The Devil's Excrement

Both statements are not only false, but reveal an incredible ignorance about cement and the Venezuelan cement industry. But nobody around him dares tell Chavez how wrong he is.

To begin with, Venezuela imports no relevant amount of cement. Maybe some sacks or trucks get across the border with Colombia, but the amount is basically negligible compared to what Venezuela produces, uses and exports. So, if Chavez actually believed this person, the decision is based on a lie, as simple as that, and demonstrates the level of ignorance being used in making such important decisions.

The world cement industry has become incredibly efficient as essentially three companies, the same ones that are present in Venezuela, compete with each other. They are Lafarge, Holcin and Cemex. All of them have plants all over the place, which allow them to shift cement as it is needed in different parts of the world. Essentially, what these companies have done is smooth out economic cycles by having plants that can shift their sales geographically as needs change.

In fact, that is precisely what did in the Venezuelan cement industry, forcing the owners to sell. The industry used to be owned by Venezuelans who concentrated their business here. When there was a downturn here, they could shift part of their exports abroad, but international competition was tough and they did not have the muscle or economies of scales to compete. During the downturn, plants would not operate at capacity because they were able to export only part of their excess capacity.  That (and some bad management)is how the Vencemos plant, for example, ended in the hands of Cemex, in one of those cycles the company went almost belly up, the owners sold a piece to Cemex with an option in the future to get back part of their shares and they lost the whole thing.

The problem is that transportation is a huge part of the cost of cement. Companies in Venezuela exert regional influence essentially using price. Cemex, for example, has a huge plant in Pertigalete right on the water, which allows it to send cement by sea to the coast of Venezuela, dominating that region. Other companies have plants in various regions, but essentially each plant has to supply its own region, it can’t compete outside the region because transportation costs kill you. (Anyone that has ever tried to lift a sack of Portland cement should understand well what I am talking about)

The beauty of the Pertigalete plant in Anzoátegui is that the mine is right on the water and there is a deep port there. Thus, not only can Cemex dominate the coastal region, but when local consumption drops, it can just export the cement by sea to its other markets in the region. In fact, most people do not even know that Cemex Venezuela comprises cement plants in Venezuela, Panama and the Dominican Republic, allowing the company to dominate the Caribbean region.

While Chavez charges that the cement companies “export” the cement and that is why he can’t build houses that is also a lie. Most of the cement produced in Venezuela has been used locally and it was only in the years with few construction projects that cement was exported. For example, last year, Venezuela produced 7.53 million Tons of cement, of which only 729,000 Tons were exported. The previous year the country produced more 7.7 million Tons, of which 2 million Tons were exported, basically because there was no demand here. Production went down last year 150,000 Tons for the simple reason that the construction market cooled off elsewhere and there were no international buyers. Plants simply produced less.

Thus, knowledge is not being used to make decisions in this country, which is costing us a lot of money. We now have a new decision making tool: Management by hearsay.

It was also hearsay that drove Chavez to buy a dairy company recently. Someone told him the company had 37% of the milk production market, so he ordered his underlings to buy it at any price, despite the fact the company only produces 10% of the milk in the country. None of his yes men has been capable of telling him the truth and we see ads claiming the Government will certainly increase the 37% to 60% soon just to please the autocrat. Amazing!

Thus, Venezuela will spend US$ 2-2.5 billion to buy perfectly working cement plants, which are run efficiently, rather than spending it on hospitals, infrastructure and the like. These companies will supply the country with cement, but as downturns come and go, it will be unable to compete with the monsters we are buying the companies from and the operations will lose money. Additionally, as the companies are run with a “social” purpose in mind, they will become inefficient, there will be little technological investment and maintenance and the companies will certainly go in the hole. We have already seen that in CANTV and Electricidad de Caracas and it has not been even a year since they were taken over by Chavez.  (The recent EDC bond, for example, was issued in such a way that it was costly for the company and was made up simply to make some people very rich)

So, we will tag alone and unfortunately this governing by hearsay will one day explode all at once when there is no money to run any of these projects. Nothing new in this, Carlos Andres Perez did it in the 70’s with disastrous results. When oil prices dropped in the early 80’s the currency crashed and there was no money for the people, as the companies had to be kept running.

Of course, Chavez, whether in or out of Government at that time, will say he left it all functioning well and it is the Empire that is behind the whole thing. And the cheerleaders of the revolution will still believe it.

It is almost hopeless.

Concern: While
I try to limit my blog to Venezuelan affairs, I can’t help but see ourselves in
the mirror of what is happening in Zimbabwe, where
opposition offices have been raided by Mugabe’s police and at least two
journalists have been detained, including the reporter for the New York Times.
The reporter is being held for violating the “journalism” law and it looks like
the opposition victory may not be recognized. Another sad day in Zimbabwe due
to the actions of Robert Mugabe who our own President has called his “friend”.
Will the Venezuelan Government stand up for democracy in Zimbabwe?

Challenge:
The Venezuelan Ambassador to the US “warned”
that country of the consequences of classifying Venezuela as a terrorist
country based on the evidence of the Reyes computer. The warning came in the
form of the commercial consequences such as loss of jobs, oil and exports for
the US. Jeez, how unrevolutionary from Ambassador Alvarez who represents a
Government for whom ideology and their so called “principles” are certainly more important than dirty capitalistic concepts such as commerce and the like. In fact, wouldn’t an embargo accelerate the revolutionary “endogenous” development of the country?

But I
wonder who will suffer more and challenge the Ambassador to tell us who will lose more: The US with less oil, fewer jobs and less commerce
or the Venezuelans and their Government when we can no longer export oil to the
US, all visas will be void, all accounts of financial institution will be
closed, CITGO may be seized, Alvarez will be expelled, US companies will have
to leave Venezuela and Government officials will be tried for terrorism in the
US and The Hague.

