INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707160001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 33
• Document Creation Date: December 22, 2016
• Document Release Date: September 30, 2010
• Sequence Number: 1
• Publication Date: September 7, 1984
• Content Type: REPORT

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Directorate of Secret
Intelligence
International
Economic & Energy
Weekly
7 September 1984
DI IEEW 84-036
7 September 1984
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International
Economic & Energy
iii Syr
7 September 1984 I
Weekly
1 erspective-Copper and the Third World Debt Problem
3 Briefs Energy
International Finance
Global and Regional Developments
National Developments
13ternational Copper: Fallout From a Depressed Market
21 ew Zealand: Economic Problems Facing the New Government,
27ternational Rice Market: Reduced Supplies
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Comments and queries regarding this publication are welcome. They may be 25X1
directed to irectorate of Intelligence
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7 September 1984
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International
Economic & Energy
Weekly
Synopsis
1 Perspective-Copper and the Third World Debt Problem~ 25X1
The weak copper market and industrial country trade restrictions highlight the
growing linkages between trade issues and the international debt problem.
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13 International Copper: Fallout From a Depressed Market I 25X1
Although conditions in the world copper market have improved somewhat over
the past year, weak demand growth and abundant capacity expected through
the 1980s will keep copper prices low and put a crimp in the export earnings of
many LDCs.
17 International Financial Situation: Latin American Update)
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Discussions among Latin American debtors continue to indicate little support
for joint action against creditors, We remain concerned, however, that
Argentina and the banks are heading for another end-of-quarter clash in
September, while Bolivia, Chile, and Colombia also could bump heads with
lenders.
21 New Zealand: Economic Problems Facing the New Government
Prime Minister Lange, in office for less than two months, already has resolved
a foreign exchange crisis, but he nonetheless faces a difficult task shaking New
Zealand out of its economic malaise. The current economic recovery is
unlikely to continue into 1985, and unemployment and inflation probably will
be on the rise again in the coming months.
27 International Rice Market: Reduced Supplies
World rice supplies available for export-especially in Asia-are abnormally
tight heading into the major fall harvest. The outlook for 1985 is for continued
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7 September 1984
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International
Economic & Energy
Weekly
7 September 1984
copper accounts for 40 to 90 percent of export earnings.
Copper is the Third World's most important metal export. With sales of
between $5 billion and $6 billion annually, it is the third leading commodity
export behind petroleum and coffee. In Zambia, Chile, and Zaire, for example,
industries, making it possible to push a produce-at-all-costs policy.
Despite the global economic recovery, the copper market remains substantially
oversupplied, and prospects are not good for a robust demand recovery during
the rest of the 1980s. Even if economic recovery in the industrialized countries
continues, copper demand will remain constrained by changing technologies
and material substitution. On the supply side, further capacity increases-
mainly by the LDCs-will offset projected growth in copper demand. More-
over, government participation frequently is significant in LDC copper
Perspective Copper and the Third World Debt Problem
The weak copper market and its impact on LDCs highlights the important
linkage between trade and the international debt problem. The current debt
strategy supported by the United States and other Western governments calls
for the restoration of LDC creditworthiness through export-based growth and
LDC economic adjustment policies. For their part, debt-troubled LDCs have
undertaken domestically unpopular austerity measures to reduce payments
deficits and limit new financing requirements. For most debtors, however, the
sluggish response of commodity prices to Western economic recovery, together
with rising protectionism, is making the trade-oriented solution to the debt
crisis more difficult. Chilean Government officials claim that the foreign
exchange shortfall created by import restrictions on copper could make it
impossible for Chile to continue full interest payments on its foreign debt next
year.
Developed country copper producers-particularly in the United States and
Western Europe-also will not go unscathed. Most industrial countries are
high-cost producers who are finding it increasingly difficult to compete with
the LDCs under sluggish market conditions. A number of Third World
suppliers-in particular Mexico and the Philippines-are complicating the
problem for producers in the United States and Western Europe by vertically
integrating their industries into the smelting and refining stages, thus further
increasing competition for developed country producers.
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 These pressures have already begun to percolate in the form of bilateral trade
disputes. US copper producers recently won a favorable decision from the
International Trade Commission recommending substantial curbs on copper
imports. If US actions limit LDC copper exports, Western Europe and Japan
will become alternative markets, and protectionist pressures in these countries
are likely to mount.
Trade issues such as those surrounding copper are starting to become a
rallying point for collective debtors' action protesting general Western trade
barriers and advocating the need for a revised debt strategy. While Chile,
Peru, Zambia, and Zaire have the most at stake, other large debtors such as
the Philippines, Indonesia, and Morocco have an interest in maintaining and
increasing their copper market sales. In addition, current production expansion
will soon make Mexico a net copper exporter. Trade barriers could reduce the
incentive of debtor countries to continue implementing austerity measures and
could push debtors to press collectively for better future repayment terms,
including limiting debt service to a smaller share of overall export earnings.
Restrictive trade practices pose a potential dilemma for IMF-supported
adjustment programs and- for the Fund's monitoring of these programs.
Reduced export earnings could cause LDCs to fall short of complying with
IMF performance criteria. The Fund could face a situation where many LDCs
claim they are being penalized by restrictive trade practices and that
performance criteria should be eased.
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Energy
exico Seeking Closer A diplomatic source recently told the US Embassy in Caracas that Mexico lias
Ties to OPEC asked Venezuela to sound out other OPEC members on ways to strengthen ties
to the oil cartel. In his State of the Union speech last Saturday, moreover,
President de la Madrid emphasized Mexico's willingness to coordinate com-
mercial decisions with other oil exporters. While it was rapidly expanding oil
production during 1974-82, Mexico avoided any association with OPEC that
could have limited the growth of oil exports. Since then, however, Mexico,
because of financial problems and concerns over a growing dependence on its
oil industry, has sharply curtailed oil development and has adopted oil
marketing strategies similar to those of OPEC. Mexican officials recently have
attended scheduled OPEC meetings as unofficial observers.
Closer consultations with OPEC would help Mexico meet its goals of
supporting world prices and protecting its markets. De la Madrid almost surely
will stop short of formal affiliation, however. Membership would undermine
US-Mexican trade talks, alienate foreign creditors, and grate on Mexican
nationalism. The need to service heavy debt obligations, moreover, precludes
Mexican participation-even temporarily-in any cartel production cutbacks.
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Ca &dian Electricity Canadian electricity exports to the United States are expected to total 532
xports To Increase terawatt-hours (TWh) over the next several years-the energy equivalent of
nearly 1 billion barrels of oil. Canadian utilities have surplus generating
capacity and are pressing hard to increase electricity exports now that the
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 Japan's Oil Stocks Rise Japanese oil stocks rose from 425 million barrels in March to 453 million
Tanzanian Oil
P oblems
Canadian Government has approved long-term uninterruptible supply con-
tracts. Already, several multiyear contracts have been signed committing
Canadian utilities to export a total of 227 TWh of electricity. Negotiations for
an additional 305 TWh are under way, and additional export sales have been
proposed. More than 45 percent of this electricity will flow into New England
and New York state, which now depend on oil-fired electricity generation to
meet 32 percent of electricity demand. In 1983, Canada exported 38.4 TWh of
electricity to the United States, representing the equivalent of nearly 200,000
b/d of oil.
barrels in July, and now represent 105 days of forward consumption. All the
increase represented additions to commercial stocks as government-owned
stocks remained flat at 94 million barrels.
additional two facilities are planned.
Four onshore facilities are under construction and an
Tanzania is facing another fuel shortage because of its inability to pay its bills.
