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Where The CapEx Is: Russia To Invest $55 Billion In Gas Deal, China Another $20 Billion

Tyler Durden's picture


Western companies have buybacks that only reward shareholders here and now; the East actually spends capex to invest into the future. Case in point: today's "holy grail" gas deal announcement, which in addition to generation hundreds of billions in externalities for both countries over the next three decades will result in an immediate and accretive boost to GDP, to the tune of $55 billion for Russia and $20 billion for Beijing.

From Reuters:

Russia will invest $55 billion in gas exploration and pipeline construction to China, while Beijing will give roughly $20 bln to Moscow as part of the 30-year gas supply agreement, President Vladimir Putin said on Wednesday.

And incidentally we are not joking when we say that the New Normal is one in which the west spends on buybacks while the east spends on growth. Here is Goldman explaining just this back in february.

Economic recovery should equal a capex recovery; that is indeed one of the key defining characteristics of the recovery phase of a business cycle. Yet we believe that “this time will be different”, certainly for developed market-based companies. Why? A combination of structural, cyclical and technological changes suggest to us that the need for capex will be lower going forward, one of the key reasons why we are cautious on capital goods.

Things are getting smaller, faster, lighter…

Ceteris paribus you need a big machine to make a big and heavy widget and a small machine to make a small and light widget; and a big machine generally demands a bigger investment than a small one. This may seem trivial, but as miniaturisation gathers pace you need less powerful motors, less space, a smaller truck to transport it around, less material to build it and much more – all with negative implications across the capex chain. In conjunction with miniaturisation machines are getting faster. A robot today can make more widgets than it could yesterday.

…until they disappear all together

The lightest and smallest widgets of them all are the ones that are now entirely virtual. As recently as the last up-cycle in 2003-2006, some companies invested capex building plants that made CDs, DVDs, video games, sat navs, maps, time tables and much more, that we now largely use our smartphones/tablets for. While capex will continue to be invested to produce our smart phones/tablets, it is difficult to envisage how it will compensate for the increasing number of goods that are becoming virtual.

Capex will be spent elsewhere…in Asia

While all capex counts, the capex we typically focus on is the that spent by listed companies in general, and listed DM companies in particular. However, the global supply chain looks very different today than it did only 10 year ago. Everything from electric components to steel is being sourced from non-DM companies, often not listed, and many of them based in China and other parts of Asia. This trend is particularly strong within tech, where Asian companies dominate the capex-intensive part of the value chain. However, myriad small Asian companies play an important part in the supply chain of many non-tech DM companies. And often, the part of the value chain that is being outsourced is the most capex-intensive part, such as producing raw materials or semiconductors, reducing both the cyclicality and the need for capex by DM-listed companies.

…and by states and private companies

The Chinese State Grid Corporation spent c.US$60 bn in 2012 and China Railway Corporation spent over US$100 bn. To put this into context, the 2,200 European non-resource companies GS covers spent in aggregate €250 bn. Over the last decade, FAI has increased by a factor of 2.5x in EMs while it has increased by only 10% in DMs. This has increased the proportion of capex spent by SOEs in a number of industries such as resources, transport and power generation and T&D. All capex counts, but this capex will not show up in the cash flow statements of the companies in our coverage, and we expect a declining slice to show up in the P&Ls of our capital goods coverage.

Too much was spent in the last up-cycle

The last cycle saw many booming end-markets: mining, power generation, shipping, O&G and Chinese construction among many growing 3x+. We do not expect this up-cycle to contain any booms, and see several of the preceding end-markets continuing (or entering) multi-year declines. At the core of our view is the long asset life of many of the capital goods sold into the booming end-markets of the last decade. This lends itself to multi-decade investment cycles. The 20-year decline in transmission and power generation capex in the US (early 1970s to late 1990s) provides a sobering example. We now believe that several end-markets are close to, or past, their peak. Of the five mentioned above, it is only O&G where we still expect growth, albeit at a substantially lower level.

