Newsbook

A correspondent reports from the border between Libya and Egypt

TRIBAL forces have established control across Eastern Libya since the police forces abandoned their posts a week ago, according to migrant workers fleeing the country via Egypt in their thousands. A last ditch attempt by mercenaries flown in from Chad, Zimbabwe, and Guinea and gunmen firing from helicopters to re-establish Muammar Qaddhafi's hold left a bloody trail, but no change to the tribal takeover. The scale of the violence contrasts markedly with North Africa's largely peaceful uprisings.

The uprising that is trying to reclaim Libya from the world's longest-ruling autocrat has also unleashed a wave of looting and destruction—much of it targeting foreign-managed projects, according to Egyptian, Turkish and British nationals, and some Libyans arriving in the Egyptian border crossing at Salloum. Underpinning much of the violence is anger at oil-rich Libya's transformation into a rentier state in which foreign companies won the prime government contracts and thousands of foreign workers from China, Egypt and Vietnam secured many jobs. Widespread killing by African mercenaries wearing orange construction hard-hats for helmets has further turned popular Libyan sentiment against foreigners.

A Libyan construction worker arriving from Baida, the scene of the first uprising, blamed the damage on an outpouring of years of frustration at Mr Qaddhafi's foreign adventures and white elephant infrastructure projects while most Libyans lived on in poverty. Another worker from Baida circulated a mobile phone recording of the lynching of an African he said had been a mercenary who confessed to receiving $12,000 for each Libyan he shot. Others showed recordings of  dead mutilated African bodies, and a Tunisian they claimed had worked with deposed Tunisian leader Ben Ali's republican guard.

Migrant workers describe tribesmen descending on their compounds with guns and swords, demanding their car-keys at knifepoint, confiscating their belongings and torching their pre-fab bungalows. Armed tribesmen arrived with ten trucks to loot their project, including eighty computers, according to a British contractor working on an extension to Omar Mukhtar Unversity, in the eastern city of Darna. A Turkish contractor arriving from Tobruk also reported tens of millions of dollars in damage to sewage infrastructure. Finally the regime was investing in its people, said the British project manager, who watched looters torch his part of a $2.5 billion project to upgrade 25 universities.

In their reclaimed towns, including Benghazi, the country's second city, the migrant workers report that Libyan youths cruise the streets in their stolen cars using heavy weapons and even tanks looted from army bases. Security bases and checkpoints have been torched, and emblems of the Qaddhafi regime torched. Video images showed the current Libyan flag, introduced in 1977, replaced with that which flew under King Idriss, whom Qaddhafi overthrew in 1969. It has an Islamic crescent and star in its centre. Graffiti on a court-room celebrates the downfall of "the unbeliever" Mr Gaddhafi.

Egyptian workers arriving from Benghazi said the youths had formed popular committees to restore order, likening the situation to Egyptian groups which filled the vacuum after its police force abandoned their posts after the uprising there. But others spoke of violence. An Egyptian accountant working in Tobruk said youths wielding swords had taken his company's bulldozers to capture arms from army arsenals. Hundreds of new Hyundai cars have disappeared from Darna port's storage depot, and container ships docked in the harbour set on fire.

With scant support from their embassies hundreds of kilometres away in the capital, Tripoli, thousands of migrants are fleeing by road after receiving warnings from Libyan opposition groups to leave. Thousands more including Turks and Vietnamese are reportedly trapped near Benghazi airport waiting for planes to ferry them out.

To prevent a spillover of unrest, Egyptian forces are reportedly reinforcing their border. Egyptian eyewitnesses said tanks were heading west from bases at Sidi Barrani, 80 kilometres from the Libyan border. Some Egyptians called on their troops to push west in a bid end further bloodshed. The last Libyan security forces at the Salloum crossing reportedly abandoned their posts on Monday night. Until then, travellers said a reduced Libyan border guard had insisted on stamping passports of fleeing foreigners.

BIGGER ships have sailed the seven seas. But the scrappers have ensured that the fleet of massive container vessels ordered by Denmark’s Maersk Line will be the world’s biggest afloat by the time the first of them is launched in 2013. Maersk announced on February 21st that Daewoo Shipbuilding of South Korea will construct ten of the ships in an order worth $1.8 billion; the Danish company has an option to order 20 more. And if the new ships claim no overall record for size they will significantly alter the economics of container shipping.

The three previous ships whose size exceeded that of these giants were all oil tankers. Maersk’s new "Triple-E" fleet will be the biggest container ships yet seen (artist's impression above). They will carry 18,000 boxes, 2,500 more than the biggest container ship currently in service, which is also operated by Maersk. The new vessels will use 50% less fuel per container than the present average. That will be good news for the environment and for Maersk's profitability, as crude oil sails past $100 a barrel.

