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

Morning Mumble: China (of course) + Liquidity with some likely sad news for a few Chinese traders, PLUS500 (what are its user costs). The pain of Graphene and GKP!

Good Morning,

Overnight the Chinese authorities have banned listed entities selling stock (if over 5%) in other listed entities for 6 months. So those collateralized loans should be safe for now, with a Band-Aid on the value of them. 

China curbs stock sales in effort to halt market rout and they've dealt with those insurers owed money from brokerages, by banning them from calling their positions (Reuters). The articles doesn't mention the liquidity issues the insurers are suffering as a result nor the Peoples' Bank of China assisting them with emergency funding "for as long as is needed."

The woes of China are causing a "drag effect" across all markets as a race to cash occurs. As seen on the DOW yesterday and other markets with Asian exposure. The FTSE/LSE's will have a similar occurrence. 

In essence, the Chinese are liquidating the positions that are left to cover the woes of being locked in in on native markets. After just a few days, where the Chinese market would have perhaps found a natural level and the issues resolving itself, it’s likely the woes will be engrained for the longer-term. 

Insurers have liabilities, brokers have liabilities and the population as a whole have commitments (rents, mortgages, car payments etc...) This rout or liquidity contraction is being felt across all market classes. The Chinese appear to have been oblivious to the ensuing train wreck and will recoil in terms of risk appetite and exposure to said risks. Same for their purchases, such as cars, food stuffs and luxury items. 

There's a lot of commitment tied up in the market (near $2 trillion). Chinese directors with stock pledged as collateral for loans against the now suspended stock. The Chinese Government, are reported to have pledged "unlimited liquidity." Around the same time as the state media reported this, all commodities rallied, as though a new source of financing had been found or the keys to the safe. The most notable bounce being Copper treading water around $2.50/lb and Nickel jumping above the key $5/lb to $5.15, but felt by all except precious metals. 

One cannot help but wonder if the Chinese Government are trying to patch leaks in the canoe as they appear, rather than taking stock of the situation. The insurers are now expected to shoulder some of the margin issues, along with the China Securities Regulatory Commission (CSR) and  Brokers, Margin houses and banks (PBOC holding the shoe/house). Local Governments have also seen a keen opportunity to tap the Central Government for some cash. 

The woes may be felt further with the "payday" events that have typically occurred in China, but will put further pressure on the system. Historically late payment of wages has been a normal practice, but in the absence of liquidity, this may be outside the normal practices. Especially if some companies were say "margin trading" when they were not expected to be and are now locked in. 

The SHCOMP (Shanghai Stock Exchange Composite Index) traded in a very large range of 3,373.54 - 3,748.48, with the predictable tank on opening with consistent buying throughout the day. Same for SZCOMP (Shenzhen Composite Index), trading in the range, 3,373.54 - 3,748.48.

The saddening part is the news will soon be awash in China of police arrests for "illegal short-selling practices." The scapegoats are going to have little ability to defend themselves with funds frozen already or to be frozen. The need by Chinese officials to find a scapegoat or 8 to lock up for perpetuity. 

Despite the crime being the stupid levels of long margin that was allowed to go unchecked or regulated properly. All that was needed was an 11% contraction to have a confirmed bear market rather than the normal 20%. Whereas to short in China is very difficult, not only restricted but limited to 5% of total stock, with tight controls previously in place. Even on the grey market, shorting was restricted which rather contradicts the Chinese officials’ assertions that it has been the product of a targeted and sustained shorting attack. Sounds good though doesn't it! 

PLUS500 have given a trading update. What the market would be wise to consider is who has deposited the funds a) the customer b) the company or c) an introducer? The number of active customers may have a significant distortion depending on the answer. PLUS500 traders (as per Facebook) are suggesting if you put pressure on PLUS they'll "give you between €100-200" pending on the value of that customer. More so, PLUS500 are believed to be including these "Freemans" as active customers (really?). 

Customers are in essence drawing their monies out, but first obtaining a freebie to fritter away on highly speculative bets, as between 100 and 200 trades/points are required to be able to draw out the €100-200. What is important in today's announce is the lack of Average user acquisition costs (AUAC) that will have to be revised in light of the "retention" attempts by PLUS. Or are PLUS going to introduce another cost item, say "customer retention costs." This has a material impact on bottom line of anywhere between, €9.3M and €18.6M pending on how generous PLUS have to be or have been. With some "whales" allegedly getting near €2.1K. 

