INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000100060002-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: December 22, 2016
• Document Release Date: February 7, 2011
• Sequence Number: 2
• Publication Date: February 11, 1983
• Content Type: REPORT

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International
Economic & Energy
Weekly
DI IEEW 83-006 .
11 February 1983
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International
Economic & Energy
Weekly
11 February 1983
iii Synopsis
1 Perspective-Commodity Markets and LDC Debtors
Energy
International Trade, Technology, and Finance
National Developments
13 Outlook for Commodity Prices
19 OPEC: Saudi Arabia on Center Stage
23 World Steel: Another Bad Yeah
27 USSR: Near-Term Grain Import Outlook
31 El Salvador: A Beleaguered Economy
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Comments and queries regarding this publication are welcome. They may bc25X1
directed to F 7Directorate of Intelligence, telephone
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International
Economic & Enerav
Weekly
Synopsis
Perspective-Commodity Markets and LDC Debtors 25X1
The fall in commodity prices since 1980 appears to be ending, but the
consequences are far from over. Countries in the greatest financial difficulty
will not necessarily be those that benefit first or most. 25X1
Outlook for Commodity Prices) 25X1
The steep slide in nonfuel commodity prices that began in 1980-the most
prolonged since World War II-appears to be over. In contrast to the price re-
covery following the 1974-75 recession, we expect this one to be neither strong
nor rapid unless industrial country economic expansion develops much more
momentum than most forecasters now anticipate. Even a robust recovery will
not greatly help US producers who have lost markets to foreign competitors 25X1
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OPEC: Saudi Arabia on Center Stage
OPEC's failure to agree on oil production quotas and price differentials and
subsequent indications that Riyadh and other Arab countries on the Persian
Gulf will soon cut prices have unleashed an outpouring of speculative pressure 25X1
on the market. Although Riyadh would prefer that someone else take the lead,
he Saudis may cut prices as early as next week
by 4 per barrel retroactive to 1 February 1983. 25X1
Steel industries in the industrial countries have just been through their worst
year since the steel crisis began in 1975. The coming year is likely to bring only
moderate improvement, and the longer term outlook is not much better. In
Western Europe, the continuation of heavy losses is threatening the EC's
program to phase out subsidies and is likely to lead to new conflict within the
community. 25X1
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USSR: Near-Term Grain Import Outlook) 25X1
With an estimated 1982 grain harvest of 165 million tons, we believe the
USSR needs to import 42 million tons of grain to maintain current levels of
meat production and satisfy other grain requirements in the current marketing
year (July 1982-June 1983). The Soviets have already purchased over 30
million tons, but shipments during July-December were extremely slow.
Moscow will have to import grain at a record pace over the next six months to
reach 42 million tons. Any additional Soviet purchases of US grain above the 6
million tons already bought will probably be made within the next several
weeks. If Moscow does not buy additional US grain, total imports are unlikely
to exceed 37 million tons.
El Salvador: A Beleaguered Economy
El Salvador's GDP declined for the fourth straight year in 1982, leaving it 25
percent smaller than in 1978, the last year of relative political stability.
Inadequate security and a severe foreign exchange shortage will prevent
economic recovery this year. If the current level of insurgency continues, we
estimate that about $450 million in foreign assistance will be necessary to
maintain GDP at last year's level.
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International
Economic & Energy
Weekly
11 February 1983
Perspective Commodity Markets, and LDC Debtors
The fall in commodity prices since 1980 appears to be ending, but the
consequences are far from over. While the OECD recession, now three years
old, greatly reduced demand for Third World commodities, LDCs maintained
production in order to protect export earnings and employment. As a
consequence, many markets were flooded, causing prices and export revenues
to plummet. Since 1980 agricultural commodity prices have fallen by one-third
and those for industrial materials by nearly as much.
It may be months before economic recovery in the West gathers enough steam
to increase demand for LDC commodities appreciably. For one thing, rising
protectionist pressures in the OECD countries are likely to hold down demand
for some LDC products. Moreover, even if a strong recovery occurs, as it did
following the 1974-75 recession, it probably would take at least six months
before prices of industrial materials begin a sustained rise.
Apart from uncertainties about the strength of an economic upturn, we believe
other factors may delay or weaken a recovery in commodity prices:
? There are large surpluses of most agricultural commodities, and increases in
cultivated land and improvements in agricultural technology promise to
expand output regardless of demand.
? Large stockpiles and slack capacity overhang most metal markets. Outside
the Communist world, unused capacity and stocks as a percent of consump-
tion in 1982 represented 22 and 28 percent, respectively, for aluminum; 26
and 17 percent, respectively, for copper; and 40 and 68 percent, respectively,
for tin.
? The LDCs, which greatly increased their own consumption of metals in the
1970s, will be financially unable to undertake large metal-intensive capital
projects in the foreseeable future.
? Inflationary expectations, which helped boost commodity prices during the
last recovery, have been dampened.
In any event, economic recovery will affect LDCs with different timing and in-
tensity. Countries in the greatest financial difficulty will not necessarily be
those that benefit first or most.
? Argentina and Brazil depend heavily on agricultural exports, which are not
particularly sensitive to the business cycle. Their exports of manufactures
will benefit sooner if they have enough supplier credits to take advantage of
an upturn in demand.
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? Mexico and Venezuela depend on oil for almost all of their export earnings.
Their financial position will not improve as long as oil prices remain weak.
? Chile, Peru, Zambia, and Zaire on the other hand, rely on metals for most of
their export earnings and should be among the countries that benefit most
from recovery in the industrial countries. The impact, however, may not be
felt for several months.
The countries in the best position to take advantage of OECD economic
recovery are the East Asian exporters of consumer manufactures. Demand for
these goods typically is the first to revive when an upturn occurs. Thus the
chief gainers-South Korea, Hong Kong, Taiwan, and Singapore-will be the
countries whose financial problems are the least worrisome.
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Kuwait Buys
Gulf Oil Assets
in Western Europe
Energy
After lengthy negotiations, Kuwait announced last week that it would
purchase Gulf Oil's refining and distribution operations in Belgium, the
Netherlands, and Luxembourg. The deal includes a 75,000-b/d refinery in
Rotterdam and about 750 service stations throughout the three countries.
While the price was not announced, it is estimated to be about $500 million.
Embassy reporting indicates that the initial payment to Gulf Oil would be 6
million barrels of crude oil, reportedly priced at about $27 to $28 per barrel.
According to Kuwait's Oil Minister the purchase represents the first step in a
number of "downstream" investments in Western Europe, with talks continu-
ing on possible Kuwaiti acquisition of Gulf Oil assets in Scandinavia and
Italy 25X1
Kuwait Initiates Kuwait recently awarded a contract to the French company Technip for
Gas Project construction of an offshore gas-gathering system for the Khafji and Hout
oilfields in the Kuwait-Saudi Arabia Neutral Zone. Technip's successful bid
of $150 million reportedly was about $60 million under the next lowest. The
system will take an estimated two and a half years to construct and, when
completed in 1986, will provide an estimated 2 million cubic meters per day of
associated gas. While this represents only about 15 percent of Kuwait's
average daily gas production in 1982, it will further reduce flaring and provide
additional flexibility for Kuwait, whose domestic gas system has recently been
hampered with shortages caused by low levels of crude oil production.
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Dutch Coal Gasunie, the Dutch gas monopoly, has dropped plans for the construction of a
Gasification'Project 1-billion-cubic-meter-per-year coal gasification plant in Eemshaven. Declining
Canceled demand for gas, sharply rising investment costs, and uncertain prospects for oil
and gas prices have undermined the project's viability, according to Gasunie
officials. Gasunie had planned to blend low-BTU coal synthesis gas with high-
BTU gas from the Groningen field. The project was one of the largest in
Western Europe and was intended to prolong the life of domestic Dutch gas re-
serves. 25X1
Denmark To Restrict In late January the Danish parliament passed an anti-apartheid resolution
Purchases of aimed at gradually eliminating purchases of South African steam coal by
South African Coal 1990. Danish electric utilities currently import about 3 million tons of South
African coal. Because South African coal is usually priced about $7 to $12 per
ton below coal from other countries, the US Embassy estimates that restricting
such purchases could cost Denmark about $45 million in 1990 alone. The loss
of South African coal could benefit US coal exporters, who currently account
for one-third of Danish coal imports.
International Trade, Technology, and Finance
Venezuelan Financial Difficulties in refinancing maturing loans, continued high levels of capital
Situation Deteriorates flight, and the prospects of further cuts in oil prices point to increasing
financial strains for Venezuela in the next few months. Refinancing efforts are
being hampered by recurrent arrears on some small government-guaranteed
loans. Moreover, we estimate that capital flight from Venezuela has escalated
to as high as $35-40 million per day. Nongold reserves now stand at about $8.0
billion, about half the yearend 1981 level. International bankers, concerned
with the continued decline in reserves and the prospect that further disarray in
OPEC will result in lower oil earnings, undoubtedly will shy away from
extending large new credits to Venezuela and hamper efforts to roll over old
debts.
As a result, Caracas will face an intense liquidity squeeze in the next 60 days.
The Embassy estimates that by 31 March Caracas will need to cover $3.5
billion of maturing short-term debt and $450 million in principal payments
falling due in this period. Capital flight will add to foreign exchange
requirements by further draining liquid reserves. Finance Minister Sosa
already is attempting to work out a program with international lenders for over
$9.0 billion in financing. Serious negotiations, however, probably will be held
up until the cabinet can decide how best to stem foreign exchange losses.