Crude oil requirements for the second half of this year total some 400,000 met-
ric tons
Two shipments of 80,000 metric tons each were expected
under the current oil agreement with Iran; one already has arrived
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fined products, and may be forced to ration its already low reserves.
The govern-
ment also is likely to pressure Iran-which now supplies about half of
Tanzania's consumption-and Libya-which last year supplied some 200,000
metric tons of crude-for more oil. If no new supplies are forthcoming, the
government, as in the past, will turn to the spot market for both crude and re-
Trinidad and Tobago Trinidad and Tobago's recent agreement in principle to purchase for $122
ys Texaco Rnery
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million Texaco's unprofitable refinery at Pointe a Pierre will further erode the
country's foreign exchange reserves. In an effort to centralize its refining
operations, the government also is planning to close its Trintoc refinery, a
move that will eliminate 2,000 to 2,600 jobs. Earlier this year, the powerful
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support.
Oilfield Workers Trade Union pledged not to strike the refinery should the
government take over operations. We believe the unanticipated large loss of
jobs, however, could prompt the union to reconsider its decision. With the
country's unemployment rate already topping 20 percent, labor actions by a
disgruntled rank and file also cannot be ruled out, with or without union
Zambian-Soviet Zambia is sending a delegation to Moscow this week to discuss rescheduling of
Discussions Zambian debt to the USSR, according to US Embassy sources. These
l ~n Debt Rescheduling negotiations follow a recent rescheduling of nearly $200 million in debts that
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Zambia owes to Western creditors
New Multilateral Representatives of 25 developing countries agreed on a draft outline of a new
Development Bank multilateral development bank-known as the South Bank-that would
7.
Easf Germany and
st Germany Begin
cover the bank's cost of funds.
promote cooperation between poorer countries in the Southern Hemisphere. At
a meeting in Caracas in late August, the delegates approved an outline&for the
bank that was originally drawn up by technical experts in New York last
April. According to press reports, the South Bank's primary function will be to
provide export credit guarantees and support for trade compensation agree-
ments between developing countries. The bank is to be funded solely by!
developing countries, with total paid-in capital of $1.5 billion in hard currency
and a further quota in the currency of member countries. Additional funds will
be raised on international capital markets and lent at market interest rates to
that it would only spread existing development resources more thinly.
Actual operation of the South Bank, however, remains several years off.
Discussions are still at the technical stage, and an intergovernmental group
headed by the chairman of the Group of 77 has been set up to undertake fur-
ther studies of the bank. A major problem is the lack of foreign exchange
available in many developing countries for the bank's capital. Press reports
note that a number of countries expect the wealthier oil-producing developing
nations to provide most of the input of funds. Some OPEC countries-notably
Saudi Arabia-have already rejected the creation of a South Bank, stating
Global and Regional Developments
On 30 August West German and East German airlines began the first
bilateral air service between the two countries-13 days of flights from West
German cities to the Leipzig Trade Fair. Lufthansa is flying between Leipzig
and Frankfurt, while the East German airline Interflug is serving, Hamburg,
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control flights over the intra-German frontier.
Duesseldorf, and Stuttgart. The flights are circuitous-over Czechoslovakia
and the Baltic Sea-because the Allies and the Soviets under postwar rights
during the semiannual trade fairs.
Lufthansa probably wants to serve West German travelers, who must fly
foreign flag carriers or take surface transport. The East Germans probably see
access to West Germany as a lucrative source of hard currency and a means of
broadening their access to West European markets. Cross-border flights would
require four-power approval, however, and service to West Berlin is unlikely in
view of Soviet and Western sensitivity over the city's status. The airlines for
the time being may have to remain content with service to and from Leipzig
In the first trade agreement between the two countries since their 1962 war;
SjJn Trade Agreement China last month agreed to lower tariffs by granting most-favored-nation
status to Indian exporters. According to press reports, Indian businessmen
hope to expand sales of iron ore, industrial machinery, glass, and other
products, possibly including industrial *control equipment that incorporates
advanced technology. India also hopes to purchase edible oil from China and
may increase imports of Chinese pharmaceuticals and nonferrous metals.
Some Indian businessmen expect total trade to increase to $1 billion annually
from the current low level of $150 million. We believe, however, the relatively
poor quality of Indian products together with political strains-border dis-
putes, Indian suspicion of Chinese support for Pakistan, and Chinese concern
about India's ties with the USSR-probably will inhibit such a major
expansion of trade. Indian officials supported trade negotiations in part to
develop a more favorable atmosphere for the next round of talks on the
countries' longstanding boundary dispute.
Israel' Finance
Mi ster Caves In to
Labor Demands
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7 September 1984
National Developments
Developed Countries
to implement major economic reforms.
Finance Minister Cohen-Orgad last week caved in to labor demands to adjust
tax brackets upward to account for inflation. In recent years, tax brackets have
been adjusted fully to increases in consumer prices. To dampen Israel's
spiraling inflation, Cohen-Orgad announced in mid-August that he would not
adjust tax brackets when cost-of-living increases were paid on 1 September,
but he backed down in the face of threatened widespread strike action.
Officials of the Histadrut, the large trade union organization, have the power
to stymie any government efforts to implement an austerity package. Their
stance on the tax bracket issue demonstrates their unwillingness to allow
workers' real wages to be eroded and underscores the difficulty that the next
Israeli government, no matter what its composition, is certain to face in trying
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Nakasone Names apanese ---
E omic Advisory Prime Minister Nakasone has set up a group of economic advisers charged
anel with formulating policies to boost domestic demand without raising taxes or
violating the government's commitment to administrative reform. The panel's
report is due in late October, just before Liberal Democratic Party presidential
candidates must file for the November election, and Nakasone probably hopes
it will deprive his rivals of a major target. Nakasone's strongest potential
opponent, Kiichi Miyazawa, has-advocated a program to boost growth through
public works spending. Two other rivals, Foreign Minister Abe and Economic 25X1
Planning Agency Director. General Komoto, also have called for expansionary
economic policies. Nakasone also may be shoring up support among his own
backers, especially in the Tanaka faction, many of whom have called for
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Shorter Workweek
in _Austrian Printing
,,,,Industry
Management and labor in the printing industry recently agreed to a 38-hour
workweek-one-half hour less than the recent settlement in the German
metalworking and printing industries-to take effect next April. The costs of
the reduction will be divided, since the 5-percent cut in the number of hours
worked will be partially compensated by a 2.5-percent decrease in wages: 25X1
Negotiators also included an escape clause for firms with fewer than 20
employees, and employers will not be required to pay overtime for the first two
hours after the 38th. If this contract runs smoothly, similar arrangements in
the rest of Austrian industry are likely to follow. 25X1
Less Developed Countries
De la Madrid's
S to of the Union
peech
Mexican President de la Madrid's address last Saturday highlighted economic
achievements but recognized deteriorating living standards and called for
continuing sacrifices from the Mexican people. Among accomplishments he
cited were lower public spending, improved foreign payments, and progress on
rescheduling foreign debt. The tone and content of the speech are likely to in-
crease domestic and foreign confidence in the President's ability to handle
still-serious economic problems and to meet foreign-debt obligations. Although
two years of IMF-sponsored stabilization policies have improved financial
accounts, little headway has been made on inflation. De la Madrid has
convinced most Mexicans that tough austerity policies are fair and equitable,
despite some grumbling from private-sector spokesmen who complain of
excessive state controls. The speech will help Mexico conclude a preliminary
agreement with representatives of international banks to reschedule half of its
$90 billion foreign debt.
