MarketVVizard's Market Thoughts

Top 850. Jan 27, 2004 5:58 AM

» Austrian - Pensions Again

This is the slowest train wreck I've ever watched. This is critically important for anyone with a pension. Government is about the redistribution of wealth. This institution is doing all the right things to alert the public that they will save the system, by changing the laws. Which will inevitably lead to smaller pensions for the little guy.

The real liability is probably higher then they hint at below. The real number which will come out over time will probably be larger than the S&L bailout.

Regards,

-- Austrian

Will Pension Monitor Need a Bailout?

By Kathy M. Kristof
LOS ANGELES TIMES; The Los Angeles Times is a Tribune Co. newspaper.

January 25, 2004
The federal agency that backstops the retirement plans of more than 45 million U.S. workers reported a record $11.2 billion deficit recently, reinforcing concerns that the program may require a taxpayer bailout.

The Pension Benefit Guaranty Corp.'s deficit for fiscal 2003 is more than triple the $3.6 billion shortfall of a year ago.

"The growing gap between our assets and liabilities puts at risk the agency's ability to continue to protect pensions in the future," said Steven Kandarian, the agency's executive director, although he added that it "has sufficient assets to pay benefits to workers and retirees for a number of years." The agency, which reported a net surplus of $7.7 billion in 2001, was created in 1974 to guarantee that workers covered by traditional corporate pension plans receive at least some benefits if their employers go bankrupt and can no longer fund their retirement plans.

The agency is financed by insurance premiums paid by companies that sponsor pension plans and by its investment returns.

The three-year bear market on Wall Street and the lowest interest rates in 40 years took a toll on the agency's financial reserves and hammered many corporate pension plans. In addition, bankruptcies in the airline and steel industries contributed to the agency's $7.6 billion loss last year. All told, the agency said it recorded net assets of $34 billion versus liabilities of more than $45 billion in fiscal 2003, which ended Sept. 30.

Although existing payments to pensioners are not at risk, the rising tide of red ink at the agency raises the specter of a taxpayer bailout, officials said, unless Congress acts to require companies to pay more to the beleaguered agency.

Congressional leaders have pledged to put pension reform at the top of the legislative agenda, and the Treasury Department is planning to introduce its own pension-reform plan in the coming weeks.

A series of pension-reform bills died late last year after partisan bickering and heavy lobbying by the industry, which maintained that some of the measures would have caused more problems than they solved.

Industry leaders were already blasting the higher payments that Kandarian is recommending, saying they could push dozens of companies with teetering plans over the edge.

"The worst thing lawmakers could do would be to enact legislation that makes the termination of seriously underfunded plans a self-fulfilling prophesy," said James A. Klein, president of the American Benefits Council, a Washington group that represents many of the nation's largest employers. "Any effort to impose unduly burdensome new funding rules on plans could unintentionally backfire and make it impossible for those sponsoring companies to continue their plans."

Added Steve Kerstein, managing director of the global retirement practice at Towers Perrin: "Do we need funding reform? Absolutely. Do we need to get contributions in to improve funding levels? No question. But we need to find a formula for funding reform that companies can afford."

The agency, which is paying monthly pension benefits to 459,000 retirees, has been on a government watch- list for high-risk programs since last summer, when a General Accounting Office report noted that structural problems within the traditional corporate pension system were jeopardizing the agency's health.

In addition to losses already incurred, the PBGC calculates "reasonably possible" exposure, an estimate of the amount of vested benefits in pension plans sponsored by financially weak employers.

The agency estimates that its potential exposure is $85.5 billion, nearly 2 1/2 times as high as the previous year's estimate of $35.4 billion. Two industries - airlines and metals, including steelmakers - account for nearly 40 percent of that total.

-- posted by Austrian

Top 851. Jan 28, 2004 1:05 PM

» MarketVVizard - Wow this is really starting to get ugly

put/call solidly below 1 too. Big money coming out of stocks AND treasuries today (could be the start of a long trend?). 80% down volume on the NASDAQ at this point.