The new ships will ply the routes between Asia and Europe, so the order is a bet by Maersk that China will prosper long into the future and so will its exports. Container shipping has bounced back remarkably quickly from the post-credit-crisis lows of 2009. The recovery in shipping in the first half of 2010 took many in the industry by surprise as China’s resilience was buttressed by growth in parts of Europe—particularly in poorer countries such as Russia and Turkey—and in America.

Profits ahoy
Maersk’s annual results are due to be delivered on February 23rd and should make pleasant reading for investors. That the industry is steaming ahead was confirmed last week by Asia’s largest container line, Neptune Orient. It said it had made $460m of profits in 2010 compared with a loss of more than $740m the year before. This year is likely to be plain sailing too. Shipping rates are rising and Maersk reckons global trade could grow by 8%. Clarksons, the world’s biggest shipbroker, is predicting something closer to 10%.

If the future for container-shipping lines looks promising, the same cannot be said for the bulk carriers, despite China's continuing hunger for raw materials. The Baltic Dry Index, a measure of shipping rates for bulk goods such as coal, iron ore and grain, has foundered as container-shipping rates have picked up. The reason, explains Michael Lewis of Deutsche Bank, is the rapid growth in bulk-shipping capacity: the worldwide bulk fleet is expected to grow by 16% this year, double the rate at which freight volumes will grow.

Bulk shippers ordered lots of new vessels when China’s demand for raw material sent the index soaring to nearly 12,000 in 2008. But it closed on Monday at just 1,301. The current bulk fleet weighs in at 623m tonnes, with 277m tonnes (ie, 44% of existing capacity) on the order books. Container-shipping order books, in contrast, are back to normal, at around 25% of the existing fleet. Container shipping has fared better because it is far less fragmented than bulk shipping. There are just 20 or so global container carriers: Maersk's container fleet is around 500-strong. The bulk-shipping business, however, has few dominant firms, with most lines owning no more than a handful of vessels. That container shipping is dominated by just a few big lines made it easier for the industry to take out excess capacity in the 2009 downturn and will reduce the chances of reckless expansion now that good times are back.

Image credit: Maersk Line

YESTERDAY was a good day for German political parties that have been having a bad time. The Social Democratic Party (SPD) won nearly 50% of the vote and an absolute majority of the legislative seats in Hamburg, a port city with the status of a state. That is the party's best result there in 30 years. The liberal Free Democratic Party (FDP), which had been on the verge of electoral irrelevance, managed to re-enter the Bürgerschaft (state parliament) after an absence of seven years.

The big loser was Angela Merkel's Christian Democratic Union (CDU), which rules Germany in coalition with its Bavarian sister party, the CSU, and the FDP. The CDU's loss of power in Hamburg was not a surprise. The shock was that the party's share of the vote dropped by half, from 43% in 2008 to 22%.

The results are not a mirror of the German mood, but they have implications for national politics. The CDU’s humiliation was manufactured mainly in Hamburg, not in Berlin. Its coalition there with the Green party, a national first, had all kinds of problems. The parties were at odds over infrastructure projects, such as the deepening of the Elbe river to allow bigger ships into the harbour. They agreed on a scheme to reform Hamburg’s schools, which are among Germany’s worst. But voters rejected it in a referendum.

Ole von Beust, the popular CDU mayor of Hamburg, resigned unexpectedly last July. His successor, Christoph Ahlhaus, was neither liberal nor Hamburger enough (he comes from Heidelberg) for the city’s voters. The million euros he spent fortifying his villa did not endear him to taxpayers. Mrs Merkel campaigned for him but the cause was hopeless.

For the SPD, the Hamburg triumph is a glimmer of hope. The party suffered its worst post-war defeat in 2009’s national elections, winning just 23% of the vote, and has since only fleetingly breached the 30% ceiling in polls. The incoming mayor of Hamburg, Olaf Scholz (pictured), seemed to offer a formula for success: stress economic competence, not just redistribution of income. He signalled friendliness to business by promising to appoint an ex-head of the chamber of commerce as his economics minister.

The SPD has reconquered the political middle, crowed one of its politicians. The lesson, said Sigmar Gabriel, the party’s chairman, is that “economic development must go hand in hand with social responsibility.”

The election was also a reprieve for Guido Westerwelle, Germany’s foreign minister and head of the FDP. He has almost universally been seen as a disappointment in both roles; there was speculation that he would have to give up at least one of them at the party’s national convention in May. But in Hamburg an attractive leader, Katja Suding, and the party’s opposition to the school reform gave the FDP its best result in the city-state since 1974. Perhaps voters’ anger toward Mr Westerwelle and his party is abating a bit. For the high-flying Greens Hamburg was sobering: they gained votes but will move into opposition.

