Good Morning,
Not only is there a rise in Chinese inventories, retail price increases, wholesale/factory gate prices are falling - to stay competitive China have resorted to energy price manipulation. All of which are eating into the earnings of global producers – aluminium a prime example. Following in unfortunate timing with, FT: Asia trades cautiously following Chinese data.
The overhauling of the SEO’s (State Owned Enterprises) is insufficient on its own. China, with any form of sensibility will have to adjust the wastage and excesses. The implications throughout the economy are not positive, if SEO’s suddenly garner economic prudence. The agendas of the Government will be harder to be played out, including, but not limited to, employment numbers, wages but also benefits.
The indicators suggest all is not as well in China, in addition to flying pig prices - notably the pork industry isn't as leveraged. China's food inflation won’t assist the economy out of this glut either, but they can hope. Similar to Russia but not as dramatic, China is suffering from a reducing wage cost, the impact on how people service there mortgage will perhaps be another story.
Finished goods prices (wholesale) have come under pressure from lowering demand but aided mostly by reducing commodity prices that are limiting the chances of growth. If UBS and Goldman Sachs forecasts’ of a worst case $28.50 and $20 a barrel respectively, come to fruition it’s not looking great either. If one was so inclined, this belated about turn by UBS and GS, may be an indicator the market is about to improve, with drilling count and well reductions.
See: AFR's: BHP Billiton price target cut on oil forecast revision and Bloomberg: How Low Can Oil Go? Goldman Says $20 a Barrel Is a Possibility. Essentially the outlook for certain countries isn't great, nor for debt of the oilers or the credit ratings.
Bloomberg’s Brazil's Junk Status is just the start of the risk realisation in international bond markets. Where, in the race for returns, monies have been lent on the basis of being a lower risk than the realities of the situation present. What are the implications for the following debt? More so who will own Petrobras?
Country
|
Oil Price to balance fiscal budgets 2015
|
Algeria
|
Needed $130/bbl, revised to $98/bbl
|
Angola
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$100/bbl++
|
Brazil’s just another story entirely, Petrobras’s debt woes won’t disappear overnight!
|
$115/bbl estimated just to service debt. Junk!
|
Ecuador
|
$80/bbl
|
Iran Allegedly
|
$130 by consensus but more than probable at $84/bbl based on increased exports.
|
Iraq
|
$95/bbl
|
Kuwait
|
$55/bbl
|
Libya
|
$140/bbl
|
Nigeria
|
$120/bbl
|
Qatar
|
$55/bbl
|
Saudi Arabia
|
$62/bbl (*based on revisions and financing)
|
Rest of UAE
|
$70/bbl
|
Venezuela
|
$120/bbl
|
Bloomberg's: Best & Worse Analysis.
For those readers that are keen on Pork Ribblets,
Semi-Meaty. The UK suffered a lowering in pork prices and demand during August.
Spain and Portugal, despite significant increases (double digit EMC estimates
10-12%) in exports, has seen only modest 2-4% increase in prices, despite a
surge in demand.
The global pork prices, even allowing for US woes
of Porcine Epidemic Diarrhoea Virus, or PEDv, have not seen the supply
issues being cited in the Chinese press nor so in China. One can only wonder
who or what is leading the media to believe there is a supply shortage of pork
in China? A flying pig perhaps?
With the current news flow including companies attempting to
rationalise their balance sheets and spending, similarities are yet again being
drawn towards Japan. Japan suffered a prolonged period of disinflation occurred
after periods of strong growth. Ticking another box in the theory that Chinese
companies' having no alternative but to invest globally (EMC: Japan August 2015) and / or pay down debt. Some appear exempt on sensible ratios
of debt. With Japan printing, is it a case of sell GEM (Global Emerging
Markets) and buy Japan?
Corporate entities have a rather large issue in China. The need
to focus on their borrowings, part acknowledged by China's reduction in
interest rates. If Chinese corporations continue without some form of prudence
and debt reduction, the deflation and slowing of demand will create a real risk
the number of defaults rising. It could be just the foundations and
consolidation that China needs. China's premier will not be resting on his laurels
with regard to a stimulus, but perhaps more prudent to take ones time.
The wholesale deflation has made it very difficult for the
corporations to service debt, maintain earnings and justify the higher levels
of employment. Banks, are sensibly risk assessing new applications despite the
actions of the PBOC (People’s Bank of China), shrinking liquidity further.