-- posted by MarketVVizard

Top 852. Jan 29, 2004 6:01 AM

» Austrian - Re: Pensions Again

In response to message posted by Austrian:

First shot over your pension's brow... Expect pension death by a thousand cuts. Interesting how the sales pitch is spun. Realistically speaking, pensions have been underfunded for a very long time, counting on high double digit stock market growth to cover pension liabilities AND contribute to the bottom line. When the market turned over, the imbalance became obvious. The cure is to change the rules so earnings appear stronger than they really are under current law.

Regards,

-- Austrian

Cuts in pension payments OK'd
Senate bill would ease ailing firms' burden
By Associated Press, 1/29/2004

WASHINGTON -- The Senate, with rare election-year harmony, passed a bill yesterday to reduce by $96 billion the payments companies will have to make into their pension plans this year and next.

Sponsors said the measure, passed 86-9, will help preserve pension benefits for millions of workers by discouraging financially strapped companies from terminating plans as no longer affordable.

"Our pension plans are being battered by a perfect storm of declining interest rates, stock market declines, and a weak economy," said Senator Edward Kennedy, a Massachusetts Democrat. The bill, he said, "will help the hard-earned pensions of millions of Americans to weather this storm."

The Senate must still work out differences with the House, which passed similar legislation late last year, and answer administration objections to a provision that would excuse airlines and steelmakers with chronic pension underfunding problems from $16 billion in catch-up payments.

For thousands of companies, speed is crucial. They face huge increases in payments to their pension funds if the measure doesn't become law by April.

"A lot of companies have suffered" already as a result of congressional delay, said Lynn Dudley, vice president of the American Benefits Council, a business group representing employers and retirement-plan providers.

She said her group's "members are withholding opening plants, not increasing new hires, and avoiding improvements to their programs until they know what their liabilities are."

Unions have also lobbied for the legislation. Although the legislation will result in smaller payments to pension funds over the short run, it gives some financial breathing space to companies that might otherwise go bankrupt, lay off workers, freeze their pension plans, or renege on the promised benefits.

Failed pension plans are turned over to the Pension Benefit Guaranty Corp., a government agency that insures pensions for 44 million people in more than 30,000 defined-benefit pension plans.

The PBGC finances itself with premiums it assesses pension plan sponsors, in much the same way the Federal Deposit Insurance Corp. collects premiums from banks and thrift institutions to insure their depositors. Last year the PBGC took over 152 bankrupt single-employer pension plans covering 206,000 people, and saw its deficit rise to a record $11.2 billion.

Workers may lose a portion of their benefits when the PBGC becomes trustee of a plan. For example, the agency said yesterday it was taking over the plan of a bankrupt North Carolina construction company with 6,300 workers, pension plan assets of $95 million and benefit promises totaling $215 million. The PBGC estimated it will end up assuming $104 million of the $120 million shortfall, with the rest made up by lower retiree benefits.

Pension plans are in crisis partly because contributions have been tied to the interest rate on 30-year Treasury bonds. But the Treasury Department stopped issuing the bonds in 2001 and interest rates fell precipitously, producing smaller returns on pension plan investments. Underfunding of pension plans is now estimated to total $350 billion nationwide.

The Senate bill would establish a new formula that would make contributions dependent on the investment return from a blend of corporate bond index rates. The PBGC says that will save companies $80 billion over the next two years while Congress and the administration work on long-term overhaul of the pension system.

The measure is particularly important to mature industries such as automobiles, where retirees at some companies outnumber current employees. General Motors Corp., for example, has 25 retirees for every 10 active employees and will have to pay out $6 billion in pension benefits this year.

The bill also gives relief and requires greater transparency for unions and others involved in multiemployer pension plans.

Its most controversial provision singles out airlines and steelmakers, among others who have chronically underfunded plans, for special breaks.