Hamburg is just the first, and one of the less important, of seven regional elections scheduled for this year. The next comes on March 20th in the eastern state of Saxony-Anhalt, where the SPD trails behind both the CDU, its coalition partner there, and the ex-communist Left Party. A week later are two crucial contests, in Rhineland-Palatinate, where the SPD is likely to lose its absolute majority but may continue to govern with the Greens, and in Baden-Württemberg, where things are looking better for the CDU-FDP coalition.

If the polls are right, the main parties will emerge from the next few elections with both prizes and bruises. Mrs Merkel’s political fitness may depend more on other factors: the fate of Karl-Theodor zu Guttenberg, the popular defence minister, now weakened by a plagiarism scandal; the health of the economy, currently vigorous; and above all, her handling of the euro crisis, which may enter its decisive phase next month.

Protests in Libya are met with violence from the government

IN THE wave of popular unrest that has spread across the Middle East following largely peaceful revolutions in Tunisia and Egypt, Libya appears to have taken a darker and bloodier path. Four days of clashes between government forces and unarmed protesters demanding the ouster of Muammar Qaddafi, Libya’s strong man, appear to have left several hundred dead and thousands more injured, mostly from gunshot wounds. The unrest represents the most serious challenge to Mr Qaddafi’s rule since his seizure of power in 1969.

With internet connections largely severed since February 17th, text-messaging services suspended and foreign media confined to the capital, Tripoli, the details emerging from the oil-rich North African state have been patchy and hard to confirm. Yet a trickle of telephone calls from eye witnesses, tweets and cellphone camera footage from inside the country largely confirm the grim picture painted by exiled Libyan opposition sources and international human-rights groups.

Protests appear to have erupted all across the sparsely populated nation of 6m people, but most intensely in the eastern region of Cyrenaica, which has a history of resistance to Mr Qaddafi. Tens of thousands in Benghazi, the region’s main city and Libya’s second largest, are said to have taken to the streets, torching police stations and besieging army barracks and the airport. Reports say they have confronted sniper fire, heavy machine guns and even mortar rounds. In smaller towns, including Bayda and the port of Tobruk, locals are said to have chased out government forces, after heavy loss of life. 

So far little fighting has been reported in Tripoli, but reports suggest that public anger is rising over the scale of bloodshed, the government’s use of heavy firepower and its alleged resort to deploying African mercenaries. With his country sandwiched between post-revolutionary Tunisia and Egypt, Mr Qaddafi seems precariously close to following their fallen leaders into early retirement, or worse.

Picture credit: AFP, via YouTube

It is turning out to be a very slow recovery for the financial instruments at the heart of the financial crisis. Residential mortgage-backed securities (RMBS), bundles of home loans that are spliced together and sold to investors, are being issued all the time in America. But almost all of them are stamped with government guarantees to protect investors in the event of default. The market for private-label RMBS, which package up mortgages that do not conform to government standards, is still almost lifeless. Almost, but not quite. 

On February 15th Redwood Trust, which buys up mortgages and turns them into securities, filed a prospectus for a $290m issue, America’s first private-label security of the year. (Redwood was also responsible for the only other such issue in America since the crisis, which took place last year.) But whereas the market for other securitised assets, such as car loans, has revived strongly, few expect a rush of new private-label RMBS. 

RMBS investors bear more scars from the crisis than most, for one thing, and the state of the housing market remains fragile. There is massive regulatory uncertainty: the Obama administration’s intention to wind down Fannie Mae and Freddie Mac will be realised in a matter of years, not months. And the room for private-label issuance has been squeezed by a temporary expansion in the size of the mortgages that can be guaranteed by the two housing-finance giants—these “conforming limits” will only start to shrink again in October. 

For now, the only choice for Redwood, and others who would follow, is to cling to the higher ground. The boom in private-label issuance before the crisis famously took place among borrowers that fell below the radar of government guarantees. The Redwood issue concentrates on borrowers that soar above it. The average size of the 303 mortgages in the issue is just under $1m. The average FICO credit score is 775, which makes the borrowers beacons of creditworthiness. The weighted loan-to-value ratio for the loan pool is a rock-solid 63%. These are among America’s safest mortgage bets.

That should ensure investor demand, but implies the market is limited. And even here, there is a wrinkle. Redwood asked both Fitch and Moody’s to provide ratings for the issue, but canned Moody’s because it disagreed with the agency’s assessment of the risks involved in the issue. On February 17th Moody’s helpfully published that assessment anyway. Its report focused on the threat of an earthquake damaging the Californian homes in the mortgage pool. Since Californian properties make up more than half of the Redwood offering, and many of them are in the vicinity of San Francisco, Moody’s reckons that investors would stand to suffer material losses in the event of a big quake. 

Some of this is all rather surreal. “An earthquake could occur at any point in time after closing,” warns the Moody’s report, which comes complete with scary-looking  geological charts. What next: super-volcanoes and asteroid strikes listed in the disclaimers? 