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Wed, 05/21/2014 - 08:16 | 4780595 intric8
intric8's picture

Nice. Vlad finds ways to help Russia skirt a recession, while Obozo's influence on americans keeps them caught in a cycle of ignorance and despair.

Wed, 05/21/2014 - 08:22 | 4780615 Old Man River
Old Man River's picture

Obozo's influence on americans keeps them caught in a cycle of ignorance and despair.


He believes it's not as bad as you think. After all, he won and he knows best.

Wed, 05/21/2014 - 08:32 | 4780630 Headbanger
Headbanger's picture

Photo caption:   Fuck you Barry..

Or ...    All our gas are belong to us!

Wed, 05/21/2014 - 08:57 | 4780716 Foul Harold
Foul Harold's picture

While Bronco Bama certainly isn't helping he would have never been elected in the first place by an engaged and erudite citizenry. Americans have nobody to blame but themselves. Idiocracy manifested.

Wed, 05/21/2014 - 09:12 | 4780785 Flakmeister
Flakmeister's picture

Exactly like W... At least O didn't need the SCOTUS to steal the election...

Wed, 05/21/2014 - 09:31 | 4780879 Foul Harold
Foul Harold's picture

There's no need to steal elections when you can bribe tens of millions of unscrupulous, obtuse voters with trillions in handouts and have nearly the entire corporate media infrastructure constantly distract them with lowbrow entertainment and identity politics related garbage.

Wed, 05/21/2014 - 09:43 | 4780925 Flakmeister
Flakmeister's picture

Sounds like Fox News....

Wed, 05/21/2014 - 10:14 | 4781054 Flakmeister
Flakmeister's picture


That dog done quit hunting a long time ago...

I would love to have seen your reaction when the WH outed a CIA operative.... Remember Valerie?

Wed, 05/21/2014 - 10:21 | 4781091 Foul Harold
Foul Harold's picture

Benghazi is not the point. The point is the incestuous relationship between the current adminstration and the media as per my previous remarks. But seeing as your progressive blinders are permanently welded to your brow I'm not surprised that it escaped you.

Wed, 05/21/2014 - 11:07 | 4781287 Flakmeister
Flakmeister's picture

My eyes are wide open, and while you seem to think yours are, you really need to step out of the cave before you can see anything...

Wed, 05/21/2014 - 08:17 | 4780599 mayhem_korner
mayhem_korner's picture



Just to square the investment in a real currency, that's 42M oz or 1.2M kg of gold for Russia, and 15M oz or 440 Kg of gold for China.

Wed, 05/21/2014 - 08:24 | 4780619 Winston Churchill
Winston Churchill's picture

Glad someone else gets it.
Was teaching my granddaughter basic algebra and explaining
about numbers just being symbols ,as anything else is.
A good refresher for me also.

Wed, 05/21/2014 - 08:35 | 4780645 LawsofPhysics
LawsofPhysics's picture

Yep, investing in real shit too.  Not moar financial products of mass destruction...

Can we please execute all the useless paper-pushers already?  Nothing changes stateside until that happens.

Wed, 05/21/2014 - 09:00 | 4780723 Acidtest Dummy
Acidtest Dummy's picture

USA pays pensions and provides protection to WAR CRIMINALS and you ask to execute paper pushers? If the USA were to start executing people en masse it wouldn't be paper pushers -- pushing papers is ~40% of the USA economy; considered gainfully employment -- the USA would probably begin by executing peaceniks (read hippies), civil rights activists (read black hippies), or skateboarders (read youth hippies).  

 LoP says, "When fraud is the status qou, possession is the law." It is those very paper pushers who possess the law. As Radical Marijuana says, "It is fraud backed by force perpetrated by the most successful criminal psychopaths in a murder based system that is a chronic problem intrinsic to life." 

 Re-education would be more appropriate for paper-pushers, but even that is most extremely unlikely. Rather, I expect, it will be gas chambers and incinerators for dissenters.