Currently, such companies must make deficit reduction contributions, above their normal payments, to reduce their underfunded amounts. The bill would allow these employers to pay only 20 percent of their required catch-up pay in 2004, and 40 percent in 2005.

-- posted by Austrian

Top 853. Jan 29, 2004 7:39 AM

» Normxxx - Re: Re: Pensions Again

In response to message posted by Austrian:

When the market turned over, the imbalance became obvious. The cure is to change the rules so earnings appear stronger than they really are under current law.

It is even more sinister than that, Austrian. We now have a major reason why the 'a-(?)political' FED is targeting Wall St., even though it's not in their charter. They need to make the investments and pensions of the baby-boomers whole, so they don't wind up on breadlines. Be interesting to see if the covert FED manipulation is more (or less) successful than the overt manipulation of Japan and many other Asian coutries.

-- posted by Normxxx

Top 854. Jan 29, 2004 8:09 AM

» MarketVVizard - Re: Re: Re: Pensions Again

In response to message posted by Normxxx:

Any way you look at it, future pension payouts are going to decline substantially. It is more likely this happens though dollar depreciation simply because that is more palitable. Companies like GM with 25 retirees collecting benefits for every 10 employees simply will NOT be able to survive (compete), it is only a matter of time before someone with a much lower cost structure puts the stake in them.

-- posted by MarketVVizard

Top 855. Jan 29, 2004 8:09 AM

» MarketVVizard - Microwave Steel

Microwave Steel: Faster, Cleaner, Cheaper MTU 2004-01-26

The same couch-potato technology that pops your popcorn during a TV commercial can now be used to make steel.

You shouldn't try it at home, however, since it involves heating the raw materials up to 1,000 degrees Celsius, about the same temperature as molten lava.

The feat was accomplished by Michigan Tech researcher Jiann-Yang (Jim) Hwang, who wired together the magnetrons from six garden- variety microwaves into one super-heavy-duty oven and added an electric arc furnace. He then put iron oxide and coal inside. In a matter of minutes, the microwave energy reduced the iron ore to iron, and the electric arc furnace smelted the iron and coal into steel.

The process could give the steel industry the same benefits that a microwave gives the typical family, says Hwang, an associate professor of materials science and engineering and director of Michigan Tech's Institute of Materials Processing.

It's really cheap, and it's really fast.

"With a blast furnace, most of the heat escapes," Hwang says. "It's like the stove in your home, where most of the heat warms your kitchen. It's inefficient. In our microwave, iron oxides can be heated to 1,000 degrees Celsius in one minute, compared to hours for conventional heating."

Microwave technology could cut production costs by as much as 50 percent, Hwang says. In addition to energy savings, it uses coal, eliminating the need for high-cost coke. And the manufacturing process is simple, cutting the number of steelmaking steps in half.

It's also friendlier to the environment, with significant reductions in greenhouse gases and sulfur dioxide emissions.

Industry officials aren't ready to throw their existing technology out the window just yet, but they are taking a close look at the Hwang's invention.

"This could be a promising technology, particularly for helping us reuse byproducts that are currently being discarded," said Mark Conedera, a senior environmental engineer with US Steel Corporation. "We've been supportive of the concept for these value- added uses, and it has significant environmental benefits."

Hwang believes his new technology has the potential to benefit U.S. heavy industry, particularly in the Great Lakes region, where the steel and auto industries are centered.

"A low-cost steelmaking technology would take advantage of U.S. iron and coal resources and could help keep manufacturing jobs in Michigan and throughout the Great Lakes," he said.

Hwang's microwave steelmaking research was supported by a grant from the U.S. Department of Energy.