Meanwhile, Caracas will rely on stop-gap measures such as urging exchange
banks to limit the sale of dollars.
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Despite these moves, it is unlikely that Venezuela will be able to come up with
$4 billion by the end of next month. Finance Minister Sosa has suggested that
Caracas will resort to a partial suspension of principal payments this year and
will soon request formal debt rescheduling. The Venezuelan Government-
especially President Herrera and Central Bank President Diaz Bruzual-
would like to postpone any drastic economic policy moves such as a needed de-
valuation or more formal exchange controls until after the elections in late
1983. Foreign creditors, on the other hand, are likely to demand an approach
to the IMF, with attendant exchange rate adjustments and tighter austerity
measures, before rescheduling can take place 25X1
US-EC Agricultural At the EC Agricultural Council meeting early this week, member countries
Trade Dispute criticized the US sale of subsidized wheat flour to Egypt last month. While
Escalates France did not call for breaking off scheduled talks with the United States, it
did question their usefulness. A prepared French statement circulated at the
meeting called the US move an act of commercial war and suggested the
Community take "appropriate" measures to dissuade the United States from
further actions aimed at the EC. EC Agricultural Commissioner Dalsager
described the US sale as being outside the spirit of the series of high-level US-
EC talks and referred to the US wheat flour sale as the first step of a trade
war. The EC plans to ask for GATT consulatations with the United States on
the subsidy issue.F __1 25X1
Pressures are rising in member countries for the EC to take a harder line to-
ward the United States on agricultural trade disputes. The French are the
most bitter over the US flour sale, in part because France is the largest EC
producer of wheat. West German opposition to US agricultural policies,
however, could soon intensify if the United States concludes negotiations with
Egypt for the sale of dairy products. West Germany, along with France, is the
Community's largest dairy producer and contributes substantially to the
financing of EC dairy surpluses. Should the EC choose to retaliate, it probably
would restrict US access to the lucrative EC market rather than risk a costly
subsidy war over third-country markets.
City may ask for further assistance from the United States.
Gaps in Mexico's Mexico is requesting $500 million in emergency financing from commercial
Foreign Financing banks to cover shortfalls caused by delays in the disbursement of a $5 billion
loan package being arranged. Initial disbursements, which were to be made in
mid-January, probably will not be released until next month. As a result,
Mexico is again critically low on foreign reserves and missed the payment on
31 January of past-due private-sector interest. The US Embassy reports that
bankers are unreceptive to the request for the emergency loan and that Mexico
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Unless Mexico can arrange the bridge loan, it will fall behind on public-sector
interest payments, and past-due private-sector debt payments-now over $2
billion-will continue to mount. Even with the credit, the government will be
able to service public-sector interest payments for only about three weeks.
Mexico City is unlikely to cut essential imports-now 50 percent below the
level of last year-to meet debt service obligations
Obstacles to Since late December Brasilia has gained nearly total support for two phases of
Brazilian Financing its financing program-securing new money and refinancing maturing loans-
Plan but it is encountering difficulty in rebuilding the short-term credit position
included in the pro ram's four-part package.
West German banks probably will resist Brazil's short-term financing requests
most strongly because they doubt the program will work. If the Brazilians do
not gain their support by 1 March, they will lose the commitments already
made by other banks to the financing program. New short-term credits are
necessary to avert cash problems until Brazil can draw on new bank credits
and deposits. If this package comes apart, Brasilia will have to suspend
payments to foreign creditors and reschedule its debts.
Sudanese Official The Paris Club's rescheduling of Sudan's official debt last week relieves a
Debt Rescheduled major problem for the financially strapped Nimeiri regime and sets the stage
for efforts to reschedule debts to Arab states and private creditors. The lenders
rescheduled arrears and payments for 1983 totaling $500 million. The terms
provided are generous-a 16-year repayment schedule with a six-year grace
period when only interest is paid. Furthermore, during the grace period Sudan
will pay only 50 percent of the interest due with the remainder to be added to
the rescheduled debt. As a result, Sudan's payments to Paris Club creditors in
1983 will be only $20 million, all that Sudan can handle according to recent
IMF estimates. Sudan will now seek rescheduling of $1 billion in arrears and
payments for 1983 owed Arab oil-producing states and $1.2 billion due
commercial creditors.
Costa Rican Costa Rica faces problems that could set back negotiations on the rescheduling
Debt Problems of its $1.1 billion foreign commercial debt. Repayments on government-to-
government debt already have been rescheduled through yearend 1983. A
Swiss investor is suing Costa Rica for alleged default on an international bond
issue. San Jose has not paid interest on bonds since November 1981 when a
steering committee of creditor banks insisted that bonds be included in the
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French Borrowing
Plans
commercial debt restructuring. Should the Swiss investor win his case, Costa
Rica will either pay and thereby incur the wrath of the other creditors waiting
in line or be declared in default, triggering cross-default clauses on the rest of
its commercial debt. International bankers are waiting to see if the case sets a
precedent in determining whether bonds can be excluded from debt reschedul-
ings in other countries. 25X1
National Developments
Developed Countries
The French Government is seeking $3 billion in commercial bank loans to
support the franc and to cover the current account deficit
Paris recently has been running a monthly
trade deficit of $1-1.5 billion, and' support of the franc last month alone cost
the Treasury an estimated $4 billion.
the loans will depend on interest rates and the strength of the fran
common practice since the mid-1970s-is intended in this instance to avoid
domestic criticism about the size of additional loans Paris is likely to seek.
Large foreign borrowings have become a political issue, and the Socialist
government does not want to give domestic critics new grounds for charges
that its policies are bankrupting the Treasury. The government will need
funds, however, if it has to continue to support the franc-another political is-
sue for the opposition-until the municipal elections in March. The timing for
The use of nationalized companies as surrogates for national borrowing-a 25X1
Possible IMF Greek officials apparently have met with IMF representatives to discuss
Assistance Greece's deepening balance-of-payments difficulties-foreign exchange re-
for Greece serves late last year fell to the equivalent of three weeks of imports. An IMF
technical team, which visited Athens in early December, reportedly advised
Greek officials to seek commercial loans before appealing to the Fund for help.
At the same time, the team recommended that the Fund prepare to loan
Athens $1 billion over three years if the Greek Government would agree to a
package of austerity measures. Prime Minister Papandreou probably is not yet
prepared to incur the domestic political costs of turning to the IMF. His
leftwing constituents already are irate about what they believe are austere
government policies and would balk at measures they deemed still more
restrictive)
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Since the IMF team made its recommendations, Athens has announced a
restrictive incomes policy for public employees, devalued the drachma by 15
percent, and imposed import restraints. There is no evidence that the
government has taken these steps at IMF direction. Given indications that the
commercial credit market is growing increasingly wary about lending to
Athens, however, it seems likely that Greek officials made their decisions with
an eye to keeping the IMF option open.
Australian Wheat the 1982/83 25X1
Production Plummets wheat harvest is virtually complete and tots s 7.7 million tons-some 1.3
million tons below Canberra's estimate and a dramatic drop from last year's
total of 16.4 million tons. Rainfall in the primary wheat-growing areas was 70
percent below normal last year, and US Government experts see little
immediate relief in sight. Concern now is that continued dry conditions will
not only severely hamper this season's coarse grain crop (primarily corn and
sorghum) and next season's wheat crop, but will also further limit water
supplies available for residential consumption and industrial uses
Less Developed Countries
New Israeli The new cost-of-living formula, agreed to last month by labor, industry, and
Cost-of-Living government officials, is only a slight change from the old formula. Because it
Adjustment leaves intact the system of additional wage negotiations at the industry and
plant levels, the new formula probably will have little impact on real wages or
triple-digit inflation. Quarterly cost-of-living adjustments will now be 80 to 90
percent of the increase in the consumer price index during the previous three
months. The old system granted wage hikes of 80 to 90 percent of the average
CPI increase in the previous quarter relative to the quarter before that.
Finance Minister Aridor argues that the new formula will result in wage
adjustments that will better reflect current price rises, particularly during
periods of decelerating inflation. As long as the Histadrut, the large labor
organization, can negotiate additional wage gains at the industry and plant
levels, however, labor will be in a position to bargain for additional wages to
compensate for inflation. Real wages have increased at an average annual rate
of 7 percent since 1975, a major cause of accelerating inflation during the
period
Mexican Labor Group Labor leaders have requested a meeting of the national minimum wage
Demands Emergency commission to consider an emergency wage increase. Fidel Velasquez, head of
Wage Hike the largest government-affiliated labor organization, claims that a 29-percent
increase in consumer prices last month has wiped out the 25-percent minimum
wage settlement of 1 January. In a related development, the government has
announced a program to ensure that prices of 17 basic foods do not increase
faster than wages.
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A substantial wage hike now would disrupt the IMF program and probably
cause Mexico to miss several first-quarter economic performance targets by
wide margins. Velasquez's inflation estimate probably is too high, but the
rapid price increases that have already occurred are likely to prompt labor
leaders to demand higher subsidies and a price freeze on additional basic
consumer goods. Prospects for demonstrations against austerity policies by the
labor rank and file and by opposition parties are growing.