Housing Finance Brazil's government-administered National Housing Finance System (SFH),
risis in Brazil which has financed purchases of more than 4 million homes over the past 20
F y y p
fund. Under the weight of Brazil's current recession, this fund has declined
sharply as many laid-off workers have withdrawn their shares to blunt the
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years, is experiencing liquidity problems. A major source of SFH financing
comes from a ments b em lovers into a national severance and retirement
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yria Doubling
heat Imports
Qadhafl Inaugurates
reat Manmade River
Project
which are restrained by last year's wage law.
impact of unemployment. In addition, loan repayments-another major SFH
resource-have slowed as the rapid rise in mortgage payments, which are fully
indexed to inflation, exceed salary increases of middle-class homeowners,
supported stabilization program.
The crisis is becoming a major political issue in Brazil's current presidential
campaign. According to the US Embassy, opposition to high mortage pay-
ments is becoming more widespread among homeowners, a factor that could
cause trouble for the government party in January's election. The erosion of
the SFH's resource base also has caused a decline in new housing activity, se-
verely hurting the labor-intensive construction sector. Both presidential candi-
dates-Paulo Maluf of the government party and Tancredo Neves of the
opposition-have pledged to deal with the financial problems of both home-
owners and the SFH. The government may be forced before the election to
take steps to shore up the system, and most likely will choose to ease its wage
restraint policies or subsidize the SFH with public funds. In either case, the ac-
tions would aggravate inflationary pressures and undercut Brazil's IMF-
Syria is currently in the market for 1.5 million metric tons of wheat
his quantity, plus earlier purchases, is double the amount
loading.
that Syria imported during the 1983/84 marketing year and over four times
the volume purchased in 1982/83. Syria urgently needs these imports because
of a poor harvest this year and low carryover stocks. Canada and France have
been the major Syrian suppliers in the past, but the United States, Argentina,
and Australia are likely to supply large portions of this year's increase.
Although foreign exchange reserves have been low for several years and
Syria's major exports, oil and cotton, are suffering from soft world market
conditions, Syria has assured potential suppliers that irrevocable letters of
credit will be opened at major banks 10 days before the wheat is scheduled for
help finance the first phase.
Colonel Qadhafi gave the official go-ahead last week for his priority water
relocation project. The Great Manmade River scheme is designed to pipe 3
million cubic meters of water per day over 1,900 kilometers from desert wells
in the south to water-short coastal cities. South Korean and US firms will
construct the first phase of the project, scheduled for completion in 1989. We
believe, however, that Libya's financial crunch and the huge scale of the
project-one of the largest construction projects in the world with a price tag
ranging from $7 billion to $9 billion-probably will delay completion by at
least several years. The project probably will cause additional discontent with
the regime's economic policies if Qadhafi imposes harsh austerity policies to
alaysia Planning To Malaysia, the world's largest natural rubber producer, is planning to double its
Double Rubber Output annual production to 2.7 million tons by the'year 2000. Because most rubber
plantation companies have been diversifying into more profitable cash crops-
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miniestates.
We believe the proposed expansion is overly optimistic. The long-term outlook
for rubber export prices is uncertain, and Malaysia faces increased competi-
tion from Indonesia and Thailand, which are expanding production. In
addition, Kuala Lumpur has not reduced the export tax on rubber, a major dis-
incentive to producers. Moreover, Malaysia, with a population of only 15
million, will have trouble finding sufficient low-cost labor to work the
ing by 50 percent to more than $200 million for the next two years.
especially palm oil-over the past few years, Kuala Lumpur is seeking to
expand and upgrade the small-holder sector, which currently produces about
60 percent of Malaysia's rubber. Government efforts to group the small
holders into miniestates under the management of experienced contractors
already are under way. Malaysia recently increased funds for rubber replant-
Soviet Grain Shortfall Adverse weather since April has cut the grain crop this year to an estimated
185 million tons-45 million tons short of the amount Moscow needs to sustain
growth in meat and dairy products. Because two months remain in the season,
however, a crop of this size is by no means guaranteed. Extremely wet weather
during the remaining two months of the season or an early onset of winter
could force farmers to cut grainfields prematurely or to abandon them
entirely. Such problems in the past have resulted in losses estimated to be as
much as 10 million tons.
it thinks could precipitate a US embargo.
Soviet grain purchases for the marketing year that began on 1 Jul' already
stand at some 21 million to 23 million tons, half of the USSR's estimated
needs. The Soviets have been most active in the US grain market, where they
have purchased over 12 million tons since early July. The heavy buying so far
suggests that Moscow expects to import more than 45 million tons. It also may
be planning some action-such as stepped-up attacks against Afghan insur-
gents in Pakistan, or the introduction of combat aircraft into Nicaragua-that
Soviet purchases while supplying their other export customers.
The USSR should have little difficulty importing the near-record quantity of
grain needed to meet its estimated domestic requirements. Hard currency
reserves were at record levels earlier this year, and grain financing is easy to
obtain. In addition, Moscow is continuing to upgrade its port offloading
facilities and has already demonstrated a capability to import 50 million tons
of grain annually. Barring an embargo, the United States will supply the
largest share of grain-at least 15 million tons-to the USSR during this
marketing year. Less-than-favorable weather has cut grain output in Canada
and Argentina and will prevent the Soviets from satisfying sharp increases in
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Yug 1av Concerns The US Embassy reports official concern in Belgrade over the increasingly
r Austerity negative public reaction to the declining standard of living. Austerity measures
began to hit consumers for the first time last year as real consumption fell by 2
percent. As the situation has deteriorated, the Yugoslav media increasingly
have voiced concern over the nation's mood, recently citing warnings that:
? Industrial workers who have been hardest hit by economic austerity engaged
in 80 percent more strikes in 1983 than in 1982.
? Applications for financial assistance to pay rent and utilities have tripled in
Belgrade this summer, while 30 percent of the monthly rents in some areas
have not been paid.
? Meat consumption is the lowest in eight years.
pinch.
The regime remains committed for now to implementing the austerity
measures under the IMF-supported standby program, although it is worried
about further undercutting the standard of living. A drop of 9 percent in real
incomes in the first half of 1984 suggests that real consumption will fall by at
least another 2 percent this year. Consumers will be hurt especially by wage
cuts in unprofitable or indebted firms and removal of price controls. Many
households that have depended on second incomes to get by are now feeling the
East uropean Eastern Europe appears headed toward a record hard currency trade surplus
Ha Currency Trade for the third consecutive year. In the first half of 1984, the region's surplus
S / rplus rose to an estimated $2.6 billion compared with $1.8 billion in the same period
last year, putting Eastern Europe in a good position to surpass the 1983 surplus
of $4.4 billion. Although recently bankers seem more willing to extend trade
Eastern Europe: Hard Currency Trade,
January-June, 1983 and 1984
Million US $
1983 1984
Percent
Change
1983
1984
Percent
Change
1983
1984
Total
14,913 14,7
64
-1.0
16,738
17,317
3.5
1,825
2,553
Bulgaria a
1,026 1,0
50
2.3
1,319
1,300
-1.4
293
/250
Czechoslovakia a
1,493 1,5
60
4.5
1,991
2,160
8.5
498
600
East Germany b
2,700 2,4
84
-8.0
2,719
2,619
-3.7
19
135
Hungary
1,999 1,8
95
-5.2
2,259
2,156
-4.6
260
261
Poland
2,019 2,1
52
6.6
2,751
2,957
7.5
732
805
Romania
2,164 2,1
00
-3.0
2,904
3,000
3.3
740
900
Yugoslavia
3,512 3,5
23
-0.3
2,795
3,125
11.8
-717
-398
a Estimates for trade with nonsocialist countries.
b Trade with OECD countries only. In recent years, East Germany
has run large surpluses with developing countries.