-- posted by MarketVVizard

Top 856. Jan 29, 2004 8:14 AM

» MarketVVizard - Migration of Skilled Jobs Abroad Unsettles Global-Economy Fans

Migration of Skilled Jobs Abroad Unsettles Global-Economy Fans
WSJ By BOB DAVIS
01/26/2004

DAVOS, Switzerland -- Many of the business, government and academic leaders who came here for the annual meeting of the World Economic Forum, traditionally a gathering of advocates of globalization, have voiced doubts over the past few days about one of the central tenets of global economic integration.

They question whether the increasingly global economy will produce as many high-wage jobs in rich countries as once was expected.

Their concern stems from the free-trade axiom that when a rich country sends blue-collar jobs overseas, it creates opportunities back home for workers to move up the skill ladder. The more recent corollary was that sending service jobs overseas would do the same for white-collar workers back home.

But the rising number of skilled, white-collar jobs migrating from rich nations to developing countries is raising fears that, in fact, well-paid workers in developed countries will have trouble finding equally well-paid computer, design and medical jobs at home. Many of the true believers in globalization at the Davos forum, which ended Sunday, worry that outsourcing also could erode political support for free trade internationally.

"When auto-manufacturing jobs went to Mexico, we said we'd push the bar up and create better jobs," said William Daley, who guided the North American Free Trade Agreement through Congress for former President Clinton and is president of SBC Communications Inc., a San Antonio, Texas, telecommunications operator. "Can you keep going up the job chain?"

Zhu Min, general manager of the state-owned Bank of China, suggested that the U.S. does need "to reposition itself. Manufacturing is gone; services are going. Research and development is still there. [The U.S.] needs to move up the [development] chain."

Others noted that there are substantial differences between how trade affects workers in manufacturing and services. In developed countries, lofty tariff barriers to imported goods had to be whittled away before many manufacturing jobs were at risk, a process that took decades. Governments could limit the losses by reimposing tariffs. High import tariffs eliminate some of the economic argument for using lower-cost labor abroad to make goods that will be more costly as U.S. imports under those tariffs.

But service trade isn't affected much by tariffs, and can move as rapidly as the improvements in computers and communications allow. Therefore, the job loss can be more sudden.

Alarm Is Sounded

So long as manufacturing jobs were at stake, opinion leaders didn't take much note, said Dani Rodrik, a Harvard University economist. The alarm is being sounded now, he said, because "the opinion leaders are seeing their neighbors being displaced."

Many economists at Davos said the fears over outsourcing were overblown. If Indian programmers, for instance, produce software at lower prices than Americans can, that would reduce costs for the many users of information technology. As that lower-price software permeates U.S. and European companies, those companies would become more productive and more able to hire new workers. At the same time, as India and China develop economically, they would become more- lucrative markets for U.S. exports.

While the number of U.S. service workers whose jobs have been outsourced is small -- estimates range from 250,000 to 500,000 during the past three years -- the potential for further job loss is immense, all sides at Davos agreed. Brendan Barber, secretary- general of Trade Union Congress, a British labor confederation, estimated that two million service jobs could be outsourced from wealthy nations in the next five years.

In the U.S., outsourcing is increasingly becoming a political issue. Sen. John Kerry of Massachusetts, a Democratic presidential contender, is looking at tax-law changes to discourage shifting jobs abroad and requiring workers in call centers to identify the nation in which they are located. About a dozen states also are looking at putting curbs on the use of outsourcing in government contracts.

Democratic Rep. Barney Frank of Massachusetts, among several U.S. politicians at Davos this year, said the issue could hurt President Bush in Ohio and other Midwestern states. Mr. Bush's commerce secretary, Donald Evans, challenged that, saying the jobs lost so far involve "pretty small numbers."

Some of the beneficiaries of outsourcing outside the U.S. keep a wary eye on Washington. A provision in the massive spending bill Congress passed last week, though little-noticed in the U.S. media, is stirring up a storm in India, where it is seen as evidence of a backlash that will slow outsourcing. The law says that when the federal government decides to allow private companies to do work now being done by government employees, the private companies can't do the work outside the U.S. (The provision doesn't apply to work the government employees themselves were doing outside the country.)

