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- 13 February 2006
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haemitite
FIFO & Depreciation [Depletion] are not irrelevant to cash-flow.
That they are non-cash charges, does not mean that they are unaccountable. Thus if your premise is incorrect, logically, your conclusion must also be incorrect with regards to NPV.
With regard to Inventory accounting in the above example, Inventory, under LIFO, FIFO, or Normal Stock method all mark inventory "at cost, or market" whichever is lower.
In an environment of rising prices, which currently is the case with many of the commodities, FIFO, will overstate the value of the inventory on a book basis, which also corresponds to the NPV valuation.
But yes it does...........
If the market price falls below the cost price based on FIFO.
LIFO & Normal Stock specifically avoid precisely this problem.
Therefore, the choice of accounting policy can have a very important impact on cash generation.
BSD
You have divided your response into four topics;
*Demand
*Supply
*Prices
*Acquisitions
I shall try to continue the above topic areas.
*Demand
While I concur that tarriffs are absolutely the wrong response, unfortunately, globally, tarriffs are on the way back. Europe as a simple example has placed tarriffs on bananas, the US has had tarriffs on lumber, there are many more examples, and unfortunately they are currently on the increase.
The Chinese are very poor at capital allocation.
Poor capital allocation does indeed lead to low, or non-existent margins.
The destruction of capital unfortunately does not lead to good things.
It lead to the increase in the banking system of bad debts & writedowns.
Writedowns impair the liquidity of banks balance sheets.
Credit withdrawal is the outcome.
That China is a managed economy, the result is not cut & dried, and due to the requirement to keep employment high and growing, industry will most likely be subsidised at a loss. This is already the case in a number of industies in China.
China cannot stop buying the $US, until, internal demand rises.
Only 42% of output is domestically consumed.
This is exceedingly low.
If the Yuan revalues, what will potentially happen is similar to when the Yen revalued at the end of the 1980's early 1990's. Asset bubbles will become unsustainable, and start to collapse.
The real estate boom in China, both commercial & residential, will in part form the equity of the lending banks on the asset side. Similar to Japan, falling land values will severly impact liquidity requirements on the Balance Sheet, leading to credit withdrawal/restrictions. There are any number of scenarios that could trigger the same outcome.
Well we disagree.
In my opinion, China is currently very heavily reliant on the US, not just for export markets, but for direct investment. If the US turns away from China, there will be very severe consequences for China & exporting nations [Australia & BHP] to China.
I tend to agree.
I am longer term bullish on the US, despite a number of problems.
*pensions [pension reform just passed in Congress is particularly onerous]
*medicare
*medicaid
*social security
Which raises a further concern with China.....
The age of the population.
Their percentage in the crucial age band of 15yrs - 64yrs is higher than that of the US & Europe and their wealth much lower.
Population:
1,313,973,713 (July 2006 est.)
Age structure:
0-14 years: 20.8% (male 145,461,833/female 128,445,739)
15-64 years: 71.4% (male 482,439,115/female 455,960,489)
65 years and over: 7.7% (male 48,562,635/female 53,103,902) (2006 est.)
Median age:
total: 32.7 years
male: 32.3 years
female: 33.2 years (2006 est.)
Population growth rate:
0.59% (2006 est.)
Birth rate:
13.25 births/1,000 population (2006 est.)
Death rate:
6.97 deaths/1,000 population (2006 est.)
GDP - real growth rate:
9.9% (official data) (2005 est.)
GDP - per capita (PPP):
$6,800 (2005 est.)
GDP - composition by sector:
agriculture: 12.5%
industry: 47.3%
services: 40.3%
note: industry includes construction (2005 est.)
Labor force:
791.4 million (2005 est.)
Labor force - by occupation:
agriculture: 49%
industry: 22%
services: 29% (2003 est.)
Unemployment rate:
9% official registered unemployment in urban areas in 2004; substantial unemployment and underemployment in rural areas; an official Chinese journal estimated overall unemployment (including rural areas) for 2003 at 20% (2005 est.)
In summary as far as demand.
Demand from China is not as clear cut, and bankable as some seem to advocate. If, the problems creep into the Chinese economy, and demand for whatever reason wanes, exporters to China will note the contractions in their net profits.
to be continued.........
