Thailand Crisis

Businesses start to criticize, publicly, the prices controls policy of the government. At last !

Thai Namthip Ltd, the local bottler of Coke, Fanta and Sprite, yesterday criticised the Internal Trade Department for refusing to let soft-drink companies raise prices even though sugar and transport costs have soared in recent months.

The state-mandated price ceiling on ex-factory prices was distorting the entire market, said Pornwut Sarasin, the vice-chairman of Thai Namthip.

”The department should allow the soft-drink market to move freely under the current market mechanism. If soft drinks are priced higher, then consumers will decide for themselves whether to buy or not,” he added.

Soft-drink companies saw their production costs surge because of the impact of higher oil and sugar prices.

”What the department should do is to play a major role in monitoring fair trade among operators in the market rather than making a market intervention,” Mr Pornwut said. (Bangkok Post)

It’s a perfect summary of how a free market should work… common sense and rationality.

Now here is the mindset of the authorities.

However, Yanyong Phuangrach, the director-general of the Internal Trade Department, said it had not yet taken into account any request from soft-drink companies to raise their prices as it was not an urgent issue.

Instead, the director-general urged producers to weigh the impact on the entire economy, particularly for inflation, if soft-drink prices were allowed to increase.

Soft drinks are currently on the Commerce Ministry’s watch list, which covers 177 products. The watch list is the group of products that need close price monitoring every 14 days. Any price increase needs prior approval from the department.

Of course moron ! Higher prices will fuel inflation !

So, with such twisted logic, it’s enough to forbid higher prices… in order to solve the inflation problem ? Stupid little civil servants (?) and politicians with butter in their brains.

It’s the Zimbabwe path. In this country, people can go to jail if they increase prices… Inflation is illegal. We saw the results. Collapse. And 165 000 % of inflation in one month (read here).

What is the rationality behind the idea of controlling prices of… soft drinks ?

Are Fanta and Coke essential goods, like rice, water and housing ?

Is getting fat by drinking soft drinks a human right ? What kind of degenerated mind can think this ?

It’s the level zero of politics and… civilization.

So what will happen ? The government will continue for a few months this little game… Then at one point… will have to authorize increases of prices… Otherwise businesses will just cut the supply (there is no point to produce something if you loose money on the long term). Dams will break…

It’s the inflation tsunami.

Prices controls are wrong, stupid and worse… counterproductive.

But again and over again, the politicians think they’re smarter and stronger than markets laws.

The lesson is going to be painful.

More than 1,000 taxi operators brought their vehicles to have their meters reset after the approved increase in fares was published in the Royal Gazette Wednesday.

The Department of Land Transport works together with Mahanakorn University of Technology on the resetting of the meters.

According to the university dean Sujet Chantarang, it takes about half an hour for the setting, with the price of 200 baht. (Bangkok Post).

Voila. Done.

This saga started more than 6 months ago (read here). And for what result ?

It’s going to fuel the inflation rate… at the worst moment, when many other prices are going up too. Congratulations to the thai authorities and their famous “postponement policy” Zimbabwe style.

As for the details of the new taxis fares (+12 % in average) :

The new rates will start at 35 baht for the first kilometre, not two kilometres as before.

The fares will then be five baht a kilometre for the 2nd-12th kilometres, 5.50 baht a kilometre for the 12th-20th kilometres, six baht a kilometre for the 20th-40th kilometres, 6.50 baht a kilometre for the 40th-60th kilometres, 7.50 baht a kilometre for the 60th-80th kilometres and 8.50 baht a kilometre beyond that.

But wait… Because nothing can be simple in Thailand… There is a problem. A technical one.

The new taxi fare structure for Bangkok came into effect on Thursday. Ironically however, taxi drivers can’t yet charge their passengers the new fare as they haven’t been able to update their metres due to a technical problem.

Bangkok taxi drivers lined up Thursday at ten official centres to adjust their metres, after winning permission to raise their fare for the first time in 16 years. However, Mahanakorn University of technology and the nine other centers were not ready to adjust metres because the software provided by the university had not been finished.

It will take about one week for the university and certified companies to be ready to offer the metre adjustment service. (TNA)

It’s clear that it must be a very complex software… And that they didn’t have enough time to prepare it.

Just another normal day in Thailand.

This chart closes my “inflation tsunami” case for june (source Bureau of Trade and Economic Indices).

I’m sorry to have more bad news folks…

What is the PPI ? It “measures the average change over time in the selling prices received by domestic producers for their output“.

We could say that it’s the avant-garde of the inflation, the one you see around you, in your daily life… Those prices will fuel the prices of the goods at the end of the chain.