For the past few decades, U.S. presidents have sold free trade and global integration as an economic-development strategy. Although the U.S. would lose some manufacturing jobs to developing nations where labor costs are lower, the argument went, the U.S. would gain higher- paying, higher-skilled jobs that poor nations were unable to master. Outsourcing makes that argument less compelling.

Through technology that makes communication quicker and less expensive and education that is creating pools of skilled workers in some developing countries, U.S. companies now do work abroad that once had been reserved for the U.S., Western Europe and Japan.

Software programming has been outsourced for years to India. Low- paying jobs in call centers also have been shifted to English- speaking countries around the globe. Now high-end computer-systems integration is leaving the U.S., too, as is architectural and design work.

As reported last week, International Business Machines Corp., Armonk, N.Y., plans to shift about 3,000 high-paying programming jobs to China, India and Brazil from the U.S. (See article.)

Lower-Priced Research Talent

An official at Davos from an Indian company boasted that the company could develop drugs for far less than the U.S. and Europe could -- because of lower-priced research talent and bargain rates to run large-scale drug tests.

"We cannot protect the American people from reality," said Hewlett- Packard Co. Chief Executive Carly Fiorina, speaking at Davos. "There are many, many qualified engineers around the world who want to participate" in advanced research.

Catherine Mann, an analyst at the Institute of International Economics in Washington, has estimated that U.S. companies were able to reduce the cost of computers and communications equipment by about 10% to 30% by making the equipment in factories around the world. That lifted U.S. economic growth by about 0.3 percentage point a year between 1995 and 2002, as more companies made use of information technology. She expects similar economic gains if computer software is produced in an internationally efficient fashion.

-- posted by MarketVVizard

Top 857. Jan 29, 2004 8:21 AM

» MarketVVizard - global steel situation

Scarcity of coal, iron ore hurts mini steel plants
TT By PALLAB BHATTACHARYA
01/25/04

Calcutta - This may sound paradoxical. Although the steel market is booming, a number of mini steel plants across the country are facing tough time on account of non availability of raw materials, primarily coking coal and iron ore.

The large steel plants, which do not have captive mines, are also facing the heat due to severe scarcity of coal and iron ore.

According to a senior executive of the Indian Steel Alliance (ISA), the domestic industry has been hit hard by the rising input cost. As a result, production cost has escalated by at least 25 per cent over the last few months.

"As the demand for steel grows, a section of unscrupulous importers and traders of coal and iron ore have gone berserk and started hoarding or playing with the prices. Now the situation has come to such a state that it requires immediate government attention," the executive said.

ISA has recently made a presentation to the steel ministry and apprised it of the current situation.

According to the presentation, the coke price has increased by over 67 per cent from $120 in 2002 to $200 as of now. Similarly, price of iron ore has escalated by over 71.4 per cent in the same period from $28 to $48.

In cases of iron-ore pellets and pig iron, the prices have risen much beyond 100 per cent. While pig iron price has increased from $110 to over $220, the price of pellets has increased by 157.5 per cent from $33 to $85.

Coupled with this, freight cost has also risen to over 210 per cent in the last one year.

"If all costs are taken into account, one can easily understand what tough time the steel industry is facing and why the prices are being jacked up despite resistance from the consumers," the executive said.

A finance director of a two-million tonne plus steel company has complained that state governments like Orissa, where iron ore is available, are not pro industry.

"For mining lease, you have to set up yet another plant in Orissa. Only then you are entitled to get lease. These states are not thinking in terms of being a part of India," he alleged.

Several steel companies have also been clamouring that the government should ban iron ore exports, while there is a huge shortage in the country itself. _______________________________________________________
Japan's steelmakers get raw deal after boost
FT By Mariko Sanchanta
January 26 2004 4:00

Japan - Foreign investors entranced with the China growth story found a nice home for their money last year: the Japanese steel sector.