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financing to most East European countries, imports continue to decline as
some regimes apparently still place a higher priority on debt reduction than on
more Western imports. Exports rose by a meager 3.5 percent despite the strong
economic upswing in the West.
Yugoslavia showed the largest improvement by boosting exports while holding
imports constant. Eastern Europe's other troubled debtors, Poland and Roma-
nia, again achieved large surpluses although Warsaw permitted some increase
in imports. East Germany improved its overall balance by moving from a $290
million deficit with West Germany in the first half of 1983 to a $190 million
surplus this year. A large cutback in imports from West Germany was
partially offset by increased purchases from other OECD countries. Hungary's
export performance remains disappointing, and, like last year, Budapest
probably will not achieve its planned hard currency trade surplus. Czechoslo-
vakia's surplus is consistent with Prague's plan to reduce its already small debt
by some $600 million this year.
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International Copper:
Fallout From a Depressed Market
Although conditions in the world copper market
have improved somewhat over the past year, weak
demand growth and abundant capacity expected
through the remaining 1980s will keep copper
prices low and put a crimp in the export earnings of
many LDCs.2 Profits of Western producers also will
suffer from low prices and increased competition,
particularly from LDC producers. Pressures to
protect the domestic copper industry have already
begun to percolate in the United States, where
producers recently won a favorable decision from
the International Trade Commission that recom-
mended substantial curbs on copper imports.
Demand Depressed
The 1980-82 recession and increasing use of copper
substitutes over the same period took a severe toll
on copper demand. Non-Communist refined copper
demand fell by more than 1.1 million metric tons
between 1979 and 1982, a 15-percent decline.'
Most of the falloff in demand occurred in the
OECD countries, where consumption remains well
below previous levels. Copper demand in the LDCs
has also slumped as a result of the global recession,
with the greatest impact occurring in 1982. After
experiencing a twofold consumption increase and a
doubling of its share of world use during the period
of 1971-80, LDC copper demand fell by 100,000
tons in 1982 and was little changed in 1983.
Although much of the falloff in world copper
demand resulted from the slowdown in business
activity in the developed countries, a large part of
the reduction also was caused by a continuing.
decline in copper-intensity factors-that is, copper
usage per unit of economic activity. Copper-intens-
ity factors for the period of 1979-83 averaged
' This article summarizes a forthcoming Research Paper.l
In this article, both "world" and "non-Communist" refer to the
non-Communist world
Refined Copper: Non-Communist
Consumption and Production, 1970-83
I
5.0 1970
Deficit
O Surplus
Consumption
7 percent below that of the previous five-year
period and roughly one-fourth lower than intensity
factors of the early 1960s. Had intensity factors
been maintained at the 1974-78 level, more than
900,000 additional tons of copper would have been
used by OECD countries by yearend 1983. The
main reason for the reduced intensity pattern has
been the availability of inexpensive substitutes and
the trend toward lighter weight in the transporta-
Production and Stocks Up
Despite the 1.1-million-ton drop in refined-copper
usage in 1979-83, world mined copper-production
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Non-Communist Countries: Thousand metric tons Copper Prices, 1972-84
Mined Copper Production
Total
5,065
5,925
6,006
OECD
2,594
2,383
2,198
United States
1,560
1,181
1,046
610
716
615
158
244
265
266
242
272
2,316
3,330
3,592
692
1,068
1,257
Zambia
684
596
515
Zaire
387
460
503
Peru
212
367
322
Philippines
160
305
271
Mexico
61
175
193
Papua New Guinea
0
147
183
120
212
348
155
212
216
144
212
211
11
0
5
LDC output as a percent
of total
46
56
60
was as high in 1983 as in 1979, a record year for
copper consumption. As a result, copper stocks in
late 1983 were 40 percent higher than at yearend
1979.
LDC copper producers were a major cause of the
surplus. As a group, they raised mined copper
output by 100,000 tons a year in 1980 and 1981
and 200,000 tons in 1982. Even the small 1983
decline was partially a result of technical problems
at Zambian mines and strikes by copper workers in
Peru, rather than a fundamental decision to reduce
excess production. With the exception of Zambia,
Peru, and the Philippines, all LDC copper produc-
ers in 1983 either maintained or increased produc-
tion levels in comparison with 1979. The largest
gainer was Chile, now the world's leading copper
producer, where output increased by 18 percent.
50
In contrast to LDC output increases, producers in
the developed countries cut back sharply. Accord-
ing to the US Bureau of Mines, by late summer
1982 US copper mines were operating at roughly
50 percent of capacity. While capacity utilization
rates improved to 65 percent by yearend 1983, US
copper production still was down one-third from
1981 levels. In Canada, the world's third-largest
copper producer, mine output dropped by about
75,000 tons during 1982-83. Australia was the only
leading developed-country producer of copper to
expand output during this period.
Coming Out of the Recession
Increased worldwide economic activity has signifi-
cantly improved copper demand during the first
half of this year. Through June, non-Communist
copper demand grew by about 6 percent in compar-
ison with the same period last year. In both the
United States and Japan, which together account
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Secret
for more than 45 percent of non-Communist con-
sumption, copper demand rose more sharply. The
10-percent increase during the first half of 1984
largely was a result of US consumer expenditures
in the housing and automotive sectors and vigorous
growth in Japanese industrial production. Forecast-
ers expect slower industrial growth in 1985, leading
many industry observers to believe that the copper
recovery will be short lived.
Prices, after climbing steadily to nearly 70 cents
per pound earlier this year, have fallen back. At
midyear, prices were averaging only 65 cents per
pound, and by the end of July they had dropped to
60 cents per pound.
Copper prices will rise slowly if at all over the next
year, because the market remains substantially
oversupplied. In spite of significant drawdowns,
total commercial stocks remain high at 1.2 million
tons, and ample standby capacity will continue to
hold down prices.
more than 900,000 tons of copper mining capaci-
ty-14 percent of non-Communist 1983 consump-
tion-is idle. If prices begin to show a sustained
rise, this capacity could be quickly reactivated.
Looking Ahead
We believe copper demand over the longer term
will be particularly constrained by falling intensity
factors in the developed countries, primarily as a
result of changing technologies and material
substitution:
? Advances in electronics and design have permit-
ted the use of thinner gauge wires in telephone
equipment.
? Improvements in multiplexing-the process of
sending multiple conversations through a single
telephone circuit-are reducing the need for ad-
ditional cables..
? Automobile and aluminum industry experts pre-
dict nearly a 50-percent increase in aluminum
usage in automotive applications by 1990; much
of the aluminum will replace copper, particularly
in radiators.
? Copper also faces a major challenge from fiber
optics, which is expected to make substantial
inroads in communications. Copper-intensity fac-
tors will continue to rise somewhat in the LDCs,
but total LDC copper demand is expected to
remain weak because of slow-growth prospects
and possible attempts by LDCs to take advantage
of technological innovations.
As a result of these factors, we estimate that total
world copper demand by 1990 will reach only about
7.5 million tons. That level would be below the
amount consumed in 1979, copper's peak year of
demand, and would represent an average annual
growth rate of only about 2 percent over present
depressed levels.
Increase in copper production capacities over the
balance of the decade-mostly occurring in Third
World countries-will about match the modest
recovery in world copper demand, further entrench-
ing the over-supply situation. About 700,000 tons
of new mining capacity is planned by 1990, with
nearly two-thirds of the increase occurring in the
LDCs. Large projects in Argentina, Brazil, Chile,
and Peru will account for 380,00Q tons of the
planned increase. With only a 900,000-ton increase
in demand projected, surplus mining capacity will
continue to pose a serious problem.