PPI is a precursor. Or a messenger.

You can see on the next chart that there is an obvious correlation between CPI (Consumer Price Index) and the PPI.

We touched the bottom in august 2007… Since then… it’s an explosion.

This is why the CPI (+8,9 % in june) will continue to increase in the coming months.

Those who say otherwise are deluding themselves. The PPI figures are a clear proof.

At such level, the businesses have to offset the increasing costs by increasing their own selling prices.

It’s Economy 101.

And it’s the inflation tsunami on the move.

… At least (and at last) in the main stream medias.

I just want to show that I’m not the only lunatic to speak about the risks of “inflation tsunami” in Thailand.

The idea is very basic : higher prices spread from raw materials, commodities, to intermediary goods, then to finished goods… businesses margins start to be under severe pressure… at one point (but the process is slow)… they can’t take it anymore, they increase their own prices… even for services. It increases the pressure on the people… Who start to demand higher wages… etc.

Spillovers effects, secondary effects or just “vicious circle”, you name it.

On top of this picture, that is easy to understand, we have to add other factors that worsen -a lot- the problem  :

-subsidies (fuels, etc.) : very bad because it prevents people from taking rational decisions (”honey ! Let’s buy a car ! Okay”). They live in a virtual reality. And subsidies… always cost. Someone, eventually, has to pay.

-controls and capped prices : it creates a dam… working great. But at one point the dam can break… leading all the actors to increase their prices simultaneously, creating an even greater inflation shock.

-”stimulus packages” and other “government expenditures” and budget deficit : the state tries to substitude itself to weak private investments… by throwing money around. Efficiency ? Close to zero. The thai state can’t be efficient.

-cheap money, cheap debt : for too long, the BOT (central bank) has kept negative real interest rates (look at the chart). It’s a total distorsion of the market and a total anomaly on such long period of time.
Too much free money or cheap money chasing too many cheap ideas of investments, or worse… non productive investments.

-weak currency : In 2006, 2007, the BOT has done everything to… weaken the THB versus USD, in order to “boost” the exports. This system created a lot liquidities on the market (BOT was buying USD, exchanging USD for THB) and then issuing bonds to try to mop up thoses liquidities. The bonds are short term : 1 year). And this system increased of course the imported… inflation.

-the last factor (with no thai responsability) : the black swan. Oil prices of course.  in may 2007, barrel = 63 USD… One year later = 130 USD. And counting.

Mix all those points… and you get a very bitter potion. And probably even poisonous.

There is no point to try to deny it : the inflation tsunami is on the move.

Raging inflation could be worse next year and stay in double-digit territory as businesses would be under pressure to adjust costs and raise prices after they have depleted their inventories, a leading economist warned yesterday.

Virabongsa Ramangkura, a former deputy prime minister, said that even if oil prices stay at US$120 (Bt4,000) to $150 per barrel next year, inflation will continue to rise into double figures.

“I believe that inflation will continue to rise and it will stay at the double-digit figure next year. This year it might touch 10 per cent or slightly more. But next year it will rise even further as businesses have to adjust their costs after using up their inventories,” he said.

The inflationary pressure is compelling many businesses to embark on drastic restructuring of their operations to cope with the high-cost environment. (Nation)

Thailand it’s… Wonderland everyday.

A country where a Prime Minister makes paper birds in Parliament, where the president of the national airline is fired on thursday morning and then called back in the evening… and where the Energy Minister changes his mind on a daily basis.

Wonderland indeed. And every sane people should feel like being Alice.

Anyway.

Since april, PTT has announced that LPG prices would go up in july. On june 20, the Energy Minister was speaking about it too. But then… the U-turn (famous style figure in the country).

The energy minister postponed a planned increase in the price of liquefied petroleum gas (LPG) for use in vehicles after a severe shortage in the market raised suspicions vendors were hoarding supplies.

Energy Minister Poonpirom Liptapanlop said yesterday the priority was to ensure supply for LPG meets demand.

The ministry previously announced it would raise the LPG price today and later gradually float it to alleviate the burden of a state price subsidy. The announcement led to a serious shortage of LPG for vehicles over the weekend.

The minister said a date would be set later for floating the price.

”As of now, the date for the LPG price rise is unconfirmed. The ministry has not yet considered it,” she said. (Bangkok Post)

Thailand’s supply of liquefied petroleum gas (LPG) is in shortage at present mainly because greater numbers of personal vehicles have been converted to use the alternative fuel, according to the Energy Ministry.

