Newsletter 2 (1/23/03) Market Risk Owl Page 1

Why are Markets Moving? China’s FDI increased +12% in 2002 to $53B vs
A. ECONOMIC Signals $47B in 2001; and, contractual foreign investment
(future trend indicator) up +20% to $83B vs prior
US TRADE BALANCE year (Emerging Markets Datafile, 9/18/02; FT, 1/15/03).
US: annual trade deficit for 11 months in 2002 Although, Worldwide FDI dropped 50% from 2000
reached -$390.47B as November’s shortfall of - to 2001 ($1.492T to $.735T) (Inter–Press, 9/17/02)
$40.1B was added to the -$35.2B in October (Agence (Table 3).
France Presse, 1/17/03) (Table 1).
Table 3
Table 1
Foreign Direct Investment (US$,Trillions)
US Trade Deficit 2002 ($Bill.) % Diff
US Trading Monthly Inflows 2002 2001 2000 (2000-01)
Partners Nov Oct variation (%)
World 0.503 0.735 1.492 51%
Total 40.1 35.2 12%
China 0.053 0.047 0.040 15%
Other 11.07 5.25 53%
EU 0.323 N/A N/A N/A
China 10.45 9.52 9%
US N/A 0.124 0.301 59%
Japan 6.49 6.46 0%
Korea N/A 0.003 0.006 50%
Euro Area 5.46 6.19 -13%
L. America N/A 0.085 0.094 10%
Canada 3.74 4.32 -16%
Source: Euro Report, Inter–Press, Bus Wire (9/02)
Mexico 2.89 3.46 -20%

Top 5 major US trading deficit partners in China: 2002, exports increased by 1/5 as
descending order are: China, Japan, Euro-area, international companies moved production to China
Canada, and Mexico (Chart 1). (Bloomberg, 1/9/03); resulting in a trade surplus of
$30.4B [exports (+22.3%) at $325.6B, and, imports
Chart 1 (+21.2%) at 295.2B]. China, is forecasted to
US Trade Deficit $40.1B(11/02) produce 20% more cars in 2003 vs 2002 (+1.3M),
Mexico considered fastest growing auto market, led by joint
Canada Other
7% Other ventures such as VW & GM (Channel NewsAsia,
9% 28%
1/21/03). Driving forces are cheaper labor, less
China stringent labor/product safety regulations increases
Euro Japan liablility risks – if not adhered to as in other nations
(NYT, 1/28/03).
Area Japan China Euro Area
14% 16% 26% Canada Japan: December’s 2002 monthly trade surplus fell
Mexico 37% to $5.6B vs ($8.7B in Nov.) as exports
declined, and yen up 5% vs USD in past 3 months.
Spurt in November exports due to producers setting
US trade deficit figures may be overstated as FDI up plants abroad - such as in China (Bberg, 1/27/03).
and US foreign affiliate sales based “in China” are
counted as Chinese exports to US. As are Japanese Euro Area: Germany's monthly trade surplus
and European MNCs that are increasingly operating widened to $12.6B in November of 2002, as
in China. That US trade deficit figures with China exports increased. Deutz AG, German maker of
have increased ($80B in 2001, $70B in 1999, and diesel engines, stated sales may rise further as
$10.4B in 1990) (Foreign Affairs, 7/02 & 8/02) (Table 2). business in China grows (Bberg, 1/10/03). Watch for
German election’s Feb 2 (Bberg, 1/16/03).
Table 2
Trade/Affiliate$$ Total Affiliate
Canada: Trade surplus $49.5B in 1st 11 months of
Counted as Chinese Exports from China
2002; however, November’s surplus declined
Exports in 2000 = $120B
($2.69B vs $3.1B in Oct) as U.S. demand fell and
US and China 1990 1999 2001
exports declined for first time in 5 months (Toronto
US Trade Deficit w / China $10.4B $70B $80B Star Newspapers, 1/18/03, Bberg, 1/17/03).
US MNC assets in China $2.1B $33B
US MNC-majority ow ned Mexico: Ranks 9th in FDI recipient; experienced
Affiliate sales $775M $20B declining manufacturing investment (-50%) hit by
$.225B competition of China’s lower labor costs (L.American
Affiliate export sales to US (1994) $2.7B Weekly, 9/24/02; Albequerque Journal 10/02) (Chart 2/Table 4).
Affiliate shipments to US $5.1B Total trade shortfall was -US$8.01 for 2002 (Bberg,
parent company (1994) $18.5B 1/23/03) (Table 4).
Source: Foreign Affairs, 7/02 & 8/02
Author: Denise I. Heidelberg (MBA/MA International Studies)
Newsletter 2 (1/23/03) Market Risk Owl Page 2

