economists have different opinions on the impact of AI, there is general agreement among economic studies that AI will increase inequality.

One possible example of this could be a further shift in the advantage from labor to capital, weakening labour institutions along the way. At the same time, it may also reduce tax bases, weakening the government’s capacity for redistribution.

Most empirical studies find that AI technology will not reduce overall employment. However, it is likely to reduce the relative amount of income going to low-skilled labor, which will increase inequality across society.

Moreover, AI-induced productivity growth would cause employment redistribution and trade restructuring, which would tend to further increase inequality both within countries and between them.

As a consequence, controlling the rate at which AI technology is adopted is likely to slow down the pace of societal and economic restructuring. This will provide a longer window for adjustment between relative losers and beneficiaries.

In the face of the rise of robotics and AI, there is a possibility for governments to alleviate income inequality and its negative impacts with policies that aim to reduce inequality of opportunity.

What’s left for humans?

The famous economist Jeffrey Sachs once said

What humans can do in the AI era is just to be human beings, because this is what robots or AI cannot do.

But what does that mean, exactly? At least in economic terms?

In traditional economic modeling, humans are often synonymous with “labor”, and also being an optimizing agent at the same time. If machines can not only perform labor, but also make decisions and even create ideas, what’s left for humans?

A close up photo of an eye with a bright white halo around the pupil.
What’s so special about humans? Economists are still working on that one. Photo: Arteum.ro / Unsplash via The Conversation

The rise of AI challenges economists to develop more complex representations of humans and the “economic agents” which inhabit their models.

As American economists David Parkes and Michael Wellman have noted, a world of AI agents may actually behave more like economic theory than the human world does.

Compared to humans, AIs “better respect idealized assumptions of rationality than people, interacting through novel rules and incentive systems quite distinct from those tailored for people.”

Importantly, having a better concept of what is “human” in economics should also help us think through what new characteristics AI will bring into an economy.

Will AI bring us some kind of fundamentally new production technology, or will it tinker with existing production technologies? Is AI simply a substitute for labor or human capital, or is it an independent economic agent in the economic system?

Answering these questions is vital for economists – and for understanding how the world will change in the coming years.

Yingying Lu is Research Associate, Center for Applied Macroeconomic Analysis, Crawford School of Public Policy, and Economic Modeller, CSIRO

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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US debt: The bomb is ticking

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The US debt ceiling will be increased by$ 1.5 trillion, according to a deal between Democrats and Republicans. Markets do not, however, expand quickly, and the price of default insurance ( CDS ) on US government bonds is still skyrocketing.

Why don’t people support the bill put forth by House Speaker Kevin McCarthy? It all revolves around President Joe Biden’s reluctance to give in or, more accurately, reduce public investing. In the end, the leader will reject it even if both houses of Congress vote” Yes.”

Treasury securities are dissipating in the interim, and the offer on a 13-week Treasury bill is approaching 5 %. At this rate, Elon Musk’s anticipation that the nation will mistake will be realized sooner rather than later. The challenge of the US default, on the other hand, is by no means different.

Researchers at Fitch Ratings predict that the US institutional leveraged loan default price will end in 2023 at 2 to 3 % despite the CDS spike, escalating economic headwinds, and recessionary danger. Therefore, never actually 50 %, so there is still nothing to worry about.

What happens if the veil comes down?

Even if the nation doesn’t repay its loans on time, it will still be considered a professional default, in which case the debts, including the interest, may be settled. The primary remaining query is when. In the worst-case approach, the nation’s credit rating might be lowered, which might raise the price of loans.

Speaking of the repercussions for the US market, prices could drop on the one hand, and the challenge of a recession would be even more clear in light of declining borrowing and spending. Everyday Americans’ retirement addresses would also be impacted.

According to Moody’s Analytics, real GDP could fall by more than 4 %, resulting in a reduction in the number of jobs lost and the potential for an employment rate of over 8 %. Additionally, at the worst of the downturn, stock prices could drop by nearly a fifth, wiping out$ 10 trillion in home income.

The S & amp, P 500, fell 17 % in 2011 as a result of the political unrest in Washington over the country’s debt limit. The recovery of past worth took about seven weeks. The results may be even worse if things do not go as planned this day.

Is there a place to hide then?

There are devices like the ProShares Trust Ultrashort 20 Year Treasury ETF, the Rydex Inverse Government Long Bond Fund, and the Powershares DB US Dollar Bearish Fund for those who think a proxy is inevitable. Finally, but most importantly, gold( XAUUSD ) might increase.

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