Officials conceded that LPG procurement had been squeezed because gas use in May had risen by 5,000 tonnes.(TNA)

Energy Minister Poonpirom Liptapanlop affirms there will be no adjustment to LPG prices in the immediate future. She says a joint integrated committee will be set up to study the effects of the price adjustment by next week.

A proposal will be made to revise up the price of LPG, which was widely-expected to take place this month. The joint committee will be responsible for evaluating the effects of the increase on the economy and consumers. It’s hoped a final report of the study will be completed in a few weeks. The report will then be submitted to the the National Energy Policy Committee for its consideration. (TOC)

So ladies and gentlemen… you’re lucky ! You just won a few days, maybe a few weeks. And without any doubt, this courageous decision is going to reduce the inflation problem we currently have…

Of course, until then, you’ll face chaos and hoarding and shortages… but don’t take it personally. The Energy Minister is working, hard, for you.

Just in case : be prepared for the next U-turn. Into the Rabbit-hole.

UPDATE 3 JULY
For once, the Democrat Party says something intelligent : “motorists, consumers, suppliers and vendors saw the disapperance of LPG from the markets because government leaders made conflicting remarks.

“The prime minister said the price of LPG will rise on July1, the finance minister said the price increase will happen later this month and the energy minister said there is no plans for price hike,” Jurin said.” (Nation)

Well put.

We know that the Finance Minister is not afraid to call Lord Buddha’s help (read here) and is a partisan of the “middle path economic policies“.

Here is another example of this philosophy…

State-owned financial institutions should cut their lending rates to help borrowers suffering from rising living expenses, says Finance Minister Surapong Suebwonglee.

He said he had no firm targets on how much state banks should reduce rates, as it depended on the funding structure of each institution.

“This is not an order. But I do think banks should help to relieve some of the burden for the public,” Dr Surapong said.

The call comes even as loan and deposit interest rates are rising across the banking system. (Bangkok Post)

We always go back to the same point : cheap money, more debts, more fuel in order to boost the “boost”.

You are suffering from inflation ? Your purchasing power is decreasing… Surapong has the solution for you : “take more debts !”

Totally twisted logic.

Inflation explodes (look the chart)… At +8,9 % in june (year on year)…

Let’s remember that for inflation in 2008 :

-NESDB forecasts between 5,3 to 5,8 % (revised in may from 3,2 and 3,7 % !)
-Bank Of Thailand sticks to 4 to 5 % (revised in april from… 2,8 and 4 % ah ah ah)…
-and the government… well… 5,5 %.

What a bunch of clowns. But wait, here is the gold medalist… The Commerce Minister (picture)… Aka The Great Deflator (the man who managed to reduce the price of toothpaste… it’s very serious, read here and there).

However, the Commerce Ministry remains optimistic the oil-price spurt may have run out of gas and that oil prices will not rise as expected in the remaining months, so it has left its annual target unchanged at 5.5 per cent for the year. (Nation)

There is only one comment to make : surreal.

You have to understand their utter despair : they prefer to look (and they are !) for perfect and total fools, to loose face… instead to aknowledge the gravity of the situation… because that would fuel “inflation expectations”…

So I guess, even in november, they will tell us that inflation for 2008 could be 5,5 %.

[last word and "now something completly different" like the Monty Python were saying : The Great Deflator is also the man who wanted to... patent the full moon party "to prevent other countries from copying Thailand’s famous festival" ! I know you don't believe me... read here]

Here is the chart of Consumer Price Index with the (just published) june’s datas.

+8,9 % compare to june 2007, versus 7,6 % in may.

The index is at 127,7, versus 126,2 the previous month.

Core CPI (food and energy excluded) is at +3,6 % year on year.

I can already tell you that the CPI in july will be minimum at +8,9 %. And certainly equal or higher than 9,3 % (how ? Easy : base effect. Just copy the value of june for july, and compare with july 2007…).

And that in august, we will have +10 % (mark my words).

It’s the inflation tsunami on the move.

Prices of more products and services are about to increase in the coming weeks and months… despite all the tricks, postponements, delays used by the government.

Will the BOT increase interest rates (real rates are negative since way too long, look the chart here) but then fuel a recession ? Stay on hold ? Cut ? But that would send the THB to the toilets and increase the energy bill (imports of oil) ?

Checkmate.

All the other central banks face the same dilemna, more or less.

So what can we do ? I don’t know.

I know however that the whole story about “speculators” is bullshit.

And I know that the only way to really break the inflation is to really break the demand (of everything, from gasoline, raw materials, to new cars, to condos, houses, from steel to cheap loans… everything).

And the only way to really break the demand is to have… a real recession. A dirty one. A nasty one.