LDCs are planning to increase their smelting and
refining capacities by roughly 900,000 tons and
650,000 tons, respectively, by 1990. If these expan-
sion plans are realized, the LDCs will have the
capability to process more than 80 percent of their
copper output through the smelting stage and
nearly 65 percent through the refining stage. This
compares with 1983 smelting and refining capabili-
ties of 72 and 57 percent, respectively.
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Selected LDC Copper
Mining Projects
Country
Project
New
Capacity
(thousand
metric
tons)
Argentina
El Pachon
100
Brazil
Caraiba
90
Chile
Chuquica-
mata
100
Peru
Tintaya
40
Remarks
This project could come on-
stream by the late 1980s,
but development is on hold
until the market improves.
This expansion project prob-
ably will be completed by
1990.
Expected to be completed
in 1987.
Tintaya, which is state-
owned, will be completed by
1985.
poned for two years and will
not be completed until late
in the decade.
Most of the increase in refining and smelting
capacity will occur in the industrializing LDCs:
? Brazil plans to expand capacity at the Caraiba
smelter/refinery to 150,000 tons by 1986, up
from 50,000 tons in 1983.
? The Philippines' PASAR smelter/refinery, which
began operations late last year, will reach rated
capacity of 135,000 tons by 1986..
? Mexico's La Caridad smelter probably will come
onstream next year with 180,000 tons of capacity.
The capacity increases in Brazil and Mexico are of
particular interest because they are also users of
refined copper. With its expanded capacity, Brazil
will be able to satisfy about 75 percent of its refined
copper needs and will be able to reduce imports
accordingly. Mexico will be able to satisfy all of its
copper requirements and have substantial amounts
available for export.
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7 September 1984
Implications
Weak demand growth and abundant capacities will
hinder LDC attempts to export their way out of the
debt problem. Copper is the Third World's most
important metal export. With annual sales of be-
tween $5 billion and $6 billion, it ranks behind only
petroleum and coffee as the leading foreign ex-
change earner for the LDCs. Growing financial
difficulties have magnified copper's importance in
the earnings picture of many LDC exporters. The
Third World countries hardest hit by this market
outlook include Zambia, Zaire, Chile, Peru, and
the Philippines-all of which have serious debt
problems.
LDC moves to expand production will increase
competition for Western producers. Efforts to pro-
tect the domestic producers have already begun to
percolate in the United States, where producers
recently won a favorable decision from the Interna-
tional Trade Commission that recommended sub-
stantial curbs on copper imports.
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International Financial Situation:
Latin American Financial Update
Discussions among Latin American debtors contin-
ue to indicate little support for joint action against
creditors. We remain concerned, however, that
Argentina and the banks are heading for another
end-of-quarter clash in September; Bolivia, Chile,
and Colombia also could bump heads with lenders.
The IMF is facing requests from Brazil and Chile
to relax current economic-performance targets,
while Argentina, Bolivia, and Colombia have been
unable to establish IMF programs and are coming
under increasing pressure from commercial banks.
In contrast, Venezuela is holding multiyear re-
scheduling talks with its bank creditors in the
absence of direct IMF participation, and Mexico
has reached an agreement with its bank advisory
committee that allows for a multiyear rescheduling
of public debt.
Cartagena Group Meets
In mid-August, Latin American countries held
their first follow-up session to the June conclave at
Cartagena. During low-key discussions, technical
advisers exchanged information on the progress of
their debt negotiations with both official and bank
creditors. The foreign and economic ministers of
the 11 Latin American countries in the Cartagena
group are scheduled to meet in Argentina on 13-14
September to discuss common debt problems. We
1believe they will focus largely on devising proposals
to ease their repayment burdens and to present to
the industrial countries at the IMF/IBRD annual
meetings in September. Argentina and other Car-
tagena participants that are involved in tense IMF
negotiations probably will try to elicit support for
their attempts to water down Fund proposals.
The failure to resolve differences between several
South American countries and the Fund at the
coming meetings could lead to resurgent financial
difficulties. We remain particularly concerned
about:
? .An Argentine payments crunch resulting from a
$750 million repayment on a bridge loan due on
15 September, and at least $900 million in inter-
est arrearages that must be brought current by
30 September.
? A termination of commercial bank debt talks
with Bolivia if La Paz does not resume payments
by mid-October, when the 90-day payments
standstill granted by bankers ends.
? A possible clash between Chile and the IMF and
banks over the relaxation of stabilization policies
and new financial support.
? An impending standstill on payments by Colom-
bia because of dwindling reserves and the inabil-
ity to obtain new credit.
Developments With IMF Programs
Brazil is currently renegotiating monetary perform-
ance targets with an IMF technical team.
the Fund-impressed by
Brazil's large trade surplus and progress in limiting
the growth of public borrowing-has agreed to
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increase the July-December monetary growth goal
from a 50-percent to a 100-percent annual rate. In
return, Brasilia probably will agree to some fiscal
tightening. Depressed domestic economic condi-
tions are also likely to cause Brazil to bargain hard
for a relaxation of austerity policies during IMF
talks before debt negotiations with banks this fall,
especially in the face of the coming presidential
elections
Chile's willingness to remain in compliance with its
IMF program will be the key to resolving a tighten-
ing financial bind. Finance Minister Escobar says
lower copper prices and rising interest rates will
cause debt repayment difficulties by yearend unless
bankers agree to provide an additional $500 million
in new money. Meanwhile, Escobar claims that
strong political pressure for growth is forcing him
to request a new-and less restrictive-two-year
IMF program that would begin in December.
Santiago will start negotiations with the IMF in
late September and ask for a larger budget deficit
and greater IMF lending. Escobar has announced
he will proceed unilaterally, without Fund support,
to increase the budget deficit. We believe he is
using such threats to improve his negotiating pos-
ture, but Chile remains willing to make good faith
moves-such as a devaluation-to relax IMF
'resistance. According to US Embassy reports,
banker resistance to new lending and inflexibility
by the IMF could lead Chile to politicize the debt
issue. Under such conditions, Santiago could at-
tempt to tie its debt repayment to export perform-
ance, increase its import tariffs, and institute other
nationalistic economic policies.
Argentina was forced on 15 August to repay $125
million to its major creditor banks after talks with
the IMF failed to achieve sufficient progress. In
our view, the banks are signaling Buenos Aires that
their patience is at an end and that only document-
ed progress with the Fund will move them to
provide new money. The Alfonsin government,
however, continues to struggle to establish a credi-
ble set of economic policy adjustments that will
satisfy the IMF. The major stumblingblocks, ac-
cording to the financial press, are the size of the
public-sector deficit, wage adjustments, and mone-
tary and exchange-rate policies. Although Alfonsin
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7 September 1984
probably would rather reach an agreement with the
Fund than suffer the consequences of being cut off
from bank funding, we are skeptical that his eco-
nomic team can devise a comprehensive austerity
program that also fulfills his promise of providing
real wage increases of 6 to 8 percent.
Colombia continues to resist a formal IMF pro-
gram. Consequently, a $700 million energy-project
loan package sought by Bogota this year may be
held up unless an IMF-supported program is in
place
Even if Bogota is able to
devise an informal economic program with the help
of the IMF, we do not believe this would be
sufficient to boost creditor confidence and renew
voluntary lending.
Bolivia is now suffering the consequences of its
failure to reach an agreement with the IMF.
Without the IMF approval, we believe talks on
debt renegotiation and new credits will remain
stalled, worsening the economic situation and
weakening the civilian government.
