Good
Morning,
Last
week, Nikkei Hong Kong PMI® was released with the dramatic
title, PMI falls to lowest level since April 2009. The last
time the data was this negative was in 2002 and 2009. The indicators are not
great, with a lowering in new orders enabling companies to complete pipeline
work. This may be a swallow in the grand theme of things, but we shall watch
for a continuance before we long lithium pharmaceuticals.
One
item from Li, is the factories now avidly marketing their wares (inventories)
at rocket bottom prices. From some shoddy capital equipment to
very decent drilling machines for oil, all are being marketed with discounts
that are notable. Could the shale suppliers being under further pressure?
We
shall revisit this over the coming weeks, now the parade is over and they can
continue the witch-hunt. As a simplistic recap, production down, services
demand down, innovative development and investment down. China has forced a new
low, companies can recommend a buy on their own company – A Chinese investment bank rates its own stock — thinks it's
definitely a buy.
Now
who do you believe? Man Group China head says she was not investigated by
authorities, but was merely meditating. One had to reread this to make sure
there was no confusion between meditating and medicating! Of
course Li Yifei "had been attending industry meetings and taken a
5-6 day trip to meditate." So for those that don't reappear, say those
that worked at CITIC or similar, should we contact the Guinness Book of
Records, not only for the longest meditating period but largest event of its
kind?
We
had Markit France Retail PMI® that had very similar themes
to the BDO High Street Sales Tracker that was reported
Thursday. Although as a snapshot in time, predominantly based on weather, it's
not necessarily all bad. With some sectors and retailers likely to be more
resilient and / or benefit, but there is a theme, with some buying
opportunities presenting. Perhaps when considered against household debt
(excluding mortgages), there is a very simple answer for the decline in sales?
Save for more holidays abroad.
With
retail shoppers making decisions on holidays or retails sales, choices are now
having to be made. Watch for those margins, as sales competition hots up,
especially if there's discounting the autumn/winter season, more so than
normal.
Associated
British Foods (ABF) pre-close trading update gives out the positives, save
for FX and sugar. Why is ABF not split into two? The argument for a split is
getting ever stronger, save for some improvements in sugar more recently on the
back of El Niño (FT)
Earlier
in the year retailers evidenced improvements in pricing. These benefits are
likely to be offset by competitiveness due to weather (lack of punters)
and the need for seasonal stock changes. ABF via Primark have shown they’re not
insulated either despite lower prices. Concerning that with their pricing
perception in Primark stores, customers want even cheaper clothes!?
BDO
analysis suggests inventories up, sales under-pressure and weakness in the
wider and or global economy it's not looking great. (The last sentence may
apply to different regions).
Like
the Hong Kong PMI data, it’s noted that key reports are trending with as "bad
as, not since levels seen in 2009 etc...” The read across to Kingfisher and
Merlin entertainment does not looking brilliant, over to BDO.
The strength of the pound is proving somewhat detrimental to high
street retailers’ revenues. Consumers are spending more on items abroad to take
advantage of the exchange rate, whilst tourists – particularly from the
Eurozone – are less willing to spend. The continuing political and
macroeconomic uncertainty, coupled with the threat of an interest rate rise in
mid-2016, is also weighing on consumers’ minds.
Kingfisher
(KGF) may be insulated thanks to a growth in French housing purchases by
speculators/investors, although spend is normally lower than those buying a
‘home’. We won’t have to wait too long, with the interims due on the 15
September 2015. One can barely contain the excitement with an update on KGF’s
“One” and their 'sharp' decisions in September.
The
news is filled with Glencore. As the share initially shot up today on news of
a rights issue that was absent entirely of pricing or indicative terms. Please
remember, as per Ivan’s statement it has not been determined whether it will be
a rights issue. It does appear to be 100% underwritten (so perhaps the market
thinks it’s irrelevant), for now. This is in addition to Glencore’s African Copper - Operational Update.