US Trading Euro Area Cocoa: <QCA Cmdty>: March delivery futures

Partners China Japan (Germany) Canada Mexico
Yuan
closed 3 ½ month-high 1/27/03: US$2250/metric
MOM Currency pegged to tonne, continuing its ascent on 1/30/03 to US$2398
Change vs USD USD 0.190% 3.10% 3.17% -5.50%
on London International Financial Futures/Options
Yuan
YOY Currency pegged to Exchange (OsterDowJones,1/27/03;Bberg, 1/30/03).
Change vs USD USD 10.78% 25.88% 4.23% -19.60%

Cocoa (MoM), $/metric

Currency Today
(1/30/03) 8.2800 118.57 1.0817 1.5219 10.94
Source: Bberg tonne
1/30/2003 2398
Currency Prior
Month (12/31/02) 8.2800 118.79 1.0492 1.5718 10.37 12/31/2002 2021
Currency Last year % Change 19%
(1/31/02) 132.89 0.8593 1.5891 9.1475

Trade Surplus
(YTD) 2002 USD 112.5B (nov) 31.5 (nov)
-8.2B
(dec)
Chaos erupts amidst violent protests in Ivory Coast
30.4B 79.76B
Exports (2002) 238B 147.7B capital city to French-brokered peace deal (civil
USD 325.6B 444.5B 569B (nov) (nov) (nov) war has doubled cocoa prices). Ivory Coast is
Imports (2002) 210B 154.6B
USD 295.2B 373.8B 457B (nov) (nov) (nov) world's leader in cocoa production, followed by
Ghana, Indonesia, Brazil, Nigeria and Malaysia
Total Exports (%) 10% 33% 45% 25% (OsterDowJones, 1/27/03; AP 1/27/03, FT, 1/20/03,
www.infinitytrading.com/cocoa.html).
Total Exports to
US (%) 30% 10% 85% 90% U.S. candy companies used 7.9% less cocoa in 4th
Source: Bloomberg quarter as cocoa prices reached a 17-year high per
Table 4 largest US candy manufacturers: Hershey Foods
Corp. and Mars Inc. (Bberg, 1/24/03). Cocoa importers
B. Commodity Fluctuations (Netherlands, US, and Germany account for 54% of
Aluminum: (LMAHDS03 <Cmdty> or NI ALU): world imports in 1995/96. US leader (1995/96)
futures delivery (3 months) fell $4.50, or 0.3%, to 12% of world imports of cocoa butter, liquor, and
$1,422/ton on London Metal Exchange (Bberg, powder (http://www.infinitytrading.com/cocoa.html).
1/30/03). China's 2002 aluminum output rose 29%
from prior year (copper output rose 12%) because Table 5
of increased demand from domestic automakers 10-cocoa bean type prices, cocoa butter,cake
and building developers. China produced 4.4 Cocoa Prices for U.S. Current Previous %
million metric tons of aluminum last year, up from Spot Delivery Price Price Change
3.4 million tons in 2001 (Bloomberg, 1/24/03). Main Ghana 2,588 2,525 2%
Main Ivory 2,535 2,472 3%
Aluminum (MoM), USD$/Ton
Source: Bberg Nigerian Main 1 2,397 2,334 3%
1/30/2003 1431 Sanchez 2,382 2,319 3%
12/31/2002 1350 Sulawesi 2,328 2,265 3%
% Change (mom) 6% Superior Seasons 2,397 2,334 3%
Malaysian 100 2,278 2,215 3%
Cement: (CX US <Equity>): CEMEX of Mexico, Ecuador Liquor 3,563 3,463 3%
world’s 3rd largest cement producer, suffered a African Type Butter 4,208 4,090 3%
decline in profits of 56% in 4th quarter ($165M vs 10-12% Natural Cake 2,948 2,865 3%
$372M). Due to peso depreciation of 19% since Prices: effective Jan 27, USD/metric ton
last April and less demand in countries of operation Source: Bberg, 1/27/03
(US sales down -13% - 2nd largest market for
CEMEX; and, Venezuelan sales down –32%) (FT, Copper: <LMCADS03 INDEX> Futures March
1/22/03; CCBN, 1/21/03). delivery average cost this year $1651/ton. US home
construction increased - biggest copper users of
Cemex (ADR) USD$
(MoM), wires and pipes - 400 pounds used in average US
Source: Bberg home.
1/30/2003 18.64 Copper (MoM), $/metric
Source: Bberg tons
12/31/2002 21.51
1/30/2003 1726
% Change -13%
12/31/2002 1560
% Change 11%

Author: Denise I. Heidelberg (MBA/MA International Studies)

