Tuesday, 20 January 2015

Morning Mumble: A side thought for the banks & Chinese (stimulus).

Good Morning,

Some things I started at the weekend and didn't have time to complete, a life Jim! For those knowing my historic gambling decisions will be shocked that it ended up being the culmination of a week of exceptional performance and ironic that the betting at the dogs resulted in an approximate nil loss.

Yes it was with pleasure that the 41 year gambling curse and lost a few won a few was broken. A good night on Friday, it was a positive I had my carer there to remind me to hand over the keys to my car, reminded me to bring my wallet, my phone, in fact just about anything! It's going to become more common as keyless entry becomes the norm and as a car swaps drivers the person (me) with the card/key in their pocket disappears off. Is there a potential insurance risk here? 

Banking stocks are normally good for trend and sentiment trading such as Standard Charter (STAN) based on their Asian exposure and limited upside. They have had a contraction in their lending based on a tougher lending requirement and panicky underwriters being more risk averse. Something that may be highlighted in time in their bad debt provisions never mind the Greek issue.

EMC Banking Updates (01/17/2015), is not without precedence that some well-known FX traders including Barclays (BARC) may have a few losses to notify the market of. Reuters highlight the Barclays issues... and Zero hedge pointing out the divergence of stocks& financial credit. There's a certain trading houses well known for FX, gold and copper might also need a little weekend work (this weekend as well).

Disappointing for the staff of FX companies scaling back and laying off because they're entering or attempting to avoid administration. We'll avoid mentioning those that should have made themselves of the full risks but they should have been fully aware with leverage that means there's a leveraged equivalent of debt (the multiplier). The FT. Swiss franc fallout claims more casualties. What is likely is a regulation in the FX market, with circa 80-90% of retail losing monies on FX, will there be limitations on capital exposure and the leverage? 

There was a contraction in speculation (yet again) that has impacted on stocks and commodities, with the Wall Street Journal (WSJ) running with China Shares Tumble on Margin-Trading Crackdown, with the rolling over of positions. This is likely to make payment due for some significant losses. Some of which have been commented on here and some that have been defaulted upon, perhaps those iron ore speculators are going to get "le grand awakening" post Chinese Government intervention.

It’s a big day for China with consensus of 7.4% Gross Domestic Product (GDP). The FT ran yesterday Five things to watch on China GDP growth. With so much weighted towards housing and making up such a significant proportion of growth the focus will be on how this balances with the rest of the economy.

Importantly Chinese Local Governments (LG) are reliant upon housing for revenue/income. With such high levels of borrowing can the LG's continue with Central Government stimulus unlikely to increase these revenue streams. Having failed in all efforts so far to turn around the housing market (for now) and in the absence of a turnaround in the sector? Expect some changes in land sales agreements to be announced soon, cheaper land for cheaper housing the same as UK focus currently. 

Other sectors have some catching up to do with the housing issues, declining sales, voids in unsaleable and un-rentable property due to oversupply. Something that will cause the market to digest with some immediacy. As a result oil and copper have pulled back some today in anticipation.

Oil was off on the Chinese data, despite the Chinese being actively in the market buying physical is at WTI $47.26 /bbl. and Brent $48.54/bbl. Even with Chinese Copper being set to benefit from China grid investment it fell. Do not expect much appreciation until February factories restarts, although restocking has been conducted earlier than most realise there should be a moderate appreciation in copper assuming other variables (EU/Greece) don't come in to play and further declines in margined trading. 

Yesterday it was noted the ChinaISA (China Iron and Steel Association) reported on steel inventories, China’s daily crude steel production – a movable feast. In speaking with Li, it was amazing that the Dalian Commodity Exchange (DCE) commenced trading iron ore contracts at night. Yes folks, if the Chinese couldn't get enough in the day, they can wire up on coffee and trade through the night. Shockingly this assisted the DCE to rise giving some hope to iron ore traders and investors as prices bounced.

A lot of news to digest from Rio Tinto (RIO) with 4th quarter results, I'll come back to this with more time. To summarise Rio is as solid as the market expected. The pigs in the palace are hard coking coal down -9% on 2013, Semi-soft and thermal coal -6% (on 2013) and Titanium dioxide feedstock down 11% (Can we hear KMR cheer during financing negotiations). Iron ore on trend with a 5% increase on Q3, proving the model is economies is scale won't stop this juggernaut. Expansion to 360 Mt/a expansion is around 80 per cent complete it’s wise to consider the stress to prices by end of H1 2015.