Wed, 05/21/2014 - 09:21 | 4780773 LawsofPhysics
LawsofPhysics's picture

Bullshit.  In today's world maintaining the status quo requires a tremendous amount of energy.  Sorry, there simply aren't enough calories available for consumption to maintain the status quo, let along do what you propose.

Please, wake up.  Authority/law is derived from the consent of those under that authority.  In my neck of the woods, everyone is very well-armed and well educated.  In addition, we all have tradable skills.  In this collapse (unlike previous world wars) it will become very clear very quickly precisely who's labor is of of real value.

The power the paper-pusher currently have is also derived from the fiat they control.  Full faith and credit motherfuckers, once fiath is lost they will be powerless.  The local police and military members will protect those who's labor is of real value because it will help them to survive. 

We are heading the way of south america, india, and afghanistan, not nazi germany.

Wed, 05/21/2014 - 09:48 | 4780948 Acidtest Dummy
Acidtest Dummy's picture

I am very sorry to have to report that the "consent" of those under that authority is immaterial. "Consent" or die, that is the choice. 


 "Local police and military members will protect those whose labor is of real value." Not likely because police can pay themselves! They are allowed this extraordinary privilege for their service in protecting the elite. And the military are near the first in line to recieve new fiat as it is printed as long as they follow their orders. The mechanics of these systems are pretty well known. 

  From the point of view of the most successful criminal psychopaths the main problem is dissenters -- people who would convince others to withhold consent -- remove dissenters, no more problems. And yes, it does take energy and will be expensive, but cost is no object because absolute total control is the goal.



Wed, 05/21/2014 - 11:04 | 4781267 LawsofPhysics
LawsofPhysics's picture

Again, "pay themselves" you say?  Pay themselves what?  If they don't accept paper anymore your argument is null.

Again, "cost" is fucking irrelevant, if there is no energy available to BUY.

Wed, 05/21/2014 - 11:57 | 4781531 Acidtest Dummy
Acidtest Dummy's picture

Police Can Pay Themselves anything that you have when they catch you. Police are bandits with badges. Police are organized criminals. Police are a gang and they will take anything they can from you -- while they thrash you for "resisting." And the police are unaccountable, the privilege they recieve for protecting the elites. 

 I think gas chambers and and incinerators because that seems like the worst choice TPTB could make, it will be expensive and ultimately it will fail. But LoP what you probably don't understand (because the Laws of Physics exist in the real world) is that TPTB are on a HOLY MISSION. They are doing God's work. This world is not their ultimate destination. Their work is their ticket to Heaven. They are not people you can reason with, sorry.


Wed, 05/21/2014 - 09:45 | 4780935 RadioactiveRant
RadioactiveRant's picture

As an added bonus, shoveling a few fatties into power station incinerators could help the US BoP by further reducing the need for oil imports.

Wed, 05/21/2014 - 08:19 | 4780602 dirtyfiles
dirtyfiles's picture

the kind of leader people needs

Wed, 05/21/2014 - 08:33 | 4780639 NOZZLE
NOZZLE's picture

Meanwhile in USA,  the professional eco handwringers are busy making sure that we cant add one more pipeline to the thousands of other pipelines already in existence.  Fucking traitorous pieces of shit. 

Wed, 05/21/2014 - 11:40 | 4781453 BlindMonkey
BlindMonkey's picture

That is because the Eco-cocksucker spending big bucks to keep that from happening owns a competing pipeline. Mind you place serf.

Wed, 05/21/2014 - 13:53 | 4782002 MedTechEntrepreneur
MedTechEntrepreneur's picture

Warren Buffett  is the reason why. Buffett wants to ship oil by his trains on the Taggart Transcontinental Line hence Obama will issue the 10-289 order killing all pipelines.

Wed, 05/21/2014 - 14:40 | 4782148 Flakmeister
Flakmeister's picture

Before spouting slogans and bullshit, why don't you breakdown how much Warren will make off his choo-choos carrying crude vs how much the Kochs (through Flint Hills) will make processing and exporting Keystone XL oil...

I'll give you a hint, 3% of BNSF loads are oil cars and BNSF made about 4 billion last year...