FIFO & Depreciation [Depletion] are not irrelevant to cash-flow.
That they are non-cash charges, does not mean that they are unaccountable. Thus if your premise is incorrect, logically, your conclusion must also be incorrect with regards to NPV.
With regard to Inventory accounting in the above example, Inventory, under LIFO, FIFO, or Normal Stock method all mark inventory "at cost, or market" whichever is lower.
In an environment of rising prices, which currently is the case with many of the commodities, FIFO, will overstate the value of the inventory on a book basis, which also corresponds to the NPV valuation.
But yes it does...........
If the market price falls below the cost price based on FIFO.
LIFO & Normal Stock specifically avoid precisely this problem.
Therefore, the choice of accounting policy can have a very important impact on cash generation.
BSD
You have divided your response into four topics;
*Demand
*Supply
*Prices
*Acquisitions
I shall try to continue the above topic areas.
*Demand
While I concur that tarriffs are absolutely the wrong response, unfortunately, globally, tarriffs are on the way back. Europe as a simple example has placed tarriffs on bananas, the US has had tarriffs on lumber, there are many more examples, and unfortunately they are currently on the increase.
The Chinese are very poor at capital allocation.
Poor capital allocation does indeed lead to low, or non-existent margins.
The destruction of capital unfortunately does not lead to good things.
It lead to the increase in the banking system of bad debts & writedowns.
Writedowns impair the liquidity of banks balance sheets.
Credit withdrawal is the outcome.
That China is a managed economy, the result is not cut & dried, and due to the requirement to keep employment high and growing, industry will most likely be subsidised at a loss. This is already the case in a number of industies in China.
China cannot stop buying the $US, until, internal demand rises.
Only 42% of output is domestically consumed.
This is exceedingly low.
If the Yuan revalues, what will potentially happen is similar to when the Yen revalued at the end of the 1980's early 1990's. Asset bubbles will become unsustainable, and start to collapse.
The real estate boom in China, both commercial & residential, will in part form the equity of the lending banks on the asset side. Similar to Japan, falling land values will severly impact liquidity requirements on the Balance Sheet, leading to credit withdrawal/restrictions. There are any number of scenarios that could trigger the same outcome.
Well we disagree.
In my opinion, China is currently very heavily reliant on the US, not just for export markets, but for direct investment. If the US turns away from China, there will be very severe consequences for China & exporting nations [Australia & BHP] to China.
I tend to agree.
I am longer term bullish on the US, despite a number of problems.
*pensions [pension reform just passed in Congress is particularly onerous]
*medicare
*medicaid
*social security
Which raises a further concern with China.....
The age of the population.
Their percentage in the crucial age band of 15yrs - 64yrs is higher than that of the US & Europe and their wealth much lower.
Population:
1,313,973,713 (July 2006 est.)
Age structure:
0-14 years: 20.8% (male 145,461,833/female 128,445,739)
15-64 years: 71.4% (male 482,439,115/female 455,960,489)
65 years and over: 7.7% (male 48,562,635/female 53,103,902) (2006 est.)
Median age:
total: 32.7 years
male: 32.3 years
female: 33.2 years (2006 est.)
Population growth rate:
0.59% (2006 est.)
Birth rate:
13.25 births/1,000 population (2006 est.)
Death rate:
6.97 deaths/1,000 population (2006 est.)
GDP - real growth rate:
9.9% (official data) (2005 est.)
GDP - per capita (PPP):
$6,800 (2005 est.)
GDP - composition by sector:
agriculture: 12.5%
industry: 47.3%
services: 40.3%
note: industry includes construction (2005 est.)
Labor force:
791.4 million (2005 est.)
Labor force - by occupation:
agriculture: 49%
industry: 22%
services: 29% (2003 est.)
Unemployment rate:
9% official registered unemployment in urban areas in 2004; substantial unemployment and underemployment in rural areas; an official Chinese journal estimated overall unemployment (including rural areas) for 2003 at 20% (2005 est.)
In summary as far as demand.
Demand from China is not as clear cut, and bankable as some seem to advocate. If, the problems creep into the Chinese economy, and demand for whatever reason wanes, exporters to China will note the contractions in their net profits.
to be continued.........