Newsletter 2 (1/23/03) Market Risk Owl Page 3
CVRD $USD
Copper (cont-d): Grupo Mexico SA (#3 world <VALE5 BS equity>
Source: Bberg
producer) copper miners on strike in Mexico
1/30/2003 25.123
<GMEXICOB MM Equity> (Bberg, 1/21/03, NYT
1/30/2002 22.176
12/23/03).
12/31/2002 27.581
Grupo USD$ % Change (yoy) 13.3%
Mexico SA % Change (mom) -8.9%
(MoM)
1/30/2003 1.1065
In 2000, US iron-ore imports are 51% from
12/31/2002 1.1075 Canada, and 39% Brazil (US Dept of Commerce Bureau
% Change -0.1% of Export Administration, 2001). Iron–ore shipments
Source: Bberg costs increased (US$13.50/ton vs US$6/ton last
year). China, iron-ore buyer from Australia and
Oil: <CL1 CMDTY> Venezuela’s outage prompted Brazil (National Post, 1/20/03). Australia and Brazil,
US refiners to rely increasingly on Iraqi crude oil dominate world's iron-ore exports, exporting each
exports in past two months (FT, 1/22/03). Last week, 1/3 of total (www//minerals.usgs.Gov/minerals
US Crude Inventory Levels 272M barrels above /pubs/commodity/iron_ore).
*Iron-Ore, primary source for 1st step in integrated steel-making
“minimum level” of 270M that oil prices closed at process to produce raw steel or semi-finished steel - then rolled
2-year high (Feb Contract: $33.21/barrel). If below or shaped into finished-steel mill products.
minimum level; then, refineries reduce output **Molten iron or hot metal; cooled to solid form called “pig
(Dallas Morning News, 1/16/03; AP, 1/21/03). iron” (US Dept of Commerce Bureau of Export Administration,
2001). Price of pig iron +72% in 2002 due to increased demand
from US Steel mills. That Brazilian foundries are lobbying for
Crude Oil Future Mar temporary export tax on pig iron to reduce input price (Business
<CL1 CMDTY> 03 ($/Barrel) News Americas, 1/21/03).
(MoM),
Source: Bberg
Steel: Brazil and Mexico account for 50% of semi-
1/30/2003 33.85
finished steel imports to US. In 2000, US carbon
12/31/2002 31.20
slab imports were 36% Brazil and 23% of Mexico
% Change 8.5% (US Dept of Commerce Bureau of Export Administration, 2001).
Last September, China surpassed US as world’s
Freight Rates: <TMRD> Higher oil output and largest steel importer. Yet, China’s domestic
contraction of tanker fleet increased freight rates manufacturers suffer from higher steel import costs.
(daily rate to hire a tanker to transport 260K tonnes Galanz, world’s largest microwave ovens producer, may raise
prices 30% due to higher steel prices; and, Wuxi Little Swan, for
of crude from Mid-East to Japan averaged washing machines uses galvanized steel plate whose prices
US$79,500 in December vs $US17,750 a year increased from 2000 to 6400 yuan/tonne over past year (AFX
earlier (National Post, 1/20/03). European Focus, 1/16/03).
Gerdau SA <GGB US Equity>, Latin America’s
Arabian Gulf to Japan USD$/Ton largest steel maker reported +11% net income up 4th
250K/ton Dirty Tanker Rate
<TREK 1 go> or <TRMD
qtr (acquisitions in Canada/US; and, Real’s depreciation
go>, Source: Bberg favored export growth) (Bberg 1/29/03).
1/30/2003 16.80
Gerdau $USD
12/31/2002 11.34 <GGB US equity>
% Change 48.1% Source: Bberg
1/30/2003 8.68
1/30/2002 9.62
Venezuela’s Bolivar: <VEB Curncy> declined 31%
vs USD since oil strike began 12/2/02. That 12/31/2002 8.90
Venezuela CB suspended FOREX trading until Feb % Change (yoy) -9.8%
5th to keep international reserves from declining % Change (mom) -2.5%
further. VEB continues to weaken closing 1919.3 *********************************
on 1/30/03 (Bberg, 1/30/03). Please note: I have added my interpretation to the information
obtained for this newsletter compiled via secondary research,
Venezuelan VEB/USD utilizing publicly available sources such as Bloomberg.
Bolivar Spot
(MoM) This is the second newsletter; and, I welcome your comments
Source: Bberg and suggestions as this is a dynamic document and always trying
1/30/2003 1919.3 to improve the newsletter. My email is Deniseheid2@aol.com
12/31/2002 1388.8 or Deniseheid2@bloomberg.net.
% Change (mom) 38.2%
Iron-Ore: Brazil’s Cia. Vale do Rio Doce <VALE5
BS> world’s largest iron-ore producer (Bberg, 1/22/03).
Author: Denise I. Heidelberg (MBA/MA International Studies)