Rapacious demand for high-grade steel products from China helped pump up profits for Japanese producers, persuading foreign investors - particularly hedge funds - to boost their share ownership in Japan's leading steelmakers to record highs.

But keeping pace with the breakneck speed with which China's economy is expanding, the theme of that story is already beginning to change.

Chinese demand is now, conversely, starting to hurt the Japanese steel sector due to a significant increase in the prices of raw materials.

China, which is estimated to provide half of all the coke traded worldwide, is curbing exports due to the surge in domestic demand - thereby tightening the supply of raw materials worldwide.

BHP Billiton and Rio Tinto, iron ore producers in Australia, said they had won an agreement to raise the price of fine iron ore by 18.6 per cent from April 1 with Nippon Steel, Japan's leading steelmaker. Coal prices have increased by about 25 per cent, year on year.

The move will result in increased costs for Japanese makers, estimated to total Y500bn-Y600bn on an aggregate basis in fiscal 2004, according to Akio Mimura, president of Nippon Steel and head of the Japan Iron and Steel Federation Industry. He expects the trend to continue for three to four years and has described it as a "serious problem".

Atsushi Yamaguchi, steel analyst at UBS Warburg in Tokyo, expects higher coal and iron ore prices to have a total material cost impact of Y54bn in fiscal 2004 on Nippon Steel's earnings.

At Nippon Steel, even executives were taken by surprise by the degree of the price increases. "No one imagined such an increase in the prices of raw materials," said Yuki Iriyama, manager of the overseas business development division at Nippon Steel and a member of the board.

He maintains, however, that the price rises should not squeeze margins excessively, as the company is currently in price negotiations with its customers.

"We have to explain our cost increases and we have to persuade them to let us increase prices accordingly," says Mr Iriyama. "Because raw materials comprise 20 per cent in the overall cost of producing steel, a 20 per cent increase in raw materials translates into a 4 per cent increase in total cost."

The irony is that China, which was until recently blamed for "exporting" deflation to Japan via an inflow of cheap goods, may now be providing the Japanese economy with an inflationary push. The distant future, however, could prove more of a worry for steelmakers. Andy Xie, economist at Morgan Stanley in Hong Kong, said in a recent report that the Chinese government had been announcing capacity projections for many industries to deter excessive capacity formation.

"[China] has learnt from the over-investment saga of 1993 and is proactively trying to rein in the excesses," said Mr Xie.

"However, it may be too late for industries such as steel, aluminium, autos and chemicals. When commodity prices are high, as they are now, they can justify building more factories by extrapolating the current prices into the future.

"However, when prices fall, they get to keep the factories and jobs while banks suffer bad loans."

Steelmakers insist they are braced for a hard landing, should it arise. "The Chinese market comprises 30 per cent of total global steel consumption and is still growing, while the Japanese market is shrinking," says Mr Iriyama.

"But we must acknowledge this situation will not continue forever. Our target is to increase capacity to produce high-end steel products."

To this end, Nippon Steel has already launched a Y45bn joint venture with Baoshan Iron & Steel, China's leading producer. The cold- rolling mill in Shanghai is currently under construction, with annual production of 1.7m tonnes of steel due to commence in May 2005.

The idea is to capitalise on local demand for high-grade auto sheet steel, particularly as Toyota and Honda have commenced production in China.

"Now, local procurement is impossible in China," says Mr Iriyama. "Automakers will give priority to this joint facility."

Meanwhile, foreign investors remain sanguine. The steel sector, which was last year's best-performing equity sector, is still near its peak and the share prices of Japan's leading steelmakers remain stable.

"There is considerable risk that recession will occur in a few years in China and there may be an oversupply of low-end products," says Mr Iriyama. "But I am optimistic going forward. More than half of our exports are high-end products, which are currently goods that China cannot produce in sufficient amounts."