Flint Hills will get 150,000 bpd at a tax free $34 crack spread....

No XL means the spread would be $28 or so...

Wed, 05/21/2014 - 08:33 | 4780640 LawsofPhysics
LawsofPhysics's picture

Reinvesting in your own country, what a novel fucking concept.

Wed, 05/21/2014 - 08:37 | 4780651 Winston Churchill
Winston Churchill's picture

Such a revolutionary concept will never catch on here.
You would have to think beyond the next quarter.

Wed, 05/21/2014 - 08:34 | 4780644 Bill of Rights
Wed, 05/21/2014 - 10:12 | 4781047 intric8
intric8's picture

No worries! Fat 400 pound jamaima living off federal handouts and ilk similar to her will quietly disappear while the rest of us are rounded up by fema guys with guns and taken to processing centers.

The system is clearly unsustainable. Its gonna be surreal when its back is finally broken.

Wed, 05/21/2014 - 08:38 | 4780653 mydogisprettier...
mydogisprettierthanyou's picture

FRN's, Yuan, or Rubles?

Wed, 05/21/2014 - 08:41 | 4780660 Billy Shears
Billy Shears's picture

But, but we have the XL pipeline! Oh, yeah, forget that.

Wed, 05/21/2014 - 08:48 | 4780686 Flakmeister
Flakmeister's picture

But we don't want the XL....

XL is to displace more expensive (and taxable) Vza. heavy oil imports whose refined products are re-exported. Refined products from much cheaper XL oil would be tax-free (FTZs on the coast)....

Yet another corporate handout through the Tax-Code with no resulting jobs....

XL is a shitty deal for the American people

Wed, 05/21/2014 - 08:43 | 4780667 what's that smell
what's that smell's picture

more stuff to blow up when the shoe hits the fan....

go long extinction futures!

i love the smell of plutonium in the morning...smells like the end of the world.

Wed, 05/21/2014 - 08:43 | 4780668 Flakmeister
Flakmeister's picture

That's a lot of CAPEX for the alledged flows...

Wed, 05/21/2014 - 08:56 | 4780711 Ghordius
Ghordius's picture

yes, but the Polish PM has this idea of us europeans buying Russian gas wholesale, as one entity. so having a second big customer... might be good for prices and bargaining power in general, for Russia

Wed, 05/21/2014 - 09:17 | 4780814 Flakmeister
Flakmeister's picture

Why? Putin/GazProm would not be able to bully smaller wholy dependent users...

Wed, 05/21/2014 - 08:56 | 4780713 bobby02
bobby02's picture

55b is develop the Kovitka and Chayanda fields. 20b is for the pipe, but you're right, that's kind of high (although it will likely wind up even more costly, if history is any guide).

Wed, 05/21/2014 - 10:11 | 4780970 Flakmeister
Flakmeister's picture


Following up. I notice that this deal is not really news as it has been in the "pipeline" for a long time


The Kovykta field is considered to supply natural gas to China and Korea. According to these agreements signed by Rusia Petroleum with China National Petroleum Corporationand Kogas on 2 November 2000, the annual export of gas to China and Korea will be 20 billion cubic meters (bcm) and 10 bcm, respectively.[7]

Taken from TNK-BP release 2007


BP apparently had a hard time with the Kovykta field....

And there is this:


Wed, 05/21/2014 - 10:50 | 4781217 bobby02
bobby02's picture

Yeah, BP had a hard time at Kovitka, but not necessarily with the field, per se.

Wed, 05/21/2014 - 08:49 | 4780693 falak pema
falak pema's picture

A typical example of Reaganomics and outsourcing : get other people to make your capital expenditures for you! 

While you suck in the gravy of ST profits based on your monetary hegemony all fed on debt and corporate/state BIG STICK.

A big stick that gets more and more expensive and less and less efficient and cost efective.

We are one big MIC-NSA security Stasi type state racket in first world.

If you take away military/security spending our GDP shrinks and trade balance SOARS negative even more! 