China is being forced to become efficient (or attempt to), this will have
implications for employment levels and taxation receipts. The PBOC has realised
this, with planned infrastructure and PPP/PFI spending, there are little
alternatives.
It’s prudent to have a quick recap of the Chinese growth
story and their economy this year. To prop the economy up, the PBOC has reduced
interest rates five times (soon to be six). Injected capital directly into the
banking system to attempt increase lending and part replace the capital
outflows.
China have reduced the Reserve Rate Ratios (RRR) 5 times to a now 18% and
attempted to prop up the stockmarket financially, followed by policy. Better yet, China
devalued their currency and tightened up on e-payments and capital outflows
including commodity financing deals. Glencore would be wise to consider
the latter.
Most of the actions by the Chinese government have had
limited impact, China has no alternative but to acceleration spending on
infrastructure projects. China has already been discreetly bringing forward
infrastructure projects, examples being the development of waste management
systems for Beijing.
Tax incentives are being given for investments and capital
expenditure, both for individuals and corporations, on top of development
grants for those wishing to become entrepreneurs. We have not forgotten the
dire state of local government and their dwindling revenues and central government seizing $150B, where the confetti of debt has been issued and
underwritten by central government.
It appears Macau have caught another cold, thanks to a group
with a light-fingered approach to gambling. Not only is
Macau in the glut of a property depression, in part aided by Li's
anti-corruption policies and clampdown on excesses, but more so, the wider
economy both with property and business revenue declines.
Not to worry, gross revenues in Macau may have dropped by 38% in June (worst for five years), but their
property has so far only dropped 15%. Junket’s losing near $250M appear not to
be of significance to some analysts, it’s only 3 percent to 4 percent of junket
volumes. Ironically, due to the declines
it’s actually nearer 8% but what’s a few % of an entire market in
decline?
One has to wonder how well the listed Macau Property (MPO) is and what of their Net Asset Valuations in light of the property
situation in Macau. With some dramatic discounts being touted on high end
property of 25%, but the average is 15% decline as a minimum. We'll know more
in due course with a visit planned very soon by the travelling duo!
Of course, with a share buyback in full swing at MPO you'd have thought
the SP would be appreciating/holding. With a NAV near 50% above the current SP,
one cannot think what the buyers are waiting for!
Staying with a theme, Cloudbuy's (CBUY) NOMAD Westhouse has quit with immediate effect.
Disappointedly (for the management) it won't have helped them with their half yearly report also out at the same time.
Why did Westhouse quit, more so, if anyone was long on this
stock post the EFH (Here EFH 1 and Here EFH 2 about turn) debacle covered very well elsewhere,
then they need to have words with themselves. Time would not be wasted in
looking at how EFH traded this stock, perhaps those whom earn monies exposing such
things will be inclined?
Kingfisher’s interim results are out, beating expectations (EMC) and also a beat on the implications
of the BDO. However, the drop in profit is not to be ignored. One has to consider
the sensibility of the ScrewFix expansion - 200 stores. The press/city would be
wise to wake up to the discounting and margin erosions, more so ScrewFix is not
just a “tradesman’s entrance.” Margins yet again under pressure.
KGF are not confident of a French performance (remaining
cautious on trading in Castorama and Brico Dépôt France). In essence what the
UK gave, France took away. It would be wise to monitor the industrial output of
France, renamed “the indicator for Catorama and Brico Dépôt.” KGF, in hindsight
for them, may be thankful in being unable to complete on Mr Bricolage. How prudent of KGF to sell their controlling stake in China.
To save time, we’ll say goodbye to Haik Chemical now, this company has been the eternal dog of performance. We
could blame the likes of Hi-Tech Spring,
whom consistent with higher inventories and lower demand have been forced to be more competitive.
Apologies for the search function not working properly in
the top left hand corner, there is nothing that can be done about this. Utilising Google's site search, may be wise.
Atb Fraser
(Travelling today so limited).
Chinese Government attempts a SHCOMP type investment strategy for Macau due to dwindling revenues and declining tourism. So they aren't going to buy all the property.... just help out? http://www.thestreet.com/story/13310511/1/wynn-resorts-wynn-stock-jumps-after-china-pledges-support-for-macau.html
ReplyDeleteMore on this later 02/10/2015
Atb Fraser