Bolivian Debt to The Siles administration is continuing efforts to settle a $59 million debt to
US Oil Companies two US petroleum firms operating in Bolivia for their share of the oil
produced. Prospects for meeting this summer's settlement deadline, however,
are bleak. La Paz was counting on revenues from natural gas sales to
Argentina this year, but Buenos Aires already is over $90 million behind on
payments. In early December, the US Embassy in La Paz assisted in a barter
arrangement involving 800,000 barrels of petroleum as an initial payment on
the oil debt, but the actual transaction has not yet occurred. Bolivia's only oth-
er move to date was a "good faith" payment in late December of $1.3 million
Indonesian Oil Indonesian officials are increasing efforts to obtain foreign loans to compen-
Revenues Declining sate for declining oil revenues. The head of the Central Bank says Jakarta will
need considerably more this year than the $1.25 billion it borrowed abroad in
1982, hinting the figure could exceed $2 billion. Indonesia is arranging a
$1 billion commercial credit from foreign banks, the second largest ever
granted to an Asian borrower. According to the US Embassy, Jakarta also is
trying to obtain new loans from Middle Eastern banks. 25X1
The Indonesians have become especially concerned about their financial
position as a result of OPEC's recent failure to agree on prices and production
quotas. Production in Indonesia has fallen to 1.1 million b/d, 200,000 below
the OPEC quota and 500,000 below capacity. Indonesia now appears willing to
accept loans tied to the US prime rate, which is higher than the rates it
demanded only a few months ago. Jakarta also appears anxious to arrange new
loans quickly, because it fears credit terms for less developed countries will
become tighter later this year. 25X1
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Guinea Delays (Guinea's plans of becoming a leading
Iron Ore Project exporter of iron ore have been shelved because of weak market conditions.
Some of the shareholders in the $1 billion project-which include US Steel,
several foreign governments, and Guinea-reportedly want to wait until
international prices rise at least 60 percent. A final decision is likely at a
shareholder meeting this month. Guinea's President, Sekou Toure, views the
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project as the key to reviving Guinea's economy. Moreover, the need for
Western technical and financial assistance figured prominently in Toure's
decision in the mid-1970s to move closer to the West. An indefinite delay in
the project may prompt Toure to reassess the usefulness of such ties.
Moroccan Phosphate Morocco's depressed phosphate industry is not likely to improve this year.
Earnings Languish Phosphate rock sales-which accounted for 41 percent of export earnings in
1982-are unlikley to increase from the reduced level of 16.5 million tons
shipped last year. Rabat also may be forced to cut rock prices by as much as
$5 per ton to preserve its market shay Such a 25X1
cut would reduce export earnings by about $100 million, an amount approxi-
mately equal to potential savings that would be earned from a $4-per-barrel
drop in the nation's oil imports. In addition, below average rainfall in recent
months raises the prospect of another poor grain harvest, thus increasing the
negative impact of a drop in phosphate earnings. 25X1
India Decries US Stand US opposition to Indian borrowing from the Asian Development Bank has
on ADB Loan Request angered Prime Minister Gandhi and, according to the Embassy in New Delhi,
will have a negative impact on overall bilateral relations. New Delhi, which
has not previously borrowed from the ADB, is seeking approximately $2 billion
in nonconcessional project loans for 1983-87. Indian officials have long been
aware that the United States does not favor Indian borrowing, but the dispute
has intensified during the past few months when active negotiations about a
general capital increase for the ADB have become tangled with negotiations
about the Indian loan request. India's balance-of-payments prospects have
deteriorated since early 1981, when New Delhi first sought access to ADB
funds. Gandhi's closest advisers believe that the United States has been
actively campaigning against Indian borrowing and are skeptical of assurances
to the contrary.
Pakistan Buoyed by The IMF Executive Board last week voted in favor of the third and final
US Vote on disbursement of Pakistan's $1.7 billion three-year Extended Fund Facility
IMF Support (EFF) loan arrangement, with the United States casting a positive vote.
Despite the balance-of-payments assistance from the IMF, Pakistan still is
negotiating to reschedule loan payments falling due this year. Pakistan
probably will seek to obtain additional IMF and World Bank support after the
EFF expires in November.
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Stagnation in Soviet Statistics just released by the Central Statistical Administration indicate that
Standard of Living the standard of living in the USSR last year stagnated at best. According to
the official report on the performance of the Soviet economy in 1982:
? "Real per capita income"-actually a constant-price measure of total
consumption minus some services-rose by only 0.1 percent.
? Retail sales in constant prices increased by only 0.3 percent, implying a per
capita decline of about 0.6 percent. Retail trade accounts for about three-
fourths of Soviet personal consumption.
The virtual flattening of these two key Soviet measures of well-being is
unprecedented. In 1981, real per capita income rose by 3.7 percent and in
1976-80 at an annual average rate of 3.2 percent. The corresponding figures
for per capita retail sales were 2.6 percent and 3.7 percent, respectively. Our
calculations also show little growth in real per capita consumption last year-a
0.4-percent rise, down from an increase of 1.2 percent in 1981.
25X1
Since domestic production of most consumer goods and services rose in 1982,
though more slowly than in 1981, it is not clear why consumption as reported
by the Soviets leveled off. Net imports of consumer goods may have been cut
back or inventories may have been increased. A major diversion of consump-
tion from state stores and collective farm markets to semilegal and illegal
outlets could also have been a factor. _ __ _ . 25X1
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Chinese Grain (China has purchased over 1 million tons of
Purchases From amine wheat since Traders believe the two countries may have
Argentina increased the amounts called for in their long-term grain agreement originally
scheduled to run from 1981 through 1984. Since 1981 the Chinese have
purchased only small quantities of Argentine grain because the Soviets have
taken most of the available supplies
Although Beijing recently threatened to reduce purchases of US grain in
retaliation for US-imposed textile restrictions, the Chinese appear to be buying
Argentine wheat for economic reasons. The Argentines, who have had a record
harvest and are offering low prices, could have supplied the Chinese with more
grain, particularly in light of Soviet inactivity in the Argentine market.
Relatively high prices probably will keep China out of the US grain market
over the next few months, and purchases later in the year may depend on how
the textile issue is resolved
Further Expansion of China and Italy late last year signed
Chinese-Italian a two-year agreement that significantly expands technical cooperation in
Nuclear Cooperation nuclear science and technology. The new accord will provide training for
Chinese personnel in fusion research, fuel cycle technology, thermal reactor
development, and fast reactor technology. China's decision to increase its
cooperation with Italy is consistent with Beijing's policy of diversifying sources
of foreign technology. Since 1978 China has turned increasingly to Western
Europe for scientific data and technology to support its modernization
program and recently signed a nuclear-related cooperation agreement with
France. We believe the agreements are designed, in part, to provide China
with equipment and technology that cannot be obtained from US sources.
25X1
25X1
For the Italians, the agreement will help promote commercial sales in the
nuclear field. Since 1981 Beijing has purchased nuclear technology from an
Italian firm, which is planning to help the Chinese design and build a facility
for nuclear fuel reprocessing. This plan has only been partially implemented,
however, because of Italian concern for protecting proprietary information
associated with the sale. Italy, moreover, is bound by COCOM controls and
would have to obtain permission to sell reprocessing technology.
25X1"
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Secret
Outlook for Commodity Prices
The steep slide in nonfuel commodity prices that
began in 1980-the most severe and prolonged
since World War II-appears to be over. In recent
months, most broadly based indexes of mineral and
agricultural commodities have leveled off or inched
upward in expectation of economic recovery in
developed countries. In contrast to the price recov-
ery following the 1974-75 recession, we expect this
one to be neither strong nor rapid unless industrial
country economic expansion develops much more
momentum than most forecasters now anticipate.
In any event, commodity prices normally lag at
least six months behind a turnaround in economic
activity. Even a robust recovery will not greatly
help US producers who have lost markets to foreign
competitors willing to sell below cost in order to
earn foreign exchange.
Commodity Price Trends
Plagued by oversupply and weak demand, com-
modity prices continued to slide in 1982, although
at a slower rate. The Economist price index of
industrial materials, composed of 20 metals and
materials, fell nearly 15 percent in 1982, while a
similar index for food commodities was down about
20 percent. By yearend, average commodity prices
were roughly 35 percent below their 1980 peak.
Metals
Although metal producers in the developed West
sharply reduced output in 1982, demand fell even
more as industrial production slumped. In most
cases, yearend 1982 inventories were above yearend
1981 levels:
? Copper. Copper prices fell 15 percent in 1982 as a
result of weak demand-particularly in construc-
tion and transport equipment-and mounting in-
ventories, which reached a four-year high. US
copper producers were hard hit. In late 1982 the
industry was operating at a rate 15-20 percent
below 1981. In contrast, LDC producers, many of
which are government controlled and account for
an important share of their country's employ-
ment, typically continued to pour out metal.
Indeed, in 1982 Chilean output was a record 1.2
million tons as the government sought to main-
tain export earnings.
? Aluminum. Aluminum prices on the London
Metal Exchange averaged 45 cents per pound in
1982, off 22 percent from the 1981 average.
Production in the United States fell to a 14-year
low. These and other cuts-Japan's output was
down 54 percent-brought consumption and pro-
duction into near balance but did nothing to
alleviate the large overhang of metal on world
markets. Inventories stood at a record 3.2 million
tons as of September 1982.
? Lead. Lead lost one-fourth of its value in 1982 as
demand fell to its lowest level since 1975. A weak
automotive sector was the primary culprit.