Indeed, there may be considerable risks to come from a possible slowdown in Chinese demand. But the Japanese steel sector has not sung its swansong just yet.
_____________________________________________
Coal industry is fired up as prices have soared. Demand is rising, supplies are tightening. But will it continue? AP By Brad Foss 01/26/04

The coal industry is on fire.

With supplies tightening and demand rising, mining companies are commanding higher prices for the fuel and investors are rewarding them lavishly.

Massey Energy Co.'s stock price has more than doubled in the past year, while shares of Consol Energy Inc., Arch Coal Inc. and Peabody Energy Corp. have soared 50 percent or more.

The last time coal prices were at today's levels was 2001, when stockpiles dwindled as power producers sought an alternative to expensive natural gas. But those good times proved to be short-lived as coal producers boosted spending right before the economy slowed and natural gas prices plummeted.

''In '01 people got burned by expanding too quickly,'' said James Gardiner, executive vice president and chief administrative officer at Massey Energy of Richmond, Va.

While the industry once again might be experiencing a short-term boom, many officials and analysts believe coal producers are at the start of a period of prolonged prosperity — albeit one that won't begin in earnest until 2005, when supply contracts signed this year begin to pay off.

''I believe we're on the verge of a major resurgence,'' Jack Gerard, president of the National Mining Association's said last week at the West Virginia Coal Association's annual meeting, held in Charleston.

Wall Street is upbeat about several trends, the most significant of which is steadily declining productivity from aging Appalachian mines, resulting in two consecutive years of lower nationwide output despite growth in the West.

The domestic shortfall — magnified by a handful of bankruptcies by Eastern coal companies since 2001 — has been offset through imports, and no shortages are forseen. But analysts predict that over time supplies will tighten, leading to higher and more volatile prices.

''In our view the long-term supply and demand outlook for the U.S. coal producers continues to improve,'' Credit Suisse First Boston analyst David Gagliano said in a recent report.

In 2003, U.S. coal production declined 1.9 percent (4.4 percent in the Appalachia region), according to Energy Department statistics. Credit Suisse First Boston estimated that demand grew 2-3 percent last year.

With nuclear plants nearing output limits and natural gas prices soaring, analysts believe coal will become an even more important fuel to electric utilities. More than half the nation's electricity already comes from coal and demand is expected to increase as the economy improves.

The outlook for coal also benefits, analysts said, from the Bush administration's industry-friendly positions on issues ranging from power plant pollution to controversial mining techniques.

The spot price for Central Appalachian coal averaged $41.50 per short ton for the week ended Jan. 16, which was 33 percent above last year's level, according to the Energy Department. Coal mined in Wyoming's Powder River Basin averaged $6.75 per short ton, a 9 percent increase from a year ago.

Because most coal is purchased through long-term contracts, today's higher spot prices have little immediate impact. But they do give producers leverage during contract negotiations.

''An awful lot of coal is being sold at prices that haven't been seen in some time,'' said Massey Energy's Gardiner, referring to contracts to deliver coal in 2005 and beyond.

That's not to say utilities are building inventories while prices are high. A few believe today's bullish long-term forecasts are overly optimistic, noting that the financial incentive to ramp up production is growing.

''What we've seen in history is that, as prices go up, there's more coal produced,'' said Elliott Batson, manager of coal purchases for Duke Power, which operates regulated utilities in the Carolinas and burns 16 million tons of coal annually at eight power plants.

In the meantime, Batson said coal purchasers are hedging their positions.

Those that think the price spike is temporary are drawing down inventories of coal purchased when prices were lower, Batson said. Those worried about supplies are signing multi-year contracts.

Other factors that could undermine bullish forecasts include a slower-than-expected economic recovery, lower natural gas prices and moderate weather, which reduces demand for home heating and air conditioning.

''We could have a big sap in demand for power and, boy, I'll tell you, that would wipe out the supply deficits real quick,'' said Mark Morey, a director at Cambridge Energy Research Associates in Washington.