Wed, 05/21/2014 - 08:49 | 4780696 Canucklehead
Canucklehead's picture

So the Russians are selling a volume of gas that they typically sold to Ukraine at a price of 20-30% less than what they charged the Ukraine? Also, they are going to incur a $55 BILLION capital charge to get that gas to China?

In your books, that is smart finance?

Wed, 05/21/2014 - 09:56 | 4780919 bobby02
bobby02's picture

Wasn't the Ukraine paying $268/Mcm? How is $350/Mcm a discount? Also, the Chineese pay for the pipe (v. sup.) while the Rooskies develop the fields, the gas from which could (theoretically) be directed elsewhere.


Another curio: 38bcm/year x $350/Mcm x 30 years = $399b. What happens if annual capacity is bumped to 61bcm? I haven't seen anything on the pricing of that additional gas.

Wed, 05/21/2014 - 10:08 | 4781026 Canucklehead
Canucklehead's picture

Where are you getting your numbers from?

China is looking after assets within China. Russia is looking after assets within Russia.

Russia is paying for field development and pipeline to China.

Wed, 05/21/2014 - 10:47 | 4781188 bobby02
bobby02's picture

Are you talking about the previous Ukrainian gas price and discount? That's public knowledge.


As for this deal, look, dollars are totally fungible, so if you want to believe that the Chinese are paying for the development of the fields and the Russians finacne the pipeline, that's fine. That bottom line is the bottom line. As for the source of the 20-25b pipe capex, I offer a rather pedestrian one: http://www.bloomberg.com/news/2014-04-09/putin-seen-signing-china-gas-de...

More sophistocated observers note that the entire pipe will probably cost around 35b but it doesn't end at Blagovechensk on the Chinese border - some of that gas will continue on, probably to the Vladisvostok LNG plant. 20-25 is a good estimate of the piece that is required to get gas to China, call it 2/3,

Pipes, refineries etc. inside China are not part of this deal at all.


<edit> flakmeister's link above also estimates the price of the pipe and development of Chayanda at 40B. Estimates of Kovitka development are legion, not the least of which from the mighty BP.

Wed, 05/21/2014 - 12:45 | 4781748 Volkodav
Volkodav's picture

Ukraine was lower price. Ukraine stole a lot more...(Tymenshnko)

and never paid for...owes billions

Russia has subsidized (helped) Ukraine estimated over 200 billion since soviet ended.

Ukraine was actually in better shape than Russian Federation to succeed, until outside interferences....especially after 2006

"Stealing Popcorn" http://www.youtube.com/watch?v=clgN_7HHqbw

Wed, 05/21/2014 - 13:00 | 4781817 Volkodav
Volkodav's picture

Normal dumbass comment from you....

first Ukr was supposed to be paying  $268 before...

second Ukr has not payed for that charity price yet...

owes Russia bigtime, while running  their mouths against Russia

I will skip over all the other crap from Kyiv gang...

explain this no brainer for you...China actually pays its accounts 


Wed, 05/21/2014 - 08:52 | 4780702 NoWayJose
NoWayJose's picture

Their actually were Democrats in the White House during the Texas and Oklahoma oil booms, but they were more like Putin back then. If the current President and Congress were in charge there either would never have been a boom, or only the big banks would have been allowed to participate. And throw in the Supreme Court - which busted up Standard Oil as a monopoly - yet today's regulators and courts can find nothing wrong with a few big banks controlling oil prices, metals, housing, politicians, etc.

Wed, 05/21/2014 - 09:14 | 4780794 Flakmeister
Flakmeister's picture

That would explain the Bakken and EFS.... eh?

Wed, 05/21/2014 - 09:49 | 4780951 Foul Harold
Foul Harold's picture

Bakken and EFS sit on privately held lands. Oil production on federal lands actually fell 6 percent between 2009 and 2013. Over the same period of time, oil production increased by 61 percent on state and private lands.



Wed, 05/21/2014 - 10:03 | 4781006 Flakmeister
Flakmeister's picture

What is your point?

Do NOT follow this link or you will be banned from the site!