? Tin. Despite massive stockpile purchases by the
International Tin Council, tin prices fell by 9
percent in 1982. Non-Communist demand regis-
tered its lowest level in more than two decades,
and inventories grew to the equivalent of eight
months of consumption. Although production has
been trimmed somewhat, mainly by Malaysia
and Thailand, output through October continued
to exceed demand by some 10 percent.
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I I I
711111111111111111111111111111111111111I11
100
50
111111111111111111111111III1111111II V 1111111
0
Cotton Tin Coffee
US $ per Pound US 8 per Pound US $ per Pound
80 600
III IIIIIII IIIIIIIIIIIII IIIIII1111111111III IIIIIII V II111 V IIIIIIIIII V IIIIIII V IIIIIII
60
40
Natural Rubber Lead Sugar
US d per Pound US Q per Pound US Q per Pound
20
20 10
11111111111111111111 I1111111111I1111111111 111111111I1111IIIIIIIIIIIIIIIIIIIIIIIIII 11111I1111111111111I111111I111111111II
0 0 0
Copper Zinc Cocoa
US $ per Pound US $ per Pound US S per Pound
120 60 1.50
100
40 1.00
0
60 20 0.50
111111111111111111111111I11111111IIII1111
40 1972 73 74 75 76 77 78 79 80 81 82 0 1972 73 74 75 76 77 78 79 80 81 82 0 1972 73 74 75 76 77 78 79 80 81 82
aQuarterly averages.
b Shaded areas indicate periods of recession.
588694 2-83
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6 Percent Devia- 250
tion From Trend
of OECD GNP 200
IN A
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Consumption days 58 115 99 101 64 66 63 71 67
Copper
a Through November.
b Through August.
Through July.
d Though September.
e Includes ITC buffer stocks.
Since late December The Journal of Commerce
index of metal prices has rebounded 18 percent.
According to industry sources the price surge has
been fed by speculators hoping to cash in on a
metal market recovery. This move, however, seems
premature. We believe this because stock over-
hangs and new orders for final products indicate
that most metal markets will remain weak until
demand picks up appreciably, possibly later this
year. As a result, we do not believe the recent high
rate of increase in metal prices will be sustained
unless an unexpectedly sharp economic recovery
occurs.
We anticipate the recovery in commodity prices
will be quite different from the one that followed
the 1974-75 recession. At that time, metal prices
rode the Western recovery to record highs; by 1980
they had doubled. This time, however, most observ-
ers expect that growth in the OECD economies, at
least for 1983, will be only about half the rate that
followed the last recession. More important, indus-
try sources believe that investment in new plant and
equipment-the bellwether of metal demand-will
grow little if at all because about one-third of
OECD industrial capacity sits idle, long-term inter-
est rates remain high, and industry profits have
fallen sharply. Some of the unused capacity in
basic, metal-intensive industries may never be reac-
tivated as the structure of output in the OECD
countries continues to change.
Furthermore, during the last economic recovery
prices were forced upward by speculators who
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134.5
12.9
bought nonprecious metals as a hedge against
depreciating currencies and by metal users who
built up inventories to protect against price in-
creases. Sharply lower inflationary expectations are
not likely to provide a boost to metals prices such as
occurred in the late 1970s.
Demand for metals will be constrained even more
by the weakened financial position of the LDCs.
Many of these countries had been involved in
building up infrastructure through the construction
of large metal-intensive capital projects, and they
accounted for a growing share of world metal use
during the 1970s. For example, between 1970 and
1980 LDC copper consumption doubled, as did its
share of non-Communist use. Slower economic
growth and severe debt problems will tend to limit
LDC investment in metal-intensive industries, cer-
tainly during the next 18 to 24 months.
On the supply side, strike-induced disruptions are
not likely, even though major lead, zinc, and copper
Secret
11 February 1983
contracts in the United States will be up for
renegotiation by midyear. Given the weak state of
the metal markets, the long period of high unem-
ployment among miners, and the poor financial
position of many metal companies, labor in produc-
ing countries may try to avoid strikes. If wages and
benefits remain stable, as industry representatives
expect, it will minimize cost-push effects on metal
prices.
Good harvests, huge carryovers, and depressed
demand put downward pressure on farm commod-
ity prices in' 1982:
? Sugar. Last year's world sugar crop was the
largest in history, but consumption increased less
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Secret
than 1 percent. In the United States, which
accounts for 9 percent of world usage, consump-
tion fell about 6 percent. Slow or negative income
growth in the LDCs and strong competition from
corn-based sweeteners also restrained sugar de-
mand. As a result, world stocks reached almost
40 percent of consumption, and world sugar
prices plummeted 50 percent to the lowest level in
10 years.
? Grain. World grain markets in 1982 were charac-
terized by sluggish demand, depressed prices, and
mammoth additions to stocks. Last year's record
US corn crop will help boost world grain stocks to
a record 196 million tons, about 17 percent of
annual consumption. During the last two years
world demand fell by 14 million tons while
production increased by almost 50 million tons.
Prices have dropped to a three-year low. Fierce
market competition among major grain exporters
has resulted, increasingly involving attractive fi-
nance packages and concessionary repayment
terms.
? Cotton. Cotton prices fell 16 percent last year,
reflecting continued weak textile demand. Al-
though stocks are larger than producers would
like, they compare favorably to levels in the mid-
1970s, which were one-third greater.
? Oilseed. World oilseed production reached a rec-
ord high in 1982 with large increases in soybean
output from the United States, Brazil, and Ar-
gentina. Prices fell 16 percent as surpluses
mounted.
? Cocoa. Large-scale plantings when prices were
high led to five years of surplus production and
depressed prices last year to 35 percent of their
1977 peak. The International Cocoa Organiza-
tion, which does not include the Ivory Coast-the
world's largest producer-has been unable to
boost prices to planned levels through market
intervention. The impact of declining prices has
been particularly severe for Ghana, the world's
third-ranking producer, which depends on cocoa
for at least 60 percent of its export earnings. Last
year, Ghana's cocoa revenues were only about
half the 1979 level.
Although agricultural prices have leveled off in the
past few weeks, they have not rebounded as have
metal prices. Indeed, the outlook for agricultural
commodity prices remains bleak for at least the
next year and probably longer. Factors such as past
investments in better farming technology, land
development, and marketing infrastructure will
continue to swell world farm production despite low
prices. New land continues to be brought into
production, and most of the world's prime farmland
is being worked more intensively. Efforts by gov-
ernments to protect their farm economies through
domestic price supports and import quotas, to
maximize food export earnings, and to conserve
foreign-exchange spending on food imports encour-
age even greater farm surpluses.
? Not even the vagaries of weather, which contrib-
uted to a fourth consecutive poor grain harvest
for the USSR and cut Australia's 1982 grain crop
in half, have stemmed the tide; world grain
output will set a record this year.
? The coffee industry faces huge stocks as a result
of expanded plantings following the Brazilian
freeze of 1975.
? Cocoa prices are likely to remain well below the
levels of the late 1970s because of expanding
production from plantings already in place. The
International Cocoa Organization estimates that
prices will fall in real terms through 1985.
Meat consumption has plateaued in countries such
as Japan and even the United States as a result of
stagnating real incomes, rising trade barriers, and
dietary shifts. Price declines at the production level
have provided little stimulus to consumer demand
because much of the savings has been absorbed by
rising costs in processing and distribution. High oil
prices and low commodity prices have dealt the
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non-OPEC LDCs a double blow, greatly limiting
their buying power. With rapidly growing popula-
tions, however, the LDCs remain the most likely
source of long-term growth in demand for farm
products.
Implications for the United States
Weak prices for agricultural commodities, particu-
larly grain and soybeans, will continue to have a
negative impact on the US balance of payments.
USDA reports that agricultural exports in fiscal
1982 were down 11 percent from the record of
$43.8 billion in fiscal 1981, and it expects a further
decline this year.
Low farm product prices are also intensifying
protectionist agricultural policies. The EC's Com-
mon Agricultural Policy is largely responsible for
shifting the Community from a major net grain
importer, buying as much as 20 million tons a year
on the world market, to a significant wheat export-
er. The EC is now the world's fourth-largest wheat
exporter, second-largest beef exporter, the world's
largest poultry supplier, and the world's largest
exporter of sugar to the free market. In 1980 the
EC also accounted for some 60 percent of world
exports of butter and nonfat dry milk. The loss of
traditional export markets to the EC has goaded
other farm product exporters into action:
? More than a dozen nations have filed formal
protests against the EC's Common Agricultural
Policy.
? The United States has authorized the first buyer
incentives for farm exports since the early 1970s.
? Canada is financing grain sales at below-market
interest rates.
? The United States has threatened to dump its
huge dairy surplus on world markets if the EC
enacts import taxes aimed at US soybean meal
and corn gluten feed.
Japan's protectionist policies also are under attack.
Import quotas and high internal prices have kept
Japanese meat consumption well below levels of
other industrialized countries, restraining demand
for feedgrains as well.
Secret
11 February 1983
The long slump in commodity prices may well
represent a watershed for the US metal industry.