Morey believes it is ''too early to tell'' if the industry is at the start of a new era of rising wealth, but he said a compelling story can be told in support of that view.

For starters, major coal companies are more disciplined about production because they have grasped a simple truth the oil and gas sectors have known for years: Supplying the market with more than it needs depresses prices and ultimately is bad for the bottom line. Morey chalked up the supply glut that was created in 2001 as an aberration amplified by the severity of the economic downturn.

In the past decade producers have focused more on squeezing out everything they can get from older mines than spending large amounts of money to develop new ones. ''It's a quicker way to grab market share and it's also lower risk,'' Morey said.

The more cautious approach is also tied to fact that some of the biggest coal companies became publicly traded in recent years, placing them under greater pressure from Wall Street.

Peabody Energy of St. Louis had its initial public offering in 2001, while Consol Energy of Pittsburgh went public in 1999.

-- posted by MarketVVizard

Top 858. Jan 29, 2004 9:16 AM

» MarketVVizard - Benefit costs outpacing wage gains

[Note: Gold getting hammered today, finally breaking 400 on the downside]

By Rex Nutting, CBS.MarketWatch.com
Last Update: 10:24 AM ET Jan. 29, 2004

WASHINGTON (CBS.MW) -- The cost of employing a U.S. worker increased a modest 0.7 percent in the fourth quarter, with the bulk of the increase coming from higher costs for fringe benefits such as health care, the Labor Department reported Thursday.

It was the slowest increase in the employment cost index in seven quarters.

Benefit costs soared 1.2 percent while wages and salaries rose 0.5 percent in the fourth quarter. In the third quarter, employment costs rose 1 percent, with benefits up 1.5 percent and wages up 0.7 percent.

For all of 2003, employment costs increased 3.8 percent, with benefit costs rising 6.3 percent and wages increasing 2.9 percent. Employment costs had risen 3.4 percent in 2002.

It was the fastest annual increase in benefit costs since 1990. Many firms were forced to boost their contributions to defined-pension plans during the year to restore funds lost in the bear market.

"Low employer costs are likely helping corporate profits, but health-care costs remain a serious concern," said Rakesh Shankar, an economist for Economy.com.

"This low rate of growth in employee costs may help entice some firms to hire, especially if this trend continues going forward," said Drew Matus, an economist for Lehman Brothers. Matus warned that weak wage growth "could have a dampening effect on consumer spending as time goes by."

Economists were expecting a 0.9 percent gain in employment costs, according to a survey conducted by CBS MarketWatch. See Economic Calendar.

In a separate report, the Labor Department reported that initial claims for state unemployment benefits have been largely unchanged over the past three weeks. The key four-week average of new claims edged up to 346,000. See full story.

The tame increase in employment costs reflect severe cost-cutting by employers as well as the slack labor markets, which reduce employees' bargaining power. The data show no inflationary pressures from labor costs, one factor that's persuaded the Federal Reserve to be "patient" in raising interest rates. See full story.

Employment costs rose significantly faster in the private sector than for state and local government workers in 2003. For private-industry workers, employment costs rose 4 percent, with benefits up 6.4 percent and wages up 3 percent.

By contrast, state and local government workers' employment costs rose 3.3 percent, with benefits up 6.1 percent and wages up 2.1 percent, the smallest gain in more than 20 years.

By industry, the largest wage gains were seen in finance, insurance and real estate, which increased 7.3 percent. Banking wages and salaries surged 14.3 percent.

Wages and salaries in transportation and public utilities increased just 1.6 percent in 2003, including a 0.5 percent gain in the battered transportation sector.

Employment costs rose 4.1 percent for white-collar workers, 4 percent for blue-collar workers and 3.2 percent for service workers. Unionized workers' employment costs rose 4.6 percent, while nonunionized workers' employment costs increased 3.9 percent.

-- posted by MarketVVizard