Multiyear Reschedulings
Mexico and its bank advisory committee have
reached tentative agreement on a multiyear re-
scheduling of the public debt. They have reportedly
agreed that after the IMF stabilization program
ends in 1985 the Fund will continue consultations
with the government and will forward semiannual
economic assessments to an expanded banking
committee.
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Venezuela has been closely watching the progress
of Mexico's negotiations and hopes to use that
agreement as a precedent. Negotiations between
Venezuela and its bank advisory committee during
the past month suggest that the banks have accept-
ed the principle of/a multiyear rescheduling, includ-
ing longer repayment periods, without an IMF
agreement. The, terms remain to be determined.
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New Zealand: Economic Problems
Facing the New Government
Prime Minister Lange, in office for less than two
months, already has resolved a foreign exchange
.crisis, but he faces difficulty in shaking New
Zealand out of its economic malaise. The current
economic recovery is unlikely to continue into 1985,
and unemployment and inflation probably will be
on the rise again in the coming months. At the
same time, Lange does not have much latitude to
prime the economy with traditional monetary and
fiscal policies because of already-large government
budget and current account deficits. We believe
that Lange could face considerable political heat
over economic issues early next year, both from the
opposition National Party and the left wing of his
own party.
Lange's'Economic Inheritance
Lange inherits an economy plagued by serious
weaknesses. Real output has grown less than 1
percent a year on average over the last decade, with
real per capita income in 1983 only 2.3 percent
higher than when former Prime Minister Muldoon
took office in'1975. The economy remains heavily
dependent on agricultural production, which ac-
counts for 70 percent of export earnings. In addi-
tion, New Zealand's growth and financial position
have been severely affected by trade restrictions
against New Zealand's agricultural exports by
other OECD members and the oil price increases of
1979-80.
Lange assumes office during a brief respite from
New Zealand's chronic economic ills. The highly
respected New Zealand Institute for Economic
Research estimates that real GDP growth reached
a 7-percent annual rate in the last half of fiscal
1983 (April 1983-March 1984). In addition, Lange
has impressed observers by resolving a foreign
exchange crisis brought on by New Zealand's weak
external accounts and indecisiveness by Muldoon.
In mid-July, he devalued the New Zealand dollar
by 20 percent, ending heavy speculation against
New Zealand's currency-which followed Mul-
doon's announcement in' June that he would hold
early elections. Lange undoubtedly hopes to use the,
economic recovery and the afterglow of the devalu-
ation to political advantage in the coming months.
New Zealand's Pressing Financial Problems
Lange has stated that his first priority on the
economic front will be New Zealand's deeply root-
ed financial problems. Despite favorable interna-
tional prices for New Zealand's exports in 1979,
the current account remained in deficit. Since then,
international price trends have worked to New
Zealand's disadvantage-boosting the cost of im-
ports while lowering the value of New Zealand's
exports. Because Wellington persisted in overvalu-
ing the exchange rate, these adverse price trends
expanded the current account deficit significantly
and required that the government borrow heavily
overseas.
fi-
nancing growth with foreign borrowing is becoming
more difficult. The total foreign debt is approach-
ing $12 billion-about half of GDP. Measured by
this ratio, New Zealand's debt burden is on the
same order as financially troubled LDCs such as
the Philippines, Mexico, and Brazil. Although the
term structure of the debt is not yet a problem; the
bulk of recent borrowing is in the form of short-
and medium-term loans. As a result, the average
loan maturity has shortened considerably, with
nearly two-thirds of the government's foreign debt
due in the next five years. Debt-service payments
now exceed the cost of oil imports, and the ratio of
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Real GDP Growth'
Percent
-4 1977 78 79 80 81 82 83b 84`
a Fiscal year beginning I April of the year stated.
b Estimated.
Projected.
Consumer Price Growth
Percent
debt service to exports is 31 percent-up from 20
percent in 1979. As a result of the heavy foreign
borrowing, a prominent US financial-rating service
lowered New Zealand's credit rating in mid-1983.
On the domestic front, Lange faces equally burden-
some financial problems. New Zealand's $2.1 bil-
lion budget deficit prohibits Lange from simply
spending his way to higher growth-the prescrip-
tion argued for by the Labor Party's left wing. The
deficit is expected to reach 9 to 10 percent of GDP
in fiscal 1984-double that in the United States.
According to the IMF, only part of the deficit is
accounted for by the business cycle; nearly two-
thirds would remain even if the economy grew at a
markedly higher rate for a sustained period. The
cost to New Zealand of continuing the deficit at
such a level is a combination of high real interest
rates, high rates of monetary expansion and subse-
quent inflation, and further pressures on the coun-
try's external payments.
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7 September 1984
Registered Unemployment
Thousands
Correcting the burgeoning deficit requires both
revenue and expenditure measures. Personal, in-
come tax rates were cut sharply in late 1982, and
there is growing concern that the tax base is too
narrow. In addition, Wellington has virtually no
control over a large and rising segment of spend-
ing-such as interest payments on the public debt.
This nondiscretionary spending is rising so fast that
large cuts would have to be made in politically
popular social welfare payments just to keep total
spending constant.
Mapping Out an Economic Program
How Labor's economic program evolves in the
months ahead will depend on how Lange balances
the spendthrift ideology of his party with the
conservative views of government technocrats such
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Current account
-847
-1,433
-1,486
-1,044
Trade balance
487
- 24
-102
311
Exports
5,490
5,521
5,256
5,554
Of which:
Butter
403
436
490
332
Beef and veal
521
491
530
468
Imports
5,003
5,545
5,358
5,243
Crude oil and refined products
1,145
1,015
918
800
Net services and transfers
-1,334
1,409
-1,384
-1,355
Net investment income
-569
-632
-735
-850
Capital account
961
1,559
1,898
918
Government borrowing for balance-of-payments
purposesc
1,607
1,837
2,139
1,068
Other long-term capital
-667
Of which:
Repayments of official borrowings
-929
-1,175
-1,165
-1,330
Other short-term capital d
21
352
941
950
Foreign exchange reserves e
343
388
1,073
727
a Fiscal year beginning 1 April of the year stated.
b Estimated.
c Includes Reserve Bank borrowings.
d Including errors and omissions.
End of period.
as new Minister of Finance Roger Douglas. Ac-
cording to the US Embassy, the individualistic
Douglas is the most conservative member of
Lange's Cabinet, and we believe Douglas will push
hard for policies to trim the deficit and open the
New Zealand economy to more international com-
petition. Past experience suggests that this will not
be easy. Douglas was forced to resign from the
shadow cabinet in 1980 after issuing a conservative
"opposition" budget that had not been cleared with
Labor Party leaders.
Lange's first budget in October will be an impor-
tant indicator of how Labor proposes to tackle the
country's economic ills. Early indications are that
Lange will face considerable pressure from the left
wing of his party to follow more expansionary
policies. During the campaign, he promised to
redirect government spending to social programs.
He is also likely to face pressures from organized
labor to increase wages and to increase protection
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New Zealand: Longer Term Issues
International Competitiveness
A large part of New Zealand's external payments
problems can be traced to the country's high level
of import protection, which has left domestic firms
incapable of competing in world markets. The new
Finance Minister and most government technocrats
recognize the need for major trade liberalization,
and Wellington has made considerable progress on
this front over the past several years. For example,
the Closer Economic Relations Agreement with
Australia will phase out all trade barriers between
the two countries by 1995, and New Zealand is
obligated under the GATT Code on Subsidies and
Countervailing Duties to phase out export assis-
tance.