During the 1970s the industry experienced rapidly
rising costs caused by the sharp rise in energy
prices and the crescendo of concern over environ-
mental protection. It did not recover from the
recession of 1974-75 until late in the decade. Now
US nonferrous mines and smelters as well as iron
ore mines and steel mills have closed or gone on
reduced hours. Since 1980. employment has de-
clined 8 percent in the lead industry, 15 percent in
aluminum, about 30 percent in steel and copper, 35
percent in zinc, and over 50 percent in iron ore-
perhaps as many as 200,000 workers in total. Even
with permanent closings, capacity utilization at
yearend 1982 was down to 65 percent in the
aluminum, copper, and lead industries, 50 percent
in zinc, 30 percent in steel, and only 10 percent in
iron ore.
The competitive pressures from LDC mineral pro-
ducers will remain strong, in part because they
continue to push output and exports in an effort to
maintain foreign exchange earnings and service
their debts. Some LDCs have even accepted barter
arrangements in order to unload surplus supplies.
In recent weeks both General Motors and Chrysler,
for example, have concluded agreements with Ja-
maica to trade vehicles for Jamaican alumina.
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OPEC: Saudi Arabia on Center Stage
OPEC's failure to agree on oil production quotas
and price differentials and subsequent indications
that Riyadh and other Arab countries on the
Persian Gulf will soon cut prices have unleashed an
outpouring of speculative pressure on the market.
The unloading of inventories and falling consump-
tion forced OPEC production down sharply in
January to about 17.4 million b/d. Output is
running even lower in February, as buyers continue
to watch for the first break in prices. Reluctance of
others, principally North Sea producers, to cut
prices puts the burden of price reduction on the
Saudis. Although Riyadh would prefer that some-
one else take the lead,
[:::]the Saudis may cut prices as early as next
week by $4 per barrel retroactive to 1 February
1983. While we believe that a Saudi price cut
would force most OPEC nations to cooperate, we
think a period of competitive price cutting might
well precede an agreement to uphold the new
benchmark
Saudi Strategy and Objectives
In a departure from past strategy, Saudi Arabia is
aggressively trying to force OPEC members to
accept pricing and production agreements to
Riyadh's liking. We believe that Saudi policy is
coordinated closely with other OPEC members of
the Gulf Cooperation Council (GCC)-Kuwait, the
UAE, and Qatar-and that the individual pricing
and production policies of these states are part of a
larger, Saudi-sponsored strategy. The Saudis and
Arab Gulf states need to stop the steady erosion of
their market shares and attendant loss of revenues
that has taken place over the past 18 months.
Riyadh has generally preferred to take a passive
course to attain its objectives, varying oil output to
1982
1983
Januarys
Ecuador
0.2
0.2
0.2
Gabon
0.2
0.2
0.2
Indonesia
1.3
1.3
1.2
Iran
2.9
3.0
3.0
Iraq
0.8
0.8
0.8
Libya
1.7
1.7
1.4
Neutral Zone
0.4
0.4
0.3
Nigeria
1.4
1.2
0.8
Qatar
0.3
0.3
0.3
25X1
25X1
34 percent last year.
stabilize supplies and prices throughout 1982.
Riyadh did not foresee the dramatic market turn-
around caused by the 1979-80 price runup, nor the
deep and persistent recession. The impact of con-
servation and fuel substitution, compounded by the
drawdown in oil company stocks, was also greatly
underestimated. These factors caused OPEC crude
oil production to drop by over 8 million b/d-or 30
percent-in two years, while OPEC's share of Free
World output fell roughly 10 percentage points to
less than 50 percent in 1982. The Saudi share of
OPEC production fell from 42 percent in 1981 to
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Saudi hopes that demand would uphold the $34
benchmark price were based on expectations that
economic recovery would begin in the West and
that the general drawdown in inventories would
end. Neither has materialized, and the Saudis face
the prospect of having to absorb further losses in
sales unless prices are realigned. As it is, Saudi
production is probably running well below the 4.7
million b/d reported for January. In the short term
Riyadh wants a pricing structure that shifts more
of the burden of declining oil demand on other
producers. For the long term Riyadh evidently
wants to implement a pricing pattern that would
enable the Saudis to maintain a strong influence
over the world oil market
Warnings to OPEC "price-cheaters" have thus far
had no effect. Most non-GCC members of OPEC
are ignoring previous production agreements, in
many cases producing close to capacity until very
recently. Reporting from several sources indicates
that the Saudis, along with their GCC partners,
now want oil prices to drop by about $4. The
Saudis' problem is to engineer the price cut in such
a way as to restore the competitive price differen-
tials for Gulf crudes. If possible, Gulf producers
would prefer not to initiate the drop, hoping instead
that North Sea producers will make the first move
and force Nigeria into being the first OPEC mem-
ber to "break the ice." But we believe that the
GCC members are prepared to act if prices hold
much longer.
Iran, largely to finance its war effort, has become
the most flagrant violator of OPEC pricing and
production agreements. Faced with a serious for-
eign exchange bind, Tehran began aggressive price
cutting to expand its oil market share in early 1982.
With discounts as much as $6 below the OPEC
benchmark price production climbed quickly, and
is now averaging about 3 million b/d
Besides improving its own revenue position dramat-
ically, Tehran has been able to deny Iraq badly
Secret
II February 1983
needed hard currency. For one thing, it has cap-
tured most of the market share lost by the Saudis
and other Gulf producers-Iraq's main benefac-
tors. At the same time, Tehran has conspired with
Syria to close the Iraq-Syria oil export pipeline and
to sell Iranian oil to Syria
Saudi-Iranian rivalry and mutual dislike is a factor
in the current war of nerves within OPEC. We
cannot determine, however, to what extent political
motivations are influencing Tehran's pricing and
production actions. At a minimum we believe that
political considerations are reinforcing financial
interests that, in our view, are the most important
factors driving Iran. Political considerations- 25X1
which country will be the dominant force in the
Persian Gulf-are also playing an important role in
the Saudi determination to push the price issue. To
avoid direct confrontation with Tehran on the oil
market issue, the Saudis are willing to let the UAE
and Kuwait take the lead in making public de-
mands for better OPEC discipline
Iranian oil policy in the near term will be formulat-
ed largely in response to Saudi initiatives. Tehran
would. undoubtedly match an initial $4 price cut.
Revenues would still be more than adequate to
support the war effort and maintain current levels
of government spending. A price cut of more than
$4 per barrel, however, would begin to cause
increasing financial strains. Moreover, Tehran al-
ready is producing near capacity; it cannot market 25X1
significant amounts of new crude to raise additional
revenues. Without this ability, Iran's response to a
price cut probably does not weigh heavily in the
Saudi position
The Saudis and other GCC members appear to
have three basic options to try to bring prices down
and regain some control of the market. In order of
increasing risk to the Saudis, they are:
? A passive approach of letting some other major
producer take the initiative in cutting prices.
Saudi cuts would follow the lead of others.
25X1
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? Initiating a price cut of $2 to $4, either publicly
as a joint GCC decision, or unofficially through
price discounts. This might be followed by anoth-
er attempt to forge an effective OPEC agreement
on pricing and production.
? A large preemptive price cut, probably accompa-
nied by increased production to flood the market
with cheap oil. The Saudis and GCC members,
with their large financial reserves, could outlast
other OPEC members who would either have to
make their peace with Saudi Arabia or see their
market share taken away by cheaper Gulf oil.[
The increasing risks the Saudis must consider
include financial dislocation in the world economy,
major strains in OPEC-including possible disinte-
gration-and heightened hostility from Iran in
particular, including the possibility of military re-
taliation.
We believe the Saudis are about to give up on the
first option. The United Kingdom and Mexico-
major non-OPEC exporters-are both reluctant to
initiate price cuts that provoke retaliatory cuts by
OPEC countries. Mexican and British prices al-
ready are below those for comparable OPEC
crudes.
The Saudis now appear to have settled on the
second option and are considering ways to make it
succeed. GCC members have been issuing a steady
stream of threats to cut prices and to expand output
if other OPEC producers pursue present policies.
According to reporting from Kuwait, the GCC has
informed other OPEC members that agreement on
a $30 benchmark with acceptable production quo-
tas and price differentials must be reached before
mid-February. Failing this, the GCC would meet
again to announce a unilateral price cut of $4 per
barrel. Also, Yamani met last week with the major
US buyers of Saudi crude, reportedly to tell them
that Riyadh would cut prices by $4 a barrel in
February and make the cut retroactive to the first
of the month)
At this time Riyadh appears to prefer a publicly
announced price cut rather than privately discount-
ing its oil sales. There are indications that some
discounts have been offered to Petromin customers
to forestall further production declines, but these
offers have apparently not been extended to the
former Aramco partners 25X1
A major preemptive cut of $10 per barrel or more
appears to be ruled out for the moment, although
the option could be revived. We believe the Saudis
would be willing to risk this option to force OPEC
to come to terms. The Saudis are mindful of the 25X1
risks involved, but are aware that they and other
GCC members can tolerate an all-out price war
longer and easier than anyone else in OPEC. In
addition, most of those cheating on prices-partic-
ularly Nigeria and Venezuela-could not stand a
price war for long because of their financial prob-
lems. Even the knowledge that the GCC states 25X1
were serious in their threats to pursue this option
might be enough to make these countries amenable
to adopting meaningful pricing and production
guidelines. Concern over military reprisal from
Iran in response to such an action could weigh
heavily against this option
In the end Riyadh could, as in the past, opt to do 25X1
nothing. Although this is at odds with activist
Saudi initiatives of the past month, important
decisions never come easily to Riyadh. A further
postponement of the cut is possible.
Speculative pressure on oil prices could intensify
following a price drop if buyers expect further cuts.