But the kerfuffle over ratings offers two lessons about the evolving RMBS market. One is that that there will rightly be more noise around ratings, thanks to edginess on the part of agencies themselves, less trust on the part of investors and regulatory attempts to encourage more unsolicited opinions. Standard & Poor’s, the other big rating agency, followed the crowd with its own, slightly sniffy opinion on the Redwood issue.  

The second is that “safe” securitisation is not as straightforward as it sounds. One of the big ideas behind securitisation is that it diversifies risk by pulling together different sorts of loan, whether geographically or otherwise—some loans may sour, but the chance of all of them going bad is low. That theory looks less compelling after the crisis, of course. But focusing on loans with higher credit scores or particularly trusted mortgage originators in response may well mean greater concentration of risk—in areas with more high-income borrowers, for instance. There is too much riding on the revival of private-label RMBS for the market not to come back eventually. But things will be shaky for a long time to come.

KARL-THEODOR ZU GUTTENBERG is Germany’s most dashing, refreshing and popular politician. He is also the most accident-prone. The 39-year-old defence minister has a reputation for straight talking and bold strokes. He admitted early on that German troops in Afghanistan face "warlike conditions", which in Germany counts as a daring confession, not a statement of the obvious. He ended conscription, a pillar of Germany’s post-war order, as part of a broader plan to make the armed forces leaner, more professional and more deployable.

But the rising star from Bavaria—Mr zu Guttenberg belongs to the Christian Social Union, the Bavarian wing of Chancellor Angela Merkel’s Christian Democratic Union—has stumbled into one political mess after another. There were questions about his role in disclosing the truth about a bloody air attack called in by German troops in Afghanistan (the top civil servant and the top general took the fall for that one).

His handling of recent controversies—the death of a cadet aboard a training ship, an accidental shooting of a soldier in Afghanistan, and the opening of soldiers’ post—raised new doubts about his coolness under fire. Mr zu Guttenberg seemed likely to survive these mishaps, helped by a general suspicion that his real offence is to have outshined his rivals.

But now Mr zu Guttenberg is embroiled in a scandal that he may not be able to blame on anyone else. Yesterday Süddeutsche Zeitung, a newspaper, reported that parts of his 2006 doctoral thesis seemed to repeat passages by other authors without attribution. "Constitution and Constitutional Treaty: Comparing Developments in the US and the EU" apparently drew on articles in other newspapers, the US embassy website, even an essay by a former defence minister. Internet sleuths are gleefully crowdsourcing more examples.

Mr zu Guttenberg calls the charges of plagiarism "fanciful"; any lapses in scholarly propriety will be corrected in the next edition, he says. His allies suggest he is the victim of a left-wing plot: Andreas Fischer-Lescano, a law professor who uncovered the apparent plagiarism while writing a review of the published thesis, is a founding member of a think tank positioned well to the left of centre.

That seems desperate. Mr zu Guttenberg has a better chance of spinning the copycat passages as trivial examples of carelessness, unrelated to his job as defence minister. So far, the opposition is not demanding his resignation. The University of Bayreuth, which awarded the thesis top honours, could withdraw Mr zu Guttenberg’s doctorate if it finds he has seriously breached the norms of scholarship. His political future will depend on whether the affair so damages his credibility that he can no longer continue in office.

More important than Mr zu Guttenberg’s career is the fate of the armed forces reform he has initiated. It was already in some trouble before this latest scandal broke. Along with ending conscription the defence minister wants to reduce the size of the armed forces, from 250,000 to 185,000, while increasing the number that can be deployed on foreign missions.

The reform would redefine the roles of the top generals, shut down bases and slim the bureaucracy. An evaluation of the reform, written for the chancellor but leaked to the press, raises doubts about its “future viability”. Germany’s allies worry that Mr zu Guttenberg is paying too little attention to the defence needs of NATO and the European Union.

Yet the biggest problem may be that the changes, which Mr zu Guttenberg billed as money-saving, now look as if they will initially be a net drain on the budget. The government’s budgetary plans call for the defence ministry to save €8.3 billion ($11.3 billion) by 2014. Now Mr zu Guttenberg wants extra money to make the armed forces more attractive to volunteers and to shut conscription centres, among other things.

The savings demanded by the government will result in a “dwarfication of the armed forces,” warned Ulrich Kirsch, head of the Armed Forces Association. But Mrs Merkel and the finance minister, Wolfgang Schäuble, were disinclined to let Mr zu Guttenberg off the hook even before they became better acquainted with his academic work. It is hard to imagine that they are feeling more indulgent now.

Note: This article was originally published on February 10th. It was updated on February 16th to incorporate BHP Billiton's results 

MINING is a business that likes to think big. Huge lorries, vast holes in the ground and, of late, massive profits. Such is the impact of China on the fortunes of the world’s mining giants that even in the lean times after the financial crisis struck, the companies remained decently profitable. Now many commodities are again hovering around record prices and as their results-reporting season begins, mining firm are set to look indecently profitable.