The
market, like in the Platinum Group Metals sector, needs a casualty and Glencore
have come up with the answer. Putting two large projects under "Doctors
Orders" (Care and Maintenance) until improvement works have
finished.
The suspension of production at Katanga and Mopani for 18 months
up until the completion of the expansionary and upgrade projects. This includes
the whole ore leach at Katanga and the new shafts and concentrator at Mopani. A
suspension of operations will remove approximately 400,000 tonnes of copper
cathode from the market.
Glencore
blamed the decline in copper prices on aggressive short-selling in their full
year interim results webcast. Today's news is starting to make one think that Glencore did not
have any idea of the amount of physical in the market place nor in fact much
understanding of the current cycle. More so, the surplus is significantly
higher that Glencore anticipated by the very cut of near 400K/t’s. If this was
not the case, they would have identified suspending production at Katanga and
Mopani in their interim results webcast, rather than belatedly. The copper
price has improved a smidge of 4¢ since the interims, so what changed?
Glencore
have pulled 266K/t's annualised basis from the market, (for 18 months/note for
diary) As a result, if copper cannot sustain a comeback to near $2.50/lb and
potentially $2.85/lb on the back of Glencore's news, then there is something
substantially wrong in the global economy (and/or China).
Is
China really sick? Or just slowing? The copper price will give a very good
indication over the coming months. Not only immediately will the market react,
but due to inventories, a slower appreciation is likely over the next 9 months.
(Keep an eye on car sales). A complete gift to Freeport-McMoRan et al
(VED, ANTO, KAZ), where any 10¢ appreciate per lb is worth between $300-500M to
FCX.
Glencore
have come out to state how bad it is, but of course for Glencore it’s not bad
at all, Ivan Glasenberg, Chief Executive Officer, and Steven Kalmin,
Chief Financial Officer, made the following statement:
"Notwithstanding our strong liquidity, positive operational
free cashflow generation, lack of debt covenants, modest near-term maturities
and the recent affirmation of our credit ratings, recent stakeholder engagement
in response to market speculation around the sustainability of our leverage,
highlights the desire to strengthen and protect our balance sheet amid the
current market uncertainty.
We remain very positive on the long-term outlook for our business and this is reinforced by senior management's commitment to take up 22 per cent. Of the proposed equity issuance. Copper and zinc are both supply-challenged and an essential ingredient of future global growth. In seaborne thermal coal, a capex drought and low prices have helped rebalance the market. We are confident that thermal coal's position and availability as the lowest cost fuel source for many large economies will underpin its key role in the global energy mix for many years to come.
We have today an extensive portfolio of long-life, low-cost industrial assets, benefitting from the unique capabilities of our marketing business. We reiterate our 2015 full year marketing EBIT guidance of US$2.5 billion to US$2.6 billion and remain confident of our long-term guidance range of US$2.7 billion to US$3.7 billion."
Culling
dividends, full year and interim for 2016, cutting production etc...All should
have been conducted at the interim results where "Captain Kirk and
Scotty" could pull the levers (EMC: Glencore 24th Aug 2015). Have another look at the
Webcast from the 25 August 2015, re: Dividend etc...Then consider the news
today.
The
fundraising suggests there was an over-confidence in Glencore's senior
management at the interims in August. Did they really have sufficient
flexibility in the accounting model (in the current market), with some prudence
in light of current market conditions? Common-sense?
In
the absence of this capital raising, the balance sheet cannot be
"stress-tested." Glencore appears very desperate to be doing the
fundraising without giving an indication of anything, price, timetable or
whether the larger shareholders have approved of such an action.
If Qatar
Holdings, or Harris Associates had agreed to the fundraising, would
there have been a need to underwrite? All this of course is allegedly in the
interests of the longer-term shareholders, no strong-arming to avoid being
diluted!?
What
is noteworthy is the significant amount of "debt reduction" in the
near-term. Why was this suddenly needed, market confidence? Or
common-sense business practice that should have been identified at the
interims? Estimated to be near $6B in a very short time frame. So who is
next...? Anglo after the dip in diamonds?
Atb
Fraser
