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Future of energy, Japanese banks & more… - Views on News from Equitymaster
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  • Jul 10, 2008

    Future of energy, Japanese banks & more…

    Ready to go green...
    The market for energy is huge. As per the Economist, at present, the world's population consumes about 15 terawatts of power (1 terawatt is equal to 1,000 gigawatts which is equal to 1 m MW). That translates into a business worth US$ 6 trillion a year. And by 2050, power consumption is estimated to rise to 30 terawatts.

    The IEA (International Energy Agency) believes that any transition from an economy based on fossil fuels to one based on renewable (green) energy, is likely to be slow. The developed world complains that many existing forms of renewable energy rely on subsidies or other forms of special treatment for their viability. Nevertheless, the rapidly developing countries are also taking more interest in renewable energy sources, despite assertions to the contrary by the West. While it is true that China is building coal-fired power stations at a blazing rate, it also has a large wind-generation capacity, which is expected to grow by two-thirds this year, and is the world's second-largest manufacturer of solar panels.

    Brazil, meanwhile, has the world's second largest (behind America) and most economically viable biofuel industry, which already provides 40% of the fuel consumed by its cars and should soon supply 15% of its electricity. South Africa is leading the effort to develop a new class of safe and simple nuclear reactors. India has made its contribution in wind energy with companies like Suzlon Energy leading from the front.

    Thus while most economies are prepared to look beyond fossil fuels, if renewable sources and other alternatives can compete on cost, the poor and the rich world alike will adopt them.

  • Also read - India's energy hunt

    ...but at a calibrated pace
    At the meeting of the G8 (Group of Eight industrial powers), China and India led objection by five developing nations to emission-reduction targets set by the G8 nations. The protest was on the context that a clampdown on fossil fuels would suppress economic growth. The G8 encompasses the US, Japan, Germany, Italy, UK, France, Canada and Russia, accounting for about 62% of global economic output and a similar proportion of heat-trapping pollution. The developing economies have rejected the G8's call to share its vision of cutting greenhouse gases at least 50% by 2050. An alliance of five developing countries - China, India, Brazil, Mexico and South Africa has declined to accept the numerical targets.

    Led by China, which is targeting a GDP growth of 9.3% YoY in FY09 and India (targeting 7.9% YoY), every member of the so-called G5 (group of 5 developing economies) will grow faster than the 1.3% growth rate projected by the International Monetary Fund for the advanced economies this year. This is reason enough that the G5 leaders have objected to any steps that might stunt economic growth at a time when major improvements are needed in health care, standards of living and public services.

    Japanese banks seek greener pastures...
    Almost two decades ago seven of the world's top-ten banks were Japanese and their cheap loans supported Japanese investment. After Japan's property and stock market bubbles burst, the banks, buckling under bad debts, retreated home. Nonetheless, more recently, the caution born of that fall from grace spared them the huge subprime-loan losses that have hobbled their American and European peers (top 3 Japanese banks reported only US$ 8 bn of subprime losses against the total US$ 400 bn of losses reported globally). Now their relative financial health has persuaded Japanese banks to venture abroad again.

    Going abroad is naturally attractive for Japanese banks as their domestic market offers meager returns. With one of the lowest economic growth rates, nearly negligible interest rates and stagnant lending rates, Japanese banks are but compelled to seek better returns. The rationale becomes clearer when it is pointed out that of the US$ 15 trillion of household financial assets in Japan, slightly more than half is tucked away in bank deposits earning almost no interest. Also, around 40% of Japan's listed companies are almost debt-free and are sitting on huge piles of cash.

    As the Japanese banks' horizons have expanded, so has their international share ownership. In 2002, almost 40% of the banks' shares were owned by Japanese companies (a legacy of post-war cross-shareholding), which by 2007 dropped to less than 20%. Meanwhile, the holdings of foreign investors have increased from around 10% in 2002 to 30%-40% in FY08.

  • Also read - Indian interest rates at multi-year highs



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