BHP Billiton, which relies for its profits on the most diverse set of minerals (including oil), reported a half-year profit of $10.5 billion on February 16th. This should set the company up for profits well in excess of $20 billion for the year to June 2011. On February 10th Rio Tinto unveiled profits for 2010 of $14.3 billion, mainly a result of booming demand for iron ore, which accounted for around two-thirds of those earnings. In two weeks' time Vale, a Brazilian mining giant that also leans heavily on iron ore, is likely to announce profits of $17 billion. A couple of days before Rio’s announcement Xstrata, the world’s biggest coal exporter, said that it had made some $5 billion. 

The good fortune shows no sign of ending. China’s economy is still rolling along at a fair lick and recovery in the rich world should perk up demand there too. Over the next two decades appetite for metals is likely to double as China and India urbanise and modernise. The big miners are ready to cash in. Capital spending is at an all-time high. BHP has announced plans to spend $80 billion on new projects, while Vale wants to pump over $20 billion a year into expanding production. In 2011 Rio, meanwhile, will spend $13 billion. But capital spending is limited by the availability of new or expandable older projects as well as the men and equipment to do the digging. So the mining giants will still be left sitting on big piles of cash.

Painful memories
All three have serious impediments to spending the money on acquisitions, not least the hotter competition for the world’s better assets from Chinese and Indian miners. Rio Tinto, in the throes of spending $3.8 billion on buying Riversdale, a coal producer with interests in Africa, is deeply scarred by its disastrous overpayment for Canada’s Alcan in 2007. The damage to its balance-sheet has only recently been repaired and it will now only consider smaller acquisitions. BHP’s recent rebuff by Canada’s government in its quest to buy PotashCorp and before that the collapse of an iron-ore joint venture with Rio, after regulators objected, show the difficulty of completing a mega-mining deal these days. And Brazil’s government, though only a small shareholder, can still exert pressure on Vale in other ways. It would probably not acquiesce to a big overseas takeover by the firm, preferring it to spend on creating jobs at home.

Investors, most notably BHP’s, have called for share buybacks or special dividends to hand the spare cash over to shareholders. BHP responded by announcing that it would buy back $10 billion of shares. Rio raised its dividend and announced a buyback worth $5 billion over the next two years. In September last year Vale also said it would return $3 billion this way. Some think BHP's cash might have been better spent on another big deal, possibly in oil, where it is small enough for regulators not to feel obliged to intervene. Handing money back to shareholders, rather than seeking new investments in the biggest commodity boom the world has seen, might be regarded as an admission of failure though BHP says that it has enough to do both. In all, the mining firms will find it tricky to strike the balance between satisfying shareholders' short-term appetite for higher payouts and fulfilling their long-term hopes that the firms will continue to grow as fast as they are now.

EARLIER today a judge in Milan, Cristina Di Censo, indicted Italy’s prime minister, Silvio Berlusconi, on charges relating to his alleged use of prostitutes. She said he should be tried for paying an underage prostitute and then attempting to cover up the alleged offence by taking advantage of his official position, which is itself an offence in Italy.

But Ms Di Censo did more than just indict Mr Berlusconi. She accepted, in full, arguments put forward by the prosecution that have potentially devastating implications for Mr Berlusconi (who denies any wrongdoing). First, she agreed with them that, because of “the obviousness of the evidence” they had gathered against him, he should be put on trial without a preliminary hearing. The full trial is due to begin on April 6th, and by a twist of fate (or, as Mr Berlusconi’s followers will no doubt contend, malevolent design) all three judges at the trial will be women.

That development seemed particularly resonant against a background of protests by Italian women against Mr Berlusconi and the entrenched machismo his female critics see him as representing. On Sunday, several hundreds of thousands took to piazzas around Italy to demonstrate “for a country that respects women”.

Their protest was the latest challenge to a prime minister whose personal popularity has fallen significantly since the scandal broke last October. Mr Berlusconi also faces daily problems attempting to get legislation through parliament following a walk-out by some of his followers last year.

But his party’s poll ratings have so far held up well, and he continues to enjoy the decisive support of Umberto Bossi’s Northern League, his party's coalition partner. What remains to be seen is whether that backing will survive the remarkable, if not unique, spectacle of a serving prime minister on trial for a sex offence.

Browse an interactive history of Silvio Berlusconi's legal troubles

Almost 800 pages of evidence compiled by the prosecutors depict Mr Berlusconi giving parties at his mansion near Milan for scores of women, in which showgirls rubbed shoulders with self-acknowledged prostitutes. The prosecutors claim that among the prime minister’s guests was a 17-year-old Moroccan runaway-turned-nightclub dancer, Karima el-Mahroug, who adopted the nickname “Ruby Heartstealer”. Documents leaked from the investigation show they have her own word for it that she received a payment from Mr Berlusconi for several thousand euros. Both the prime minister and the girl say it was a gift.

