Morning Mumble: Hiatuses, Commodities waffling including China DCE/Mills Iron Ore Fillip, the Nickel stand-off, Oh Rio + Genel.

Good Morning,

It’s that time of year where things wind down for the summer break. With visits and holidays planned and a few things going on behind the scenes, it'll be more of a rest from trading/investing and the market. Allowing for pool and travel time, there should be some time for the odd comment after tomorrow. 

It’s been thought provoking how the contracts have been trading on iron ore on the DCE (Dalian Commodities Exchange), with the liquidity only "appearing" more recently (16th July), almost identically to the contraction in crude prices. 

Is the previous absence and contraction in leverage now being restored? Are the Government "interventions" starting to iron out these issues (poor I know)? At the moment it looks more of a bounce than anything else, with the speculation of the port inventories and the steel mill holidays for the 70th anniversary celebration. 

We had Goldman attempting to work out the amount spent by the Chinese on the stock market rescue (FT). Alas the figure is always dependent on ones positions and perhaps there's some work that is earning them significant fees at the moment. Some figures were already in state media prior to the article, from when the "intervention" commenced. 

When one factors in all the considerations it dwarfs the $188B by Goldman. As on suspects certain factors have not been included such as the financial provisions to SEO's that were reliant on monies from impending IPO's, brokerages (and companies) requiring margin/funding assistance directly and that excludes the near $200B that the Government has spent via the CSR for lending on margin (near Goldman's numbers), brokerage assistance and more importantly "direct market equity assistance." Oh, don't forget the bond issuances and "pension company" purchases. Maybe there will be a holding’s RNS?

It’s in China's interests to play down the amount of money spent, as the significance of such a figure will show the gravity of the problem. They need to show the availability of funds to reassure the punters and wider public (confidence). All sorts of knock on consequences, for which economists will have such grand names for. 

One suspects iron ore is a bounce with the steel mills running at reduce capacity, even allowing for the fillip in steel and iron ore prices. In discussions with Li, he has evidenced steel mills avoiding restocking on any notable scale, showing perhaps a generally limited outlook of capacity/orders. 

Steel mills have a number of woes, evidenced in part by the steel-home china iron ore inventory numbers (lower than 2013), showing a) lack confidence in the steel price recovery and demand b) significant cashflow issues (even in state owned mills, more consideration required on that) c) better stock management d) awaiting a stimulus in infrastructure. It’s hoped there can be China special with various people in due course, more so evidencing the flow of money. (Promises Promises/Pie Crust?). 

The same for Nickel inventories (port), which dipped as low as 6MT in stock piles in January. There's restocking occurring without any movement in price. Inventories have grown to 10.75MT's and increasing (Chinese and LME & importantly Asia ex-LME). In contrast to the assumed deficit is nowhere in sight and prices are under pressure. 

There appears to be a momentary stand-off for a minimum price occurring on Chinese (and globally) prices at the moment circa $5/lb ($10,800/t). One suspects the LME on warrant supplies will have to drop significantly before any major appreciation in the price. In contrast the price has dropped near 28%, whilst a restocking of some 4-5MT's has occurred. There's also the consideration of supply coming online from Indonesia (end 2015). Please note this is excluding other inventories outside LME/Chinese Ports.

Earlier in the year it was sensible to consider the Nickel shortfall against assumed production and demand, on the back of Indonesian ban. The revisions are now taking place with an increase in LME/Warehousing inventories increasing near 50% fold. It would appear the bets are now on the second half for shortfalls and increased consumption. Really? Save for some Goliath type stimulus, post a significant bond raise by the Chinese (estimates ranging between $188B and $544B), maybe? 

Note the Shanghai Futures Exchange (SHFE) nickel contracts since launch appear to have spanked the price, especially Norilsk nickel for futures on SHFE. As a thought, with greater transparency that started with Iron Ore, the prices of commodities have suffered. Was the dinosaur opaque model detrimental to Chinas needs and global purchasing? Was there too much power in the hands of the marketeers? The results are certainly suggesting so.

On the market, Rio Tinto have announced they have delivered first half underlying earnings of $2.9 billion. Beating the whisper, but being priced in yesterday as consensus was anticipating something special. In reality, there's merely a delay in recognition of commodities prices having tanked across their operating divisions. 

There's positives in terms of dividend increases (beating consensus), share buybacks on-going and an emphasis on cost reduction. One does wonder how much more Rio can reduce costs without impacting on the bottom line. Rio have a very efficient model, without a doubt, most strive towards it. Debt's up a smidge to 13.683B from 12.495B (10% ish), although nothing near the likes of small producers that debt to equity would make northern rock shiver (FQM). 

Over to Rio to put it in context

As expected at the start of the year, the macro environment and commodity outlook facing the mining industry has been challenging. Commodity prices are under pressure, in some cases falling to levels not seen since 2009 in the aftermath of the Global Financial Crisis. Moderating Chinese demand, continued supply growth and downward shifts in industry cost curves are all contributing to weaker markets. Global macroeconomic risks have also added to short-term volatility, and China's equity market correction and Greece's debt negotiations have resulted in concerns of financial markets impacting commodity trading.

As with all cycles, we expect the current cyclical weakness will pass as global economic growth picks up and commodity markets rebalance. However, the recovery will be characterised by slower commodity demand growth compared to the past decade and a likely continued focus on productivity and costs over capital project development. This is the industry's "New Normal", in which producers at the lower end of the cost curve will maintain their competitive advantage, but higher cost producers will be exposed.

The importance being that Rio are expecting slower commodity demand growth compared to the last decade. Perhaps they can inform the Chinese premier? 

Genel (GENL) give a reminder to the market of how harsh the cashflow conditions are at the moment. The half yearly evidences the obvious, cash down, negative cashflow, net debt up. All this whilst appraising, developing and producing assets in the hope one day KRG coughs up some cash. There's hope though, over to Genel,

"Genel's operating performance in the first half of 2015 was strong, with net working interest production up 41% to 88,800 bopd. In recent days the KRG has made a public commitment to pay international oil companies on a sustainable basis from September 2015. These regular and predictable payments will allow Genel to fully capitalise on our strategic opportunities.

We remain committed to the Kurdistan Region of Iraq and will continue to invest in our existing oil fields while moving our major gas fields forward to development, creating significant value for both Genel and the KRG."

The final thought goes to something that was expected earlier, bad debts in China, with non-performing loans rising to 1.8 trillion yuan ($289.92 billion) as of the end of June, up 35.7 percent from a year prior, (Reuters). What is the impact for the grey lending and underground margin contingent that will also be suffering, perhaps it’s safe to assume disproportionally. RRR (reserve requirement ratio) may need a modest adjustment. 

Atb Fraser