Just a thought…

As usual, I underestimated the creativity of the
revolution by about US$ 130 million. Instead, I presented a scenario, which
while still nonsensical, had some redeeming value for the country. Yje reality is that there is no reddeming qualities to this new financial rip-off

Because it turns out, the true and real scenario probably
represents a clear rip off and remarkably, people are mad and many have refused
to participate in it.

Essentially, the deal works like this:

A local broker, not a very well known one that recently
changed hands, is in charge of the operation: To place US$ 650 million in an
Electricidad de Caracas bond, maturing in 2018 and with a coupon (annual
payment in two parts) of 8.5%. The placement is “private” highly unusual for a
Government entity. Recall Electricidad de Caracas is now owned by PDVSA.
Private means that there are no ads in the papers, nothing of the
much-ballyhooed “democratization of capital”. Just friends and family. (Recall EDC disappears as a legal entity in May 2010, so that it makes little sense to issue a bond beyond its demise, moreover the company is buying back its previous bond at an outrageously high price)

The bond was “announced” on March 28^th. even if
nobody was there to hear the trees fall in the forest. The Bloomberg system
created it and the sole dealer of the issue was Dutch bank ABN AMRO, who I
think is owned by Barclays these days.

So, let’s use an example since many people were lost with
my story last night:

You are offered $1,000 of an Electricidad de Caracas bond
maturing in 2018 at a price of 105%, but at the official rate of exchange. This
means you would pay:

1.05*2.15*1,000=2,257.5 new Bolivars for US$ 1000

BUT, and this is a huge BUT, you are not allowed to keep
the bond. They repurchase it from you in exchange for dollars at a price of
62.7% (Reuters below says 66%, I heard only 62.7%)

So in exchange for your 2,257.5 Bs. You get 0.627×1000=
627 dollars, so you purchased each dollar for Bs. 3,600 plus the transaction
tax, below the parallel swap exchange rate. That is YOUR profit, if you were
lucky or unlucky enough to be offered the bonds.

But something is not altogether right. You see, last night
I assumed Fonden was buying back the bonds for its portfolio, but I did not have the details of the
bonds. With a 8.5% coupon and a maturity in 2018, a price of 62.7% gives you a
yield to maturity of the bond, i.e. the effective yield you will have if you
keep it until 2018, of 16.3%, obviously too high for what Venezuelan bonds
yield these days.

How do I know Fonden or somebody else is not keeping them? Easy, brokers in
New York are buying the bonds at 83%. Thus, whomever is buying them “forcedfully”
from you is turning around and selling them at 83%. This makes sense; the yield
to maturity is the bond at 83% is 11.3%, much like the yield of the PDVSA 2017
bond yesterday. That is a true market yield and price.

What this means is that someone is making a lot of money
in the deal.

How much?

Well, you can calculate it in Bs. (They are buying dollars
at Bs. 2.7 per US$). But since their trade is in dollars it is very easy to
calculate: They buy at 62.7% and sell at 83% for a 20.3% difference.

Since the size of the bond is US$ 650 million, the profit
is a cool US$ 131.95 million. (20.3% of 650 million)

No wonder it is “private”, someone really wants to keep
the profits! Who? It is anybody’s guess, but it is a PDVSA owned company, which
issued the bond and chose who, how and what to give to whom. The rest I leave
to your imagination.

But a funny thing happened on the way to the profits…many
banks, brokers have refused to participate. They don’t like the deal, they
don’t like how it is being done and they don’t like that you have to pay a
small broker with no credit rating and that is who you have to pay before you
get your dollars.

Thus, as of last night, someone told me that the issue was
not being successfully placed, despite the possible profits.

The whole thing is just too clumsy and badly done, but
what do you expect?

Just so you don’t think I am the only one mad at this or that knows about it,
Reuters wrote about the EDC issue and clearly they were sufficiently bothered
by the whole thing. (Some of the numbers are different, but they only change
things by a little bit). Here is a translation of the Reuters report:

CARACAS, April 2 (Reuters) – A subsidiary of the Venezuelan
state-owned company La Electricidad de Caracas launched an issue of $ 650
million in debt notes maturing on 2018, operators said on Wednesday, which
questioned the placement scheme, since it is being made by direct award.

    
The bonds of Electricidad de Caracas Finance BV have a fixed coupon rate
of 8.50 percent and a price of 105 percent, said the sources who explained that
investors pay on Thursday, in bolivars, for their orders.

    
This type of operation allows companies and individuals to buy dollars,
in the midst of exchange controls imposed in 2003, but at a rate higher than
the official 2.15 bolivars to the dollar, in a scheme that the government has
used before to drain liquidity and try to mitigate inflationary pressures.

     It
was impossible to confirm the transaction with the company, whose owner is the
state Petroleos de Venezuela (PDVSA) since it was nationalized last year.

    
However, the issue was “announced” on March 28 under the identification
code (ISIN) XS0356521160 but not publicized for the local market.

    
The placement of La Electricidad de Caracas <EDC.CR> was coordinated
by the Dutch bank ABN AMRO and, as operators, was conducted by the local
brokerage Unovalores. However, it was not possible to obtain a statement from
the brokerage company.

    
“There are some notes of La Electricidad de Caracas maturing in 2018
and have a coupon of 8.50 percent (…) The strange thing is that they will
never deliver papers, but are going to buy it back at 66 percent, “said
one trader.

     He
added that the issue guarantees, at this price, an implicit rate for one dollar
of 3.69 bolivars. However, another operator estimated it at nearly 2.8 bolivars
to the dollar, computing a value for an 84 per cent in the secondary market,
the 3 percent commissions and fees.