Paying anyone younger than 18 for any kind of sexual service is a crime in Italian law, punishable by up to three years in jail. Mr Berlusconi's lawyers have signalled that they intend to argue Ms el-Mahroug is older than indicated on official documents. But by agreeing to an indictment, Ms Di Censo implicitly dismissed that contention.

She also explicitly rejected the defence lawyers’ view that Milan’s prosecutors did not have the right to investigate the case. They had noted that Mr Berlusconi’s mansion is outside the city’s jurisdictional boundaries, and argue that the prosecutors ought anyway to have referred the case to a special court that tries ministers.

The second charge against Mr Berlusconi—and the more serious one, since it carries a maximum sentence of 12 years—relates to events on the night of May 27th-28th last year. Ms el-Mahroug, who had several times escaped from care homes, was taken to a Milan police station accused of theft. But instead of being returned to care, she was handed over to a member of Mr Berlusconi's party: a former showgirl who became his dental hygienist and is now a regional parliamentarian. She is herself under investigation, along with two other close associates of the prime minister, officially suspected of aiding and abetting prostitution.

The young Moroccan was handed over after the police received a call from Mr Berlusconi, in which he claimed Ms el-Mahroug was the granddaughter of Egypt’s ousted president, Hosni Mubarak.

TREAD carefully on your carpets. Hoard those squeezy bottles in your kitchen cupboards. Buy that model aeroplane you always promised yourself today, not tomorrow. The price of polypropylene, a versatile polymer, is soaring. It increased by 22% in January alone—and has risen by 133% over the past two years.

The price run-up is a headache for many companies. Some have shifted into other products: according to Plastics News some American fast-food chains are switching back to paper cups for fizzy drinks. Some makers of polypropylene products have been able to pass the price increases along to their customers: Angela Luther of AET Films, which makes plastic consumer-goods packaging, says that many of its customers have indexed contracts and have seen their prices rise as a result. Others have just had to swallow the extra cost. Dea Kelly of Shaw Industries Group, a flooring firm, says that intense competition has prevented it from passing on the hike in polypropylene costs. Carpetright, a British retailer, blamed rising polypropylene costs, among other things, for the drop in profits it reported earlier this month.

As for most commodities, the “China effect” is part of the story. In emerging Asia and the Middle East, demand for polypropylene reflects increasing consumption of goods (which either incorporate polypropylene, or are packaged in it) and rising car ownership.

But there is another, more subtle effect. Esteban Sagel of Chemical Market Associates, a Houston-based consultancy, says that higher polypropylene prices also reflect the rise in the oil price relative to natural gas, especially in North America. In the past the polymer’s price moved fairly tightly with that of oil but that relationship has broken down recently (see chart). Polypropylene is derived from propylene, which is in turn a by-product of a specific way of producing ethylene, a particularly useful hydrocarbon. A decade ago most ethylene in North America was made using naphtha, an oil derivative: it is this process that has propylene as its by-product. However, in the past few years, dearer oil—thanks in part to China’s energy-hungry growth—and the emergence of new sources of gas, such as American shale-gas deposits, have made it attractive to produce ethylene using a natural-gas derivative called ethane. The trouble is that the ethane route to making ethylene produces virtually no propylene.

Higher oil prices have also suppressed demand for petrol (gasoline). Motorists are seeking more fuel-efficient vehicles, and making greater use of biofuels such as ethanol. James Yong of Macquarie Bank says that this has led to declining American gasoline output from oil refineries since 2005. That too means less propylene, since it is also a by-product of petrol production.

Technologies do exist to manufacture propylene as an end in itself, rather than as a by-product. However, Mr Yong explains, building a tailor-made propylene plant, including getting the necessary environmental permits, can take up to four years and might cost of the order of $500m-$1 billion. So there seems little immediate prospect of fresh supplies coming on to the market to ease prices. The unreliable relationship between oil and propylene prices means that oil derivatives are not much help in protecting against rising prices for the plastic. Macquarie has seen a sharp increase in demand from big companies for bespoke hedging products for polypropylene and propylene. For those who have no protection from soaring prices, this plastic is no longer so fantastic.

Read on: A plan to recycle old PET plastic bottles into construction materials (Dec 2010)

WHAT role should property play in an investment portfolio? That question has been preoccupying plenty of funds that got burned on their real-estate investments during the crisis. This week an answer came from CalPERS, a huge and influential Californian public-pension fund, with the release of a strategic plan for its $15 billion property portfolio, which will be discussed at a board meeting on February 14th. In essence, property should be a safe source of diversification. It should not be correlated with the movement of shares; it should throw off stable income from tenants; and it should be a partial hedge against inflation.