Copper was down 15% as a result off a whopping 24% drop in grades at Bingham Canyon mine  (a common issue across the sector when compared to averages of a few years backthat should recover post mining in higher grade areas. Turquoise Hill Resources aka Oyu Tolgoi mine grades are half decent with improved grades and production with little impact from the fire. Eyes on the 27 January 2015 for Freeport-McMoRan update on Grasberg. 

Kenmare Resources (KMR)
, despite the Irish Times article about Kenmare in talks to finalise debt restructuring deal Shares in mining company have fallen 80% since rejection of Iluka bid, with debt restructuring likely to be resolved either way with Iluka Resources or not. Considering Blackrock and JPMorgan are net sellers, it’s not without risks but there's some belated cheer, Rio have scaled back their Titanium dioxide feedstock by 11% over to KMR. Investors would be wise to keep read Iluka Resources quarterly production update to measure the outlook/performance. 

Rio informs us of their provisional pricing and 2014 production versus guidance for copper (over to Rio). Provisional pricing - At 31 December 2014, the Group had an estimated 423 million pounds of copper sales that were provisionally priced at $2.87/lb. The final price of these sales will be determined during the first half of 2015. This compares with 254 million pounds of open shipments at 31 December 2013, provisionally priced at $3.33/lb. With copper at circa $2.55/lb today, anyone for a revision? 

2014 production versus guidance - Mined and refined copper production was broadly in line with upgraded guidance of approximately 615,000 tonnes and 300,000 tonnes, respectively. This was achieved notwithstanding lower than expected production from Escondida and the fire experienced at Oyu Tolgoi in the fourth quarter. 

Escondida and Oyu Tolgoi should recover by Q2 2015, which will be positive for the bottom line. Quite how Rio handles the Coal and Titanium dioxide issues will be interesting. Expect what the competitors gain today will be eroded tomorrow. 

For the cocoa watchers, it might be pertinent to watch the next quarter for prices. With strong correlations between agricultural futures and oil one wonders when the speculators will hit the agricultural futures markets. Corn looks to have found support circa $4 a bushelCorn and sugar is will be under further pressure especially ethanol producers. Margins for ethanol producers can barely be viable at current prices...Circa $0.02-0.03 (cents) a barrel at most in the current market, declining near 85% in a few weeks.  Cocoa prices ease as European grind volumes tumble

One cannot help but wonder how Maple Energy (MPLE) are doing, although they cannot really go much lower than the last time I looked at circa 6 pence on the buy. Nor can much more go wrong for MPLE, save for their creditors picking the keys up. 

Final thoughts go to Saxo, for those risk averse one would be wise to make sure they're appropriately protected. 

Atb Fraser

3 comments:

  1. Fraser- Hi- busy yesterday as I added a year and for some crazy reason we had an "open house" here- the posh wine was locked in the bunker but I was playing waiter all day so a day of rest today for me. And lots of coffee too....

    Re RIO- good spot re the copper sales and the adjustment that will be needed there due to the settlement process in place. RIO are a good bellweather for major sections of the mining world, with the iron ore war still being fought aggressively, no doubt encouraged by the casualties to date (Africa in particular has been smacked, closed, mothballed or deferred in the main).

    I guess the only plus for KMR is that the lenders have been fairly reckless so they are in it with KMR, albeit Iluka must be chuckling on the sidelines, perhaps poised to swoop on the carcass but with no real money for KMR shareholders now (the man at the Pru in the dock, with crimes against Pru investors to answer for here).

    Re AEN- their stunning move for Interoil has fallen on deaf ears in the main- they pounced when Interoil were in a hole and now the debt holders have taken their haircut and AEN get a 51% controlling stake for $5m. Wow was my initial response in 12/14 and now its been rubberstamped its still a shock how well they have played their cards here. The best deal of 2014/15 unless Ive been drinking too much mulled wine, so hats off to AEN and too inefficient markets too. If shares were correctly priced, I wouldn't really bother even looking most days.

    Re AVM- so they stumble on and get a 1p share rise due mainly to the gold price moving above $1,300/oz today. They are a v geared play on gold, no idea if and when they will start mining again, the strike being over and 300 laid off. The red flags cover the horizon so good luck to any stale longs there.

    Cheers. The Leggie

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  2. Fraser- Yes, Elliott seem to have AVM by the short and curlies now, then again AVM have been walking on a knife edge for sometime. They make POG seem like a safe play :-))

    Agree re AMA- surely 17p would have been achievable but at least they are protected if/when gold plummets again now. They have added $0.8m to the budget to expand the operating team and the rest seems to have gone on resource definition at Yaoure, which is fine by me but it looks like the jt bookrunners have made a million dollar or so for their halfhearted efforts here. At least the lowball offer is off the cards now, at least for me.

    Cheers. The Leggie

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