Unilateral price cuts would feed such expectations.
Despite company efforts to reduce inventories over
the past year, excess stocks still exist because
consumption has been lower than expected-espe-
cially during fourth quarter 1982. The ability of
Saudi Arabia and its GCC partners to convince
buyers that $30 per barrel is an appropriate bench-
mark would hinge on OPEC's ability to effectively
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limit production. If Saudi Arabia lost control and a
downward price spiral occurred there is a good
chance that it would be short lived as incentives for
producers to submit to discipline would grow rapid-
ly. Also, once buyers believe that oil prices have
bottomed out, speculative pressures will probably
reverse.
A price cut by the Saudis could spark a period of
competitive price reductions as other OPEC mem-
bers attempt to maintain revenue levels by expand-
ing their market share. The most likely to respond
are Nigeria, Venezuela, and Indonesia since they
have unused capacity and need the money. Libya
also has excess capacity but is in better financial
shape. Even without Iranian acceptance of an
agreement, we believe other producers eventually
will be sufficiently cooperative after a Saudi price
cut to assist in defending a new benchmark
25X1
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/1 February 1983
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Secret
Steel industries in the developed countries have just
been through their worst year since the steel crisis
began in 1975. Although financial losses in the EC
probably were no worse than in 1981, the US
industry suffered its biggest loss since the Great
Depression. Profits in the Japanese steel industry
dropped sharply and by the end of the year had
virtually disappeared.
The coming year is likely to bring only moderate
improvement, and the longer term outlook is not
much better. The struggle for sales in a smaller
market is leading to resurgent protectionism in
many countries. In Western Europe, the continua-
tion of heavy losses is threatening the EC's pro-
gram to phase out subsidies and is likely to lead to
new conflict within the Community.
Declining Output
In 1982 steel production in non-Communist coun-
tries fell to less than 400 million tons, nearly
14 percent below 1981. Lower production in the
developed countries accounted for all of the decline,
with output falling considerably below the recession
level of 1975. At the beginning of 1982, output in
the developed countries was running at a seasonally
adjusted annual rate of about 380 million tons. By
the end of the year, the rate was down to 295
million tons
Although output fell in all the major countries, the
United States accounted for two-thirds of the total
decline with production sinking to the lowest level
since 1946. While much of the drop in US output
was due to the depressed demand in metal-using
industries, shipments also fell sharply as consumers
used up their steel inventories in order to keep new
orders at a minimum. The rest of the decline in
Western steel production occurred chiefly in the
EC where slumping economic activity, higher im-
ports, and reduced exports caused production to fall
about 12 percent. Third World countries managed
to achieve a small production increase last year,
primarily because of higher output in South Korea
and Taiwan 25X1
Financially, 1982 was a disaster for most of the
major steel producers. Preliminary reports issued
by some of the major European companies indicate
losses in the EC about equal to the $4 billion deficit
of 1981. In the United States, company reports
available so far point to a $2.5-3.0 billion loss on 25X1
steel operations. If nonrecurring items were add-
ed-such as the writeoff and closing costs for mills
shut down-US losses would approximate $4 bil-
lion. Among the major countries, only the Japanese
industry managed to stay in the black, partly
because of the aftermath of the 1981 boom in
oilfield tubular goods. By yearend, however, even
the Japanese industry reported that it was operat-
ing close to its break-even point.
Losses were caused in part by lower operating 25X1
rates. For the year as a whole, US steel mills used
less than half their capacity, compared with 78
percent the year before. By yearend, capacity utili-
zation had fallen to 30 percent. The EC employed
only 55 percent of its steel plant during the year 25X1
with operating rates declining below 50 percent
toward the end of the year. In Japan operating
rates changed little from 1981.
Losses also piled up as steel prices were unable to
keep up with rising material and labor costs. Only
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Non-Communist countries
492
420
450
441
465
494
462
455
392
406
Developed countries
461
387
412
397
417
438
404
395
330
343
United States
132
106
116-
114
124
123
102
109
66
87
European Community
156
126
135
127
134
141
129
126
111
105
Japan
117
102
107
102
102
112
111
102
100
97
a Preliminary.
b Projected.
Including other European countries, Canada, South. Africa,
Australia, and New Zealand.
in the EC domestic market were prices appreciably
higher in 1982; the EC Commission and the larger
steel companies managed to enforce an average
increase of about 15 percent for the year as a
whole. Even in the EC, pressure from rising excess
capacity and growing import competition finally
cracked the industry's discipline, and prices de-
clined during the second half of the year
Steel industry wage and material costs continued to
rise slowly in 1982. For the Japanese and the
Europeans, local currency costs for imported raw
materials and fuels were increased somewhat by
dollar appreciation during the year. Lower operat-
ing rates also caused some deterioration in plant
efficiency, raising operating costs per ton.
Wage rates increased in most countries despite
rising unemployment among steel workers. Em-
ployment in the EC steel industry declined by
about 30,000 workers during 1982 adding to the
250,000 steel workers laid off since 1974. The
situation was even worse in the United States with
steel industry employment averaging about
Foreign Trade and the
Rise of Protectionism
Steel export volume held up fairly well during 1982
because exporters continued to force steel into a
weakening market. Japanese exports remained at
the 1981 level, while lower EC exports were offset
by somewhat higher export activity by the Third
World. Because export volume remained relatively
high, weakening demand forced export prices
downward. Spot prices for cold rolled sheet from
Europe, for example, fell from about $390 per ton
in early 1982 to around $315 at yearend
As competition became more intense, a rash of
protectionist actions hit the world's steel trade.
Besides US countervailing duty and antidumping
actions against the EC, Canada took steps to halt
alleged dumping of steel by a number of countries,
including several EC members. Elsewhere Turkey
and Australia imposed higher duties on imported
steel during the year. Toward the end of the year,
100,000 jobs below that of 1981 ~
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Spain was considering antidumping actions against
some EC steels, and Japan was looking at possible
dumping charges against steel imports from several
Third World countries. In Latin America, the
major producing countries were considering a
scheme to promote trade in steel within the region
through preferential tariff arrangements and a
"buy Latin America" campaign.
Actions taken or under consideration by the EC
include:
? Antidumping actions against Spain, Brazil, and
Venezuela.
? The adoption of accelerated antidumping investi-
gation procedures.
? Increased minimum prices for imported steel.
? The negotiation of lower import quotas in its
bilateral steel trade agreements with 13 major
steel suppliers.
EC and Japanese producers opened the year with
operating rates well below their depressed 1982
levels, and this situation is expected to continue at
least through the first half of the year. Unless
recovery is very sharp, their production for the full
year will again decline. Although the outlook in the
United States is clouded by the possibility of a
strike in late summer, a partial recovery in output
is forecast by most industry observers; steel inven-
tories are at rock bottom and the end to stock
liquidation should produce some increase in orders.
Financially, the outlook is mixed for the major steel
producers. The US industry should cut its losses
sharply as production increases. Most analysts ex-
pect that operating rates will remain below the
break-even point, however. The profit situation in
Japan apparently is still deteriorating as operating
rates fall. The industry has announced a reduction
in its investment spending and one of the largest
steel companies has stated that it will cut executive
salaries.
There are indications that the EC situation may
grow worse in 1983. German steel officials are
forecasting that their industry could lose about
$1 billion this year, probably more than the losses
of 1982. Korf-Stahl has just gone into receivership
and Saarstahl is on the verge of it. Together these
two companies represent about one-tenth of the
West German industry. A commission appointed 25X1
by the companies to study Germany's steel prob-
lems has now recommended a sweeping reorganiza-
tion of the industry involving mergers among the
leading firms. 25X1
The failure of EC steel producers to improve their
financial performance will be particularly signifi-
cant in 1983 because the Community is scheduled
to begin withdrawing its steel subsidies this year.
According to the agreement reached in 198 1, the
EC Commission will accept no new request for 25X1
emergency aid beyond the end of 1982. Aid will
continue to flow under old authorizations and for
capital investment and other purposes. As time goes
on, however, conflict is likely to develop between
the industry's continuing need for financial assist-
ance to cover heavy losses and the EC's intent to
gradually bring aid to an end. The likely break-
down of the plan to terminate the steel subsidies
probably will create further problems within the
Community. 25X1
The steel industry's long-term prospect remains
grim. During its annual meeting in Tokyo last
October, the International Iron and Steel Institute
(IISI) forecast that steel consumption in non-Com-
munist countries would reach about 525 "million 25X1
tons in 1990. Since current steelmaking capacity is
estimated by the industry at about 670 million tons,
the IISI forecast suggests that the industry will
suffer the burden of excess capacity and depressed
prices for some time to come. Moreover, trade
problems are likely to continue as countries attempt
to maintain employment and higher operating rates
by pushing exports. 25X1
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USSR: Near-Term Grain Import Outlook
With an estimated 1982 grain harvest of 165
million tons, we believe the USSR needs to import
42 million tons of grain to maintain current levels
of meat production and satisfy other grain require-
ments in the current marketing year (July 1982-
June 1983). The Soviets have already purchased
over 30 million tons, but shipments during July-
December were extremely slow. Moscow will have
to import grain at a record pace over the next six
months to reach 42 million tons. Any additional
Soviet purchases of US grain above the 6 million
tons already bought will probably be made within
the next several weeks. If Moscow does not buy
additional US grain, total imports are unlikely to
exceed 37 million tons
Soviet Import Needs
Last fall we predicted that Soviet grain imports in
the 1983 marketing year would reach a record 50
million tons. When the Soviets bought grain at an
unexpectedly slow pace during first-quarter MY
1983, we reexamined their 1982 grain harvest,
their policy toward increasing meat availability,
and their ability to pay for grain imports. Based on
larger forage and potato crops in 1982 and an
apparent decision to forgo, at least for the present,
any improvement in consumer diets, we have re-
duced our estimate of Soviet grain import needs for
MY 1983 to 42 million tons. This estimate, in turn,
could be off by several million tons given the
uncertainties associated with the underlying data.