That certainly sounds a lot more sensible than the fund’s current plan, formulated in 2007, which emphasised property’s ability to enhance returns and which lost nearly half its value between mid-2008 and mid-2009. Property types divide their investments into safe “core” assets, slightly riskier “value-added” assets, and riskier-still “opportunistic” ones. CalPERS’s 2007 plan shows just how much of a punt people were prepared to take in the boom: it allows the proportion of core assets to go as low as 20% of the fund’s total property investments, and opportunistic ones as high as 40%. Crazily, the highest amount of debt can be loaded onto the riskiest properties.

It’s all change now. "Core" assets must henceforth make up as much as three-quarters of the portfolio, with "opportunistic" investments going no higher than 15%. A 50% loan-to-value cap applies across the board. In this, CalPERS is in line with most institutional investors, which are rushing to put their money into the best properties they can find. . “I’ve never been in such a risk-averse environment,” says a big European fund manager.

The fund will also play closer to home. The 2007 plan allowed CalPERS to put up to 50% of its property pot abroad. The new plan proposes that the vast majority of its assets be held in America. Slow growth (and, in some cases, poor demography) means that Europe and Japan will largely get the cold shoulder. A bit of money will go to emerging markets.

Finally, CalPERS will also rely on private investment vehicles for its property bets. The new strategy argues that listed real estate investment trusts (REITs) can get swamped by the noise of the broader equity markets, which reduces the value of property as a way of diversifying their portfolio. Here, at least, CalPERS is swimming against the industry tide. The crisis has reminded many of the benefits of liquidity. REITs allowed investors to get out of their holdings if they wanted; they have been able to recapitalise pretty swiftly, too. REITS currently account for 15% of the industry’s investments and that share is likely to go up despite CalPERS's view.

A more cautious approach to property is undoubtedly welcome. The asset is a hybrid of bond-like cash flow from rental income and equity-like gains from rises in value. Too much emphasis was put on capital gains in the boom. But the danger now may be the reverse. As pension funds, sovereign-wealth funds and asset managers become more conservative, they cluster in the same gateway cities and chase the same high-quality properties. That is already driving prices upward: London, which has led the recovery in commercial-property values, is already too costly for some. “Core assets are not safe at any price,” warns a big investor.

Read on: After the financial crisis, America's biggest pension fund is taking a stiff dose of its own medicine (Sep 2010)

IT LOOKS, in a way, like a stealth takeover. In September Stephen Elop, one of Microsoft's leading lights, becomes boss of Nokia, a troubled Finnish handset-maker. Five months later, Mr Elop will make Windows Phone, Microsoft's operating system for smartphones, its "primary platform" for such devices. Yet this is only one of the radical decisions Nokia's new boss announced on February 11th, shortly after sending his staff an apocalyptic memo warning them that they were standing on a burning oil platform and risked being consumed by the flames. The firm will also get a new operational structure and leadership team, more of whom will come from outside Finland. And Nokia will henceforth have just two distinct businesses: smartphones and mass-market mobiles.

This is an astonishing upheaval for what was once one of Europe’s hottest firms. But behind Nokia’s woes lurks a dismal reversal of fortunes, not just for the Finnish company but also for much of Europe’s mobile-phone industry. In the 1990s Europe appeared to have beaten even Silicon Valley in mobile technology. European telecoms firms had settled on a single standard for mobile phones. Handsets became affordable, Europe was the biggest market for them and the old continent’s standard took over the world. “Europe was the cradle for innovation and scale in mobile”, says Ameet Shah of PRTM, a management consultancy.

This changed with the emergence of smartphones, in particular Apple’s iPhone, which appeared in 2007. Nokia still ships a third of all handsets, but Apple pulls in more than half of the profits, despite having a market share of barely 4% (see charts, below). More Americans now have smartphones than Europeans. As for standards, Verizon, America’s biggest mobile operator, is leading the world in implementing the next wireless technology, called LTE.

Nokia, along with the rest of Europe’s mobile industry, is also being squeezed in both simple handsets and networking equipment. Cheap mobile phones based on chips from MediaTek, a company based in Taiwan, are increasingly popular in developing countries. By some accounts this system and its users now account for more than one-third of the phones sold globally, Mr Elop wrote in his memo. And at $28 billion in 2010, the revenues of China’s Huawei almost equal those of Sweden’s Ericsson, the world’s leading maker of gear for wireless networks.

At its most fundamental, this shift is the result of Moore’s Law, which holds that microprocessors double in computing power every 18 months. The first generations of modern mobile phones were purely devices for conversation and text messages. The money lay in designing desirable handsets, manufacturing them cheaply and distributing them widely. This played to European strengths. The necessary skills overlapped most of all in Finland, which explains why Nokia, a company that grew up producing rubber boots and paper, could become the world leader in handsets.

As microprocessors become more powerful, mobile phones are changing into hand-held computers. As a result, most of their value is now in software and data services. This is where America, in particular Silicon Valley, is hard to beat. Companies like Apple and Google know how to build overarching technology platforms. And the Valley boasts an unparalleled ecosystem of entrepreneurs, venture capitalists and software developers who regularly spawn innovative services.