In addition, the Muldoon government recently
instituted a plan to move the country away from
import licensing to a system of tariff protection,
with the idea of lowering the overall level of
protection. Lange recently accelerated this move
and also decided to continue the phaseout of the $1
billion a year export-subsidy program. Still, Lange
was forced by left wing parliamentarians to extend
the phaseout by two years until 1987 in the hope of
softening the adverse impact on employment. In
our'judgment, Lange will find it increasingly diffi-
cult to maintain this momentum when the economy
starts to sputter.
Wage Setting
The present national award system of setting
wages-heavily supported by organized labor-
does not provide flexibility in the labor market.
Under the system, wage awards in all industries
closely follow a national pattern with wage in-
creases tending to be bunched together around the
national average. As a result, little incentive exists
for labor to migrate from failing to prosperous
industries. Although government economists recog-
nize the need to reform the system, Lange will be
under intense pressure from his union backers not
to tamper with the system.
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7 September 1984
from imports. Unions are likely to point to stiff
restrictions in New Zealand's export markets as a
justification for increased protection.
Lange is aware that his economic policy dilemma
between pragmatism and political expediency
closely parallels that of his Australian counterpart
Bob Hawke. It appears that Lange is impressed
with Hawke's political skills and plans to imitate
Hawke's approach by keeping economic policy
positions vague. If so, he probably will move
ahead slowly, fighting-and often winning-small
political battles along the way while appearing
"presidential" in style. Lange intends to use an
Australian-style economic "summit conference
next week to promote a pragmatic approach to
economic policy and head off criticism by party
radicals. Lange has already met with Hawke to
discuss ways of keeping his party's left wing under
control.
The election of the Labor government may have
temporarily eased the fears of New Zealand's
creditors. many
bankers believe that Labor will introduce more
market-oriented economic policies than those im-
plemented by former Prime Minister Muldoon. The
devaluation, the lifting of controls on interest rates,
and plans to trim subsidies-all moves suggested
by the IMF in consultations with the government
earlier this year-have strengthened this impres-
sion.
Despite the current recovery, however, New Zea-
land's short-term prospects are not bright. Most
economists expect consumer and investment spend-
ing to slow toward the end of this year-limiting
growth for the 1984 fiscal year to about 2 percent.
The inflationary impact of the devaluation will
cause private consumption growth to weaken con-
siderably as disposable incomes lose pace with
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rising prices. Most importantly, public capital in-
vestment is scheduled to decline as the construction
phase of some of Wellington's major energy pro-
jects wind down.' Unemployment thus is likely to
begin creeping up by yearend.
An adverse turn by the economy will cost Lange
politically. The opposition National Party will
move quickly to take advantage of Lange's econom-
ic policy dilemmas, bolstered by the fact that the
unpopular Muldoon will, in all likelihood, be re-
placed as party leader. The National Party proba-
bly will focus its attack on unemployment and
inflation, reminding the public that the jobless rate
was falling before the election and that the former
government's tough stand against unions was large-
ly responsible for ending nine consecutive years of
double-digit inflation.
An economic downturn would also hinder Lange's
efforts to control the left wing of his party. In our
judgment, Lange's ability to control the left's influ-
ence in policymaking depends critically on his
popular support-which is keyed to his success on
the economic front. If the economy does poorly,
Lange will find that he has little room to maneuver
on foreign policy issues-such as ANZUS and US
ship visits.
The Longer View
Despite his wishes to the contrary, Lange's pros-
pects for shaking his country out of its economic
malaise during his term in office do not parallel
those of his counterpart Bob Hawke. New Zea-
land's economic problems are intensified by a
precarious balance of payments, and Lange, unlike
Hawke, is assuming office with the prospect of an
economic downturn. In addition, Lange does not
appear to possess the force of personality to win
over critics within his party and achieve financial
discipline
' The $3.8 billion major energy projects, undertaken since 1979, are
designed to reduce New Zealand's dependence on imported oil.
The devaluation will, in time, help improve the
foreign payments situation by raising import prices
and making New Zealand's exports more competi-
tive in overseas markets. It is not certain, however,
that Lange's exchange-rate management will be
more enlightened than Muldoon's, and we believe
that the devaluation was carried out to end the
speculation against the dollar rather than to im-
prove the external payments. Wellington, in fact,
argues that only minor exchange-rate adjustments
are necessary in the long term because energy-
independence projects will provide large foreign
savings within three or four years.
We believe Wellington is banking too strongly on
the major energy projects. The amount of savings
from these enterprises depends crucially on interna-
tional energy prices. When the projects were first
planned, world oil prices were projected to rise
substantially more than has actually occurred. At
current prices, the projects will earn only small
returns and thus will provide, limited foreign pay-
ments savings and very little stimulus to the domes-
tic economy. Wellington does not have attractive
alternatives. It can restrain imports by curtailing
domestic demand, and thus economic growth, or
hope to weather a severe rise in the external debt
and debt service. Labor's few options for dealing
with the economic problems, coupled with New
Zealand's longstanding preference for the more
conservative National Party, could set the stage for
a one-term Labor government.
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International Rice Market:
Reduced Supplies
World rice supplies available for export-especially
in Asia-are abnormally tight heading into the
major fall harvest. Most importers have sufficient
stocks to last until the harvest begins in October,
but some big consumers-India, Bangladesh, the
Philippines, and Malaysia-are struggling to main-
tain required supplies of medium- to low-grade rice
used in public distribution systems. In the high-
quality segment of the market, Japanese stocks are
very low, and any weather damage to the fall crop
almost certainly would mean unusually large Japa-
nese imports. Brazil and Nigeria also may need to
purchase rice before fall, and the tight Asian
supply situation may force them to buy expensive,
high-quality rice from the United States. The
outlook for 1985 is for continued reduction in
export stocks.
Stocks Currently Tight
World rice stocks going into the new rice marketing
year-which began on 1 August-were at the
lowest point since 1975, equivalent to only 5.5
percent of consumption, according to USDA esti-
mates. Asian export stocks are virtually depleted
after several months of unexpected buying by
India, Bangladesh, the Philippines, Vietnam, and
Nigeria. US export stocks, which have been rela-
tively high since '1976, stand at 1.4 million tons,
down 40 percent from the all-time-high level in
1982-83. As a result of lower stocks, prices are
beginning to rise out of a two-year slump. Thai
prices, which serve as the world benchmark, de-
clined almost 50 percent during 1982-83, but rose
in 1984 from about $250 per ton in February to
$285 per ton by August. US prices declined slightly
in August, but remained about $160 above Thai
rates.
Stocks as a Share of
Consumption
Percent
Prices a
US $ per metric ton
L" I I I I I I I I 1
84685` 0 1975 80 84d
a Milled rice, f.o.b., Bangkok, 100 percent grade B.
b Estimated.
Projected.
d Average through August.
A number of unexpected developments this year,
largely on the demand side, have led to lower rice
stocks:
? Because of flood damage to crops, Dhaka already
has purchased 470,000 tons of rice from Thailand
and Burma for delivery from July to September,
and Bangladesh has asked Pakistan and China
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for additional supplies, according to Embassy
reports. Bangladesh's rice needs could reach
860,000 tons, according to UN projections. Paki-
stan, which currently has little uncommitted
stock, will be able to ship only about 10,000 tons.
? India, a net exporter in most recent years, pur-
chased a record 870,000 tons of rice this year.
Although India's rice crop this year was a record
89 million tons, initial public stocks were low
after last year's drought, and government pro-
curement was slightly lower than expected.
? Vietnam bought 190,000 tons from Thailand and
Burma as a result of a shortfall in rice production
in the north. Vietnam was a net exporter in 1983
and was expected to sell a small amount on the
world market this year.