To reach the 42-million-ton level, however, Mos-
cow will have to step up grain shipments sharply
between now and June.
1981/82 a
Imports
1982/83
Purchases
to Date
Shipped
During
Jul-Dec b
United States
15.4
6.0
1.9
Canada
9.2
10.7
5.5
Argentina
13.2
7-9
2.0
European Community
2.7
3.3
1.5
Australia
2.5
1.0
0.2
Eastern Europe
1.5
1.5
1.5
a 1 July-30 June.
b Estimated.
Soviet Activity Through December
The Soviets have already purchased 30-32 million
tons of grain for delivery by 30 June 1983.' Grain
shipments are lagging badly, however. During July-
December, shipments totaled only about 13 million
tons-8 million tons below the level of the compa-
rable period last year. Most of the reduction has
been at the expense of the United States and
Argentina whose first-half shipments to the USSR
' USDA estimates the current level of commitments at 26-27
million tons. Our estimate includes transactions-almost entirely
sales by Argentina and Canada-that have been reported by trade
sources but that have not been officially reported by the respective
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USSR: Cumulative Grain Shipments
March, grain-discharge capacity could reach an
estimated 5.4 million tons per month. Soviet grain-
handling capability will probably drop by some 10
percent in early June, however, when railcars will
be diverted to transport domestic grain from the
1983 harvest.
Moscow's financial position is not expected to pose
a problem for Soviet grain buyers over the next six
months. any US 25X1
bankers have overcome their reluctance to lend to
the Soviets and have joined West European and
Canadian bankers in providing short-term financ-
ing for Soviet grain purchases. These credits cou-
pled with a substantial improvement in the Soviet
foreign exchange situation during first-half 1982
should enable Moscow to pay for as much grain as
were each off by more than 60 percent from last
year's levels. The Kremlin may have reasoned that
with its greatest need for grain imports coming in
the spring, small purchases and shipments during
the summer and fall would conserve hard currency
and not increase world prices.
Outlook for January-June
For imports to reach 42 million tons, Moscow will
have to take delivery of 29 million tons during
January-June. Monthly shipments, in turn, would
need to average 4.8 million tons, 20 percent higher
than last year's average for the same six-month
period and much higher than the average level for
the first half of this marketing year. The USSR
should be able to absorb this amount. In April of
1982 Soviet ports handled 5 million tons of grain. If
new facilities under construction at Novorossiysk
on the Black Sea are completed by the end of
Secret
11 February 1983
Soviet ports and railroads can handle.
The Soviet Union will have little difficulty finding
grain in a world market that is struggling with
sluggish demand, depressed prices, and mammoth
additions to already record stocks. Exportable sup-
plies of wheat and coarse grains from the major US
competitors are expected to increase slightly over
last year's record level. Seasonal factors, however,
limit Soviet freedom in selecting grain suppliers
through March. Specifically, non-US suppliers can
ship only 6.5-7 million tons during the first calen-
dar quarter.
Canada. Moscow has already purchased 10.7 mil-
lion tons of Canadian grain, roughly half of which
was shipped during the first six months of MY
1983. Delivery of the remaining 5.2 million tons
will be limited by the freezing of the St. Lawrence
Seaway. When the Great Lakes reopen in April,
the Soviets will have about 3.7 million tons to ship
during April-June. This compares with Canadian
shipments of 3.3 million tons over the same period
last year.
Argentina. Soviet purchases from Argentina so far
have reached 7-9 million tons. Shipments during
July-December of only 2 million tons, however, are
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,ecrer
USSR: Grain Importsa
0 1978/79 79/80 80/81 81/82 82/83b
a 1 July-30 June.
b Estimated.
down sharply in comparison with the 6.5 million
tons shipped during the same period in 1981.
During January-June we expect Moscow to take
delivery of about 4 million tons of wheat purchased
from this year's huge Argentine crop. In addition,
we anticipate sizable coarse grain shipments for
the period, boosting total Soviet imports for the
year to 13 million tons. This depends, however, on
Argentina having a good coarse grain harvest that
will enter export channels in April and on Mos-
cow's willingness to buy.
European Community. The USSR has bought 3.3
million tons of the EC's 8 million tons of wheat
available for export. About 1.5 million tons were
delivered during July-December and roughly half
of the remaining 1.8 million tons is scheduled to be
shipped by the end of March. We anticipate no
additional EC sales because varieties available do
not match Soviet needs. (C NF)
Other Suppliers. Australia will be able to send only
about 1 million tons to the USSR during the winter
because of this year's drought-reduced harvest. In
addition, we expect Eastern Europe, Thailand,
Spain, Brazil, and Austria to supply about 3 million
tons to the Soviets in MY 1983. About 2 million
tons from these various suppliers, including Austra-
lia, were shipped during July-December, leaving 2
million tons for shipment during January-June.
25X1
Soviet purchases of US grain currently stand at 6
million tons-the minimum specified in the US-
USSR grain agreement. Two million tons of grain
were shipped from US ports by the end of Decem-
ber, and Moscow has scheduled delivery of most of
the remaining 4 million tons during January-
March. Any major additional purchases of US
grain are likely to be made within the next several
weeks because of the combination of seasonal grain
shortages in non-US exporting countries and the 25X1
Soviet need to prevent shipping bottlenecks in
April-June
Purchases by the USSR of US grain may be guided
more by politics than by economic requirements.
Although Soviet grain buyers have maintained
daily contact with US traders, the Soviets have
made clear their intentions to minimize purchases
from the United States. If Moscow's purchases
from the United States are limited to the 6 million
tons, total imports for the marketing year are
unlikely to exceed 37 million tons. To the extent
that Moscow forgoes additional US grain, it will 25X1
have to make internal adjustments-assuming that
we have accurately estimated the need for grain
and the grain crop size. The USSR could ease the
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shortfall in the near term by reducing the quantity
of grain used for food and industrial purposes,
saving perhaps up to 5 million tons of grain. They
could also cut livestock herds, thereby increasing
meat supplies temporarily, but reducing meat over
the next year or two. Feed supplies could be
stretched even more than at present by reducing
livestock rations. While this would save several
million tons of grain, it would result in lighter
slaughter weights and reduced milk yields.
Looking Ahead
If a bumper harvest results this year, imports could
be greatly reduced from the levels of the past few
years. If grain production does not pick up this
year, however, Moscow will face the difficult deci-
sion of whether to cut the long-established goals for
meat production or to boost grain imports, thus
heightening its dependence on the West for its
grain needs. Given present grain production trends,
we expect Moscow to have few problems meeting
the lion's share of its future grain import needs
from non-US suppliers.
25X1
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El Salvador: A Beleaguered Economy
El Salvador's GDP declined for the fourth straight
year in 1982, leaving it 25 percent smaller than in
1978, the last year of relative political stability.
Hope for improvement, sparked by the March 1982
rejection of the insurgents at the polls, was quickly
snuffed out by a resurgence of guerrilla violence
and a deepening world recession. The Magana
government has been unable to restore critical
private-sector confidence or stem capital flight.
Inadequate security and a severe foreign exchange
shortage will prevent economic recovery this year.
If the current level of insurgency continues, we
estimate that about $450 million in foreign assist-
ance will be necessary to maintain GDP at last
year's level. Even with this amount of financial
support, a deterioration in security could precipi-
tate a sharp drop in national output and aggravate
already high unemployment.
The Unraveling of the Economy
Beginning in 1979, El Salvador's economy was
battered by a series of internal and external shocks.
The most destructive was the escalation of civil
violence into full-fledged insurgency. Antigovern-
ment guerrillas sabotaged electric power and indus-
trial plants, interdicted communications and trans-
portation networks, and disrupted the agricultural
sector. Sagging business confidence led to the
closure of many businesses and factories, a sharp
decline in private investment, and massive capital
flight. By 1981 the insurgents had acknowledged
economic deterioration to be a key ingredient in
their strategy to destabilize the government.
In the spring of 1980 a new military junta intro-
duced a series of far-reaching reforms that com-
pounded the country's economic difficulties. The
package of reforms-including comprehensive land
redistribution, nationalization of banks, and estab-
lishment of government monopolies for marketing
coffee and sugar-was intended to defuse leftist
violence and to promote economic diversification.
Because the land reform in particular was poorly
planned and not adequately supported by govern-
ment technical and credit assistance, the reforms
set back production of El Salvador's cash crops.
Uncertainty regarding future ownership of unredis-
tributed land resulted in considerable decapitaliza-
tion and abandonment of farm operations.
Meanwhile, external developments added to the
economy's woes. El Salvador suffered a sharp
deterioration in its terms of trade with the near
tripling of the price of imported oil during 1979-81
and the precipitous drop in the price of coffee, the
commodity that consistently had accounted for
more than one-half of the country's export earn-
ings. Its previously fast-growing industrial exports
to neighboring Central American countries also fell
off. Declining export earnings coupled with the
continuing net outflow of private capital prompted
San Salvador to draw its international reserves
down heavily to cover its import needs; by yearend
1981 net reserves were $240 million in the red.