The perils of dallying
Nokia had some additional problems to deal with. The firm realised its world was changing and was working on a touch-screen phone much like the iPhone as early as 2004. Realising the importance of mobile services, it launched Ovi, an online storefront for such things in 2007, a year before Apple opened its highly successful App Store.

But turning a Finnish hardware-maker into a provider of software and services is no easy undertaking. Nokia dallied and lost the initiative. Historically, Nokia has been a highly efficient manufacturing and logistics machine capable of churning out a dozen handsets a second and selling them all over the world. Planning was long-term and new devices were developed by separate teams, sometimes competing with each other—the opposite of what is needed in software, where there is a premium on collaborating and doing things quickly.

Olli-Pekka Kallasvuo, Nokia’s boss from 2006 until last September, was keenly aware of the difficulty. To get an infusion of fresh blood Nokia bought several start-ups and was reorganised to strengthen its software and services. And it tried to turn Symbian, its own operating system for smartphones, into a platform in the mould of the iPhone and Android. “But just like Sony, Nokia has not found a way to shift from hardware to software,” says Stéphane Téral of Infonetics Research.

To allow Nokia finally to shed its hardware skin, Mr Elop, formerly in charge of Microsoft's Office software products, was brought in—and apparently given what Mr Kallasvuo never had: carte blanche. This is why most observers expected the thorough changes that have now been announced, especially as concerns the operating system on which Nokia intends to bet its future. The firm has to move fast if it wants to have a chance to create a third platform for mobile software and services next to Android and the iPhone—hence the decision to ally with Microsoft rather than going it alone with MeeGo, a technically sophisticated but still incomplete operating system it has been developing jointly with Intel. MeeGo, having hitherto been seen as the firm's platform of the future, is being downgraded to a mere "research project", while Symbian, Nokia's current operating platform, is being relegated: it will henceforth only be used on low-end smartphones.

Teaming up with Microsoft has its benefits, says Ben Wood of CCS Insight, another market-research firm. Given his background, Mr Elop could surely make such a partnership work. And it could help Nokia make a comeback in America, where its market share is in the low single digits. On the other hand, argues Mr Wood, Windows Phone 7 has not been a huge success so far. It would also take at least six months before the first “Windokia” phones hit the shelves—that's a long time in a fast-moving industry.

Still, the partnership is good news for Microsoft, which has struggled to create momentum behind Windows Phone 7 despite a huge investment in development and marketing. Both firms will now focus on establishing the platform as an alternative to Android and the iPhone in North America, Steve Ballmer, Microsoft's boss, said at the event in London.

Profits going west
The deal is good and bad news for Europe's mobile-phone industry. It is likely to help Nokia to get back on its feet. But it probably also means that all three main platforms for smartphones and, by extension, computing tablets, will be American—a situation European mobile operators would have liked to avoid because it means more of the industry's profits will flow across the Atlantic.

Yet the agreement does not mean that Europe's mobile-phone industry is doomed. The revenues of ARM, a British firm, may only be in the hundreds of millions, but most microprocessors found in handsets and other mobile devices are based on its designs. Ericsson now generates 40% of its revenues from services, for instance by managing wireless networks around the world. And on February 7th Alcatel-Lucent unveiled technology that will shrink wireless base stations from a filing cabinet’s dimensions to the size of a Rubik’s cube.

Nevertheless, for a full comeback, Europe will have to wait for an entrepreneurial culture like Silicon Valley’s. This may not be as hopeless as it sounds. The beginnings of such a culture have taken root in recent years, and some successful start-ups have sprouted. One of the most popular games for smartphones, for instance, does not hail from the Valley but from Finland. “Angry Birds” has been downloaded more than 50m times since its release in December 2009. It is so addictive that compulsive players have been asking their doctors for help in kicking the habit.

Read on: Is Cisco, the "anti-Nokia", spreading itself too thinly?

THANK you for all your entries in our latest caption competition. We asked you to provide a pithy caption to accompany an image of AOL's boss Tim Armstrong with Arianna Huffington, which illustrates a story in The Economist this week about AOL's purchase of the Huffington Post. We had a particularly good crop to pick from. Our favourite entries included:

KaosAgent: "Content farm buys opinion mill"
JaggedM: "A diamond in the Huff?"
wavewhite wedded words: "You've got sale"
Olgrich: "I love your formula"
pompomgalore: "Huffington's blog on a roll"
oliverthebear, Mr.Shay: "The cheque's in the Post"

This week we had two winners. For the headline of the article, the author chose "Content couple", proposed by Marc Burleigh. For the photo caption, we chose a slightly amended version of the caption proposed by ZeFox: "Tim's got his hands on Arianna's content." We offer our congratulations to the winners, and our thanks to everyone who took part.