Of course, this idea isn’t very popular…

I remind you that we have dozens of millions of people (and soon hundreds if we continue with the growth rate) who were driving bicycles 15 years ago… and who now want (and can afford) cars…

O course it’s a very rough summary of the situation…

But this very simple fact is highly inflationary… Difficult to deny it.

Don’t get me wrong : I don’t blame the chinese and the indians (and many others). Their behavior is perfectly normal. We certainly would do the same. I would.

You might remember that diesel is subsidized since march for 0,90 THB per liter (the gvt reduced the tax per liter designed to pay back the Oil Fund, debt inherited from previous… gasoline subsidies, when Thaksin was Prime Minister)…

The subsidy was supposed to end in… july.

At that time, I wrote : “So, let’s see… What will happen in july ? Santa Claus will become Santa Closet (after a sex-change operation) ? Crude oil will go back to 70 USD per barrel, with the “driving season” kicking in the USA ? Yes, sure. The global recession will cut demand ?“

3 months later… I must confess : Santa Claus is Santa Closet indeed. But oil didn’t go back to 70. I was right. We are today… at 140 USD per barrel (and counting, this morning, intraday, new record at 141,60).

The diesel price subsidy programme for motorists, set to expire in July, is likely to be extended as the Energy Ministry is trying to deal with the record price.

Energy Minister Poonpirom Liptapanlop said she was considering whether the reduction of 90 satang per litre on the retail diesel price, funded by the state Oil Fund and the Energy Conservation Fund, should be extended or even increased.

”Worse still, the diesel price has reached a record high at above 42 baht a litre. We don’t think it is a good idea to let motorists struggle with diesel prices jumping right now,” she said yesterday. (Bangkok Post)

It’s not a surprise of course… And this -expensive- game is likely to continue.

The government is under severe, extreme pressure (censure debate, scandals etc.)… inflation explodes… they just can’t scrap the diesel subsidy. It’s just impossible.

However, we need to understand that it’s the worse policy possible… It will get us and them… absolutly nowhere (maybe… Zimbabwe).

Unless, you continue to believe in Santa Claus… and a barrel of oil at 50 USD in 6 months…

Interesting times…

[reminder : some corporations enjoy also a subsidy on diesel : bus companies, fishermens, trucking companies etc. read here]

Sorry, it’s not specifically related to Thailand… But I found this opinion interesting (to say the truth, I totally share it).

And eventually, we could have the same phenomenon (although much smaller of course) in Thailand. A strong inflation is hurting the thai consumers, and particularily the poorests (with debts).

Rising consumer prices will leave more U.S. consumers unable to pay their debts and may lead to a “financial tsunami,” according to Bennet Sedacca, president of money manager Atlantic Advisors LLC in Winter Park, Florida.

“Whether it is anecdotal or statistical evidence, I see inflation everywhere, and this is where the financial tsunami cometh,” Sedacca wrote in a report published yesterday.

“A battered, over-indebted consumer, if forced to retrench, could create even more problems for the banking system as loan delinquencies would begin to rise even further. All sorts of delinquencies are rising. This is now a systemic issue.”

Sedacca wrote that current financial-market conditions remind him of “someone standing on a lonely beach, armed with only a small bucket, trying to stop a rare tsunami that hits the shores.

It is how I feel about our markets and the tools being utilized by the Federal Reserve, the European Central Bank and other regulatory bodies.

They are overmatched for what they are facing and, worse yet, they helped create the mess in the first place by being far too easy with money and debt creation.” (Bloomberg)

A news that could seem secondary… but…

Baosteel, China’s largest steelmaker, said Tuesday it had agreed to nearly double what it pays Anglo-Australian mining group Rio Tinto for iron ore.

Baosteel, acting on behalf of China’s steel industry, negotiated to pay between 80 and 97 percent more than last year depending on the category of iron ore, which is used to make steel.

(…the largest ever annual increase and well above the 9.5 per cent increase paid last year. FT)

Baosteel traditionally sets the price for the nation’s other steel producers for internationally purchased iron ore.

Prices of iron ore have soared in recent years due to growing demand led by a construction boom in fast-growing China and India.

The latest increase also reflects rising transportation costs that have increased due to record oil prices.

China imported 383.09 million tonnes of iron ore in 2007, up 17.4 percent from the previous year, according to government figures. (AFP)

Iron ore… basic and essential raw material to make steel for construction, cars, machinery… almost doubled price… for a country so large and with a red hot growth like China… ?

Now ask yourself : this fact points to which direction as far as global inflation is concerned ?

Upward ? Or downward ?

The inflation tsunami will continue.

[you might want to have a look at the cement production chart... with China... there]