? The Philippines had been expected to export
about 150,000 tons this year but instead imported
150,000 tons from other Asian countries to quiet
public protests over inflation and rumors of im-
pending rice shortages. In addition, Manila re-
cently approached China for more rice, according
to Embassy reporting. Although the government
estimates that rice stocks total 900,000 tons,
enough to meet domestic needs, traders and
farmers are withholding supplies from the market
in anticipation of an increase in the government-
controlled price.
? Japan, left with low stocks this year as a result of
acreage-reduction programs and bad weather, is
seeking significant rice imports for the first time
in 17 years. Japan so far has arranged to import
150,000 tons from South Korea and Thailand.
World import demand may be even higher in 1985
than this year, according to USDA estimates.
Although South Asian imports have more than
doubled in 1984, stocks remain low. Both India and
Bangladesh are expected to increase purchases to
rebuild stocks.
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7 September 1984
Total 398.8 412.4 419.2 448.9 452.9
China 139.9 144.0 161.2 168.9 170.0
India 80.5 80.0 69.8 88.6 86.0
Indonesia 29.7 32.8 33.6 34.5 36.0
Bangladesh 20.8 20.5 21.3 21.9 21.6
Thailand 17.4 17.8 16.9 18.8 18.5
Burma 13.2 13.6 14.5 14.8 15.0
Japan 12.2 12.8 12.8 13.0 13.9
Brazil 8.6 9.2 7.8 9.0 9.5
South Korea 6.0 7.1 7.3 7.4 7.3
Pakistan 4.7 5.1 5.2 5.2 5.3
United States 6.6 8.3 7.0 4.5 6.1
Others 59.2 61.2 61.8 62.3 63.7
a Data for marketing year ending 31 July of the year stated.
b USDA projections.
Production Gains Slowing
While the 1985 rice crop so far has enjoyed
generally good weather-the USDA is forecasting
a bumper crop-it is unclear to what extent the rice
market will loosen next year.
? Production in Punjab, which supplies 50 to 60
percent of the rice the Indian Government pro-
cures domestically for the public distribution
system, may have been affected by local political
turmoil. According to Embassy reporting, disrup-
tions in distribution of inputs for planting, Sikh
sabotage of irrigation networks, and labor short-
ages at the crucial transplanting stage may keep
the crop at last year's level or below.
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? The Government of Bangladesh estimates that
900,000 tons, or about 4 percent of the crop,
already has been lost to flooding. Additional
flooding in August and September along the
major rivers in the central and western parts of
the country, as well as drought in the eastern
region, may bring further losses, according to
Embassy reporting.
? Rice production in the Philippines, which has
been held down by drought in the last two years,
could be reduced this year if farmers react to
recent price. increases for fertilizers and pesticides
by reverting to planting lower yielding rice variet-
ies requiring fewer purchased inputs.
? Vietnamese production increases, which surged
by 40 percent in 1979-84, will be slowed this year
by drought and unusually cold weather in the
north.
? Madagascar, which accounts for one-third of
African production, is still trying to rebuild its
rice production infrastructure after cyclone and
flooding damage this spring in time to plant in
October-November.
As a result of these setbacks, global production
gains, which amounted to 7 percent last year, will
be held down to only 1 percent this year.
Tight Export Supplies
Low Asian stocks could decrease rice exports next
year by as much as 4 percent-400,000 tons-
below this year, according to USDA estimates. The
three major Asian exporters-Thailand, Burma,
and Pakistan-drew down stocks below levels need-
ed to ensure adequate food supplies domestically.
Indeed, according to USDA estimates, Thailand
and Pakistan are expected to cut exports by at least
350,000 tons. While Burma plans to increase ex-
ports by 50,000 tons, transport, storage, and pro-
curement problems, as well as an inability to
maintain uniform quality, may stymie this effort.
Taiwan, another Asian exporter, cut production
this year and will have 75,000 tons less to sell. At
Total exports
11,834
12,137
11,700
Burma
750
850
900
China
550
600
700
Pakistan
1,299
1,300
1,150
Thailand
3,700
4,100
3,900
Taiwan
531
375
300
United States
2,330
2,000
2,000
Others
2,674
2,912
2,750
Total imports
11,834
12,137
11,700
Indonesia
1,175
500
800
India
310
870
500
Nigeria
711
775
750
Bangladesh
82
500
400
Iraq
474
440
450
Iran
680
680
450
500
525
550
30
190
100
352
450
400
7,520
7,207
7,300
the same time, South American exports are fore-
cast to decline, on. the basis of lower 1985 produc-
tion levels. On the plus side, Australia is expected
to increase 1985 exports by about 80,000 tons, and
China is having a good production year and may
put large amounts of rice on the market if prices
rise.
Mounting Food Problems in Exporting Countries
Exporting countries-although pressing to sell as
much rice as possible to earn foreign exchange-
are increasingly under pressure to reduce exports
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because of domestic needs. High population growth
rates and urbanization are making food availability
a political issue, particularly in marginal rice-
exporting countries, such as Brazil, India, and the
Philippines:
? A recent study by the Brazilian Government
found that malnutrition is increasing and that
hunger is no longer an isolated rural issue, but a
problem in the cities as well. Per capita rice
production in Brazil fell by nearly 20 percent
during 1975-83.
? Although per capita availability of rice has in-
creased slightly in India since 1981, 1985 Indian
rice production is expected by the USDA to fall
nearly 700,000 tons short of requirements to
sustain per capita availability at 1984 levels and
nearly 2.5 million tons short of requirements to
support minimum dietary standards established
by the United Nations.
? In the Philippines, per capita availability of rice
declined during the last three years, and the
USDA estimates that the government will have
to import 450,000 tons of rice in 1985 to support
availability at current levels, or 540,000 tons to
support availability at minimal UN-set nutrition-
al levels.
There is some evidence that government officials in
Thailand and Burma, which are nearly 100-percent
dependent on rice for food grain, are also beginning
to feel the impact of population growth on the
availability of rice for export. Thailand currently
sustains an urban population growth rate of about 4
percent, but rice production increases have stagnat-
ed at about 1.5 percent since 1981. Burma, with a
2.0-percent overall population-growth rate and an
urban growth rate of nearly 4.5, increased rice
production 12 percent during 1982-84, chiefly as a
result of a successful program introducing high-
yielding varieties of rice seed. However, use of
high-yielding varieties and acreage planted to rice
are down from last year, indicating future produc-
tion problems. Stocks are estimated by USDA to be
marginal.
Secret
7 September 1984
Outlook and Implications
for the United States
With Asian suppliers sold out until the end of the
year, the outlook for next year is for continuing
pressure on stocks. Most importers have already
covered their anticipated needs for 1984 and are
not likely to return to the international market
before the fall harvest, unless crop conditions dete-
riorate or these importers are forced by domestic
political unrest to buy more rice. Competition,
however, for export supplies may be intense next
year. USDA estimates that world stocks of rice will
be drawn down by an additional 500,000 tons by
next summer. Bangladesh has already approached
Thailand to buy 1.5-2 million tons over the next
three years, more than twice the import level
projected by the USDA, probably to tie down long-
run supplies.
Tightening export supplies could provide a window
for US rice sales over the next few months and
perhaps into 1985. India is likely to purchase
another 200,000 to 500,000 tons before the year is
out, and Japan will have to buy high-quality US
rice if there is any difficulty with the size or quality
of India's crop. Nigeria has no stocks, and, al-
though present needs are covered, the government
may have to purchase high-quality rice later this
year. Brazil, typically an Asian buyer, is expected
to make off-season purchases before yearend and, if
sizable quantities are needed, US rice may be the
only rice available.
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