To shore up the country's crumbling economy, San
Salvador instituted a National Emergency Plan
under which it hiked wage rates, expanded public
construction, and boosted defense spending. Be-
cause of growing inflation and balance-of-payments
deficits, the government was forced in 1981 to shift
to greater austerity measures, such as trade and
exchange controls and a freeze on wages and some
prices. Still, because of a sharp drop in coffee
revenues, public-sector deficits continued to climb
from 2.4 percent of GDP in 1979 to 8.6 percent in
1981.
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31
-286
35
18
-287
-270
Trade balance
43
-227
105
100
-188
-185
Exports (f.o.b.)
974
802
1,130
1,072
793
735
Coffee
606
386
675
615
452
398
Cotton
76
98
85
83
53
50
Sugar
26
19
27
13
14
13
256
931
-12
14
Dashed Hopes in 1982
Early last year, a small economic turnaround
seemed possible. Widespread expectations for the
start of world economic recovery, higher coffee
prices, and large increases in IMF and US financial
assistance-including the largest allocation under
the Caribbean Basin Initiative-seemed to provide
grounds for optimism. More important, the insur-
gents appeared to have been dealt significant mili-
tary and political setbacks when better than 80
percent of eligible voters went to the polls in March
to vote in a constituent assembly election in which
the extreme left refused to participate. The massive
turnout was motivated largely by a popular back-
lash against guerrilla attacks on their economic
livelihood.
Visions of better economic times soon faded. An
unexpected deepening of world and regional reces-
Secret
11 February 1983
lions devastated Salvadoran export earnings. Stag-
nant foreign demand and sizable world stocks kept
the price of coffee low; cotton and sugar prices
continued to plummet. In addition, US sugar quo-
tas and the International Coffee Agreement im-
posed constraints on volumes that El Salvador
could sell abroad. The government was unable to
attract private foreign financing. US and. IMF
financing increased but not as much as San Salva-
dor had anticipated. As a result, foreign exchange
constraints forced the government to cut back real
imports 12-14 percent by yearend 1982.
Domestic events also tended to work against eco-
nomic recovery. After the March election, efforts
to form a new national unity government disinte-
grated into bickering among political and military
leaders, thereby diverting attention from the war
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Secret
and enabling the guerrillas to regroup, rearm, and
map new strategies. In the-second half of the year,
the insurgents resumed their military initiatives
inflicting major damage to productive capacity and
disrupting economic activity.
At the same time, political infighting and inconsist-
ent signals regarding government commitment to
the reforms engendered considerable uncertainty
about policy continuity. Attempts by the extreme
right to tamper with the agrarian reform, though
nullified by moderate elements led by independent
President Magana and Defense Minister Garcia,
foreshadowed a period of intense political maneu-
vering between the two factions.
San Salvador also had to tighten its austerity
program over the course of the year. To qualify for
a one-year $85 million IMF loan agreement in
July, the government was obliged to pare public-
sector deficits and borrowing, raise interest rates,
slow credit expansion, and make the exchange rate
system more flexible. Based on early USAID esti-
mates, we believe that public-sector investment was
slashed by more than one-third in real terms to
meet IMF-mandated targets. This-and reduced
bank credit expansion-apparently created domes-
tic currency shortages for both the private and
public sectors.
We believe that, together, the renewed guerrilla
attacks, scarce foreign exchange, and government
austerity caused a 5- to 6-percent real contraction
in El Salvador's GDP last year. Total public and
private gross capital formation was an estimated 11
to 12 percent of national output, roughly one-half
of the 1978 share. A rise in business bankruptcies,
reduced agricultural production, and growing num-
bers of persons displaced by the insurgency swelled
the ranks of the unemployed to more than 30
percent, according to the US Embassy.
All major sectors contributed to last year's econom-
ic decline. Agricultural output, which accounts for
one-fourth of GDP and more than one-half of the
country's employment, fell substantially. Coffee
production was hobbled by a combination of inade-
quate maintenance of plantations because of future
Gross Capital Formation
Percent of GDP
Consumer Price Growth
Percent
International Reserves, Net
Million US $
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11 February 1983
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E:1 nl II I
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land ownership uncertainties, spreading coffee rust,
and depressed world prices. Guerrilla attacks and
adjustments to the land reform were largely to
blame for reduced cotton production; in particular
guerrilla damage last fall to more than a dozen
pesticide-spraying planes, and intimidation of oth-
ers, is believed to have led to major cotton losses at
harvest time. Torrential rains, following closely on
the heels of a severe drought, took a particularly
heavy toll on basic crops such as beans and corn.
Similarly, demand for industrial output languished
as domestic incomes and economic activity in
neighboring countries plunged. Many firms were
unable to import critically needed materials be-
cause of severe foreign exchange shortages. In
addition, guerrilla bombings of economic infra-
structure caused major problems. The Embassy
estimated that the interruption of electric power
generation alone caused more than $60 million in
industrial production losses last year.
Bleak Prospects for 1983
An economic recovery is unlikely this year because
of the persistent insurgency and continued foreign
exchange shortages. Consistent with their aims of
Secret
11 February 1983
undermining the country's economy, the guerrillas
have escalated their sabotage of power facilities
and seriously damaged several important bridges.
Meanwhile, sluggish world and regional economies
will permit little if any growth in Salvadoran
exports. Current forecasts by commodity analysts
and the US Embassy show no significant strength-
ening of prices for coffee, cotton, and sugar in the
near term.
Continued net private capital outflows, another
poor export performance, and an IMF requirement
to pay off foreign arrearages will make. a real
increase in imports unlikely this year. Assuming
the insurgency does not escalate further and the
political schisms within the present government are
healed, about $450 million in net flows of foreign
assistance and/or borrowing will be needed to
prevent Salvadoran real imports from falling below
last year's total. Because of the close relationship
between El Salvador's import and national output,
any decline in real imports would almost assure
another real drop in GDP.
One potentially positive development this past De-
cember was President Magana's creation of a joint
government-private-sector National Economic Re-
activation Committee to find ways of promoting a
private-sector-led economic revival. If such efforts
give birth to initiatives to expand private invest-
ment incentives and to allocate larger amounts of
scarce foreign exchange and domestic bank credit
to the private sector, some small progress could be
made toward restoring investor confidence. Beyond
this, clear and consistent policy decisions on agrari-
an reform would dispel uncertainty and probably
boost crop land utilization and productivity. So far,
we have not noted appreciable movement in any of
these directions.
Either an expansion of the insurgency or increased
political tensions between the extreme right and
moderate factions of the government would serious-
ly weaken the economy and greatly increase the
need for foreign financial assistance. Recent mili-
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On 6 March 1980 the Salvadoran Government
inaugurated a land reform program affecting
roughly one-third of the country's farmland. The
land reform was divided into three phases:
? The expropriation and redistribution of land
under Phase I, involving properties having more
than 500 hectares, has been essentially complet-
ed. More than half of the country's sugarcane
and more than one third of its cotton are grown
on these lands. At yearend 1982, 328 properties
had been acquired and converted into farming
cooperatives. About 40 of these cooperatives have
been abandoned or are operated only sporadical-
ly because of their location in guerrilla-intfested
areas. Compensation for Phase I estates is to be
paid solely in bonds with maturities ranging from
20 to 30 years.
? Phase II, which calls for the expropriation of
estates between 100 hectares and 500 hectares,
has not been implemented. These properties con-
Owners of Phase II expropriatedfarms would be
compensated 25 percent in cash and 75 percent
in bonds. Because government officials fear that
implementation of this phase would seriously
hinder the country's cash crop export earnings, it
has been shelved.
Phase III, the land-to-tiller stage, was intended
to give peasants full title to as much as 7
hectares of farmland that they either rented or
tilled at the time of the reform proclamation.
This phase is expected eventually to affect
178,000 hectares and to benefit up to 150,000
families. Most of the eligible holdings produce
basic grains and cotton. The renter or tiller must
take the initiative to seek title. Toward the end
of last year, about 58,500 applications had been
filed. Provisional titles had been issued to about
60 percent of the applicants and 1,146 final titles
had been issued. Phase III has been a substantial
budgetary burden on the government because
former owners must be paid 50 percent in cash
n
--
-- r_. 25X1
tary successes have given the guerrillas at least
temporary territorial gains, worldwide attention,
and a boost in confidence. Based on apparent
guerrilla military capabilities and intentions, we
believe that a worsening of security conditions-
although not likely-is possible. If a significant
deterioration in security should occur this year, the
little remaining business confidence would evapo-
rate, thereby causing an acceleration of capital
flight and a further exodus of managerial and
technical talent.
Meanwhile, rightist leader D'Aubuisson is attempt-
ing to use the recent rebellion of a key military
commander to force Defense Minister Garcia to
resign. Although the military would likely replace
Garcia with another pragmatist, the perception of
rising rightwing influence would intensify uncer-
tainty within some elements of the business com-
munity and alarm El Salvador's peasant and work-
ing classes. Should the reforms appear threatened,
middle to lower class popular sympathy for the
insurgents might grow.
Secret
11 February 1983
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tain most of the lucrative coffee-growing areas.
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Secret
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