The massive increase in the AUAC costs has not gone unnoticed. More importantly, with gossip from certain quarters suggesting there's some settlement by those "armed up with a lawyer" to recover all their losses during the suspension. Will this become a more common-theme? What is the impact or liability for PLUS. This is excluding the unknown quantum of any potential fine that appears to be a material breach of AML procedures. Over to Playtech to ask those questions during their due diligence. Do PLUS 5000 have to update the market on these liabilities both legal and potential fines? 

Centamin Egypt (CEY) gave a better than expected Q2 Production, ahead of guidance but overall guidance wisely remaining the same. With little in the way of costs per ounce guidance, one has to range between $729 and $655 per ounce. AISC (all-in-sustaining costs) should be around $945/oz but with some positive revision potential towards $915/oz. Grades into Q3 are key, as a lack of improvement will shave %'s off the overall FY of 430,000 and 440,000 ounces."

As one savvy analyst has noticed and is likely to give some greater PR to the graphene industry is the Collaboration between Haydale Graphene Industries (LSE: HAYD) and Talga Resources (PDF version) (ASX: TLG). 

With some unfortunate victims of the 'new tech' era, such as Graphene Nanochem (GRPH). whom operate in materials and chemicals such as  Fuel additives , oilfield chemicals and homecare products. Unfortunately for GRPH their margins will be squeeze across the board, whether there's potential out there for further contracts, there's been a sustained level of selling. 

With debt levels increasing, margins being squeezed and a number of plates spinning it would be wise to price in an equity raise. Whether the company are considering this or not, it's going to be no mean feat. Limited cash, debt of circa £30M, expect news of rescheduling of debt and some element of equity raise. The Company has been punished rightly/wrongly for perhaps being listed too soon. Or arguably from a company perspective of being able to access the capital markets. 

There is/was a lot of hype around the Graphene launches, including Applied Graphene (AGM). With no debt, AGM has not been punished to the same degree, however GRPH are at a different evolutionary stage. GRPH's IR needs a significant work-over irrespective of the sustained selling. When comparing, it would be wise to consider GRPH the leveraged play, whilst AGM/HAYD and ASX: TLG appear to be more reliant on the markets for capital than creditors. 

Limited time for Gulf Keystone (GKP) who's output guidance / forecast has been cut. As a positive GKP have received some cash and will hopefully be shipping oil out via the Turkish pipeline soon. The market didn't need reminding that as a result of the 5 weeks suspension production would be down, near as damn it the 10% GKP are guiding on today. With directors departing and the like, this low ball offer is looking more and more likely! Over to GKP TV for those incapable of reading! (Mentioning no names). With certain folks taking the jolly to Paris for the AGM, sobriety will be top of their lists. 

Atb Fraser

Morning Mumble: SHCOMP/SZCOMP farce. Gold & Silver's weakness despite demand (Same for Commodities) and Amur Minerals (AMC), MONI

Good Morning,

If your house is going to be flooded and some rooms are cut off, you save possessions from the rooms you have access to. The exact same thing is happening on the Chinese markets as a result of further trading halts by companies. Traders or blind speculators are saving what they can, whilst the behemoth type stability funds buy large stocks directly or via ETF. 

FT China steps up efforts to halt stock market rout, and wider market are now reported what was widely known on the trading floor and here. The PBOC (People's Bank of China) funds are being utilised by the China Securities Finance Co. (CSF) (CSFP was previously used here but to keep in line with wider commentary the "P" has been dropped) to buy stocks direct in the market, as well as provide margin liquidity to brokerages. The total sum of the parts is approaching $140B, this should be called another form of QE.

On the one hand you have oil dropping, but perversely PetroChina is breaking ranks and staging a bull-run of legendary proportions. Tacking on near 25% price appreciation as the "stability" band aid funds buy less risky investments. So as a trader, you'd sell anything that isn't being bought and buy what the Government/Funds are buying, or run for the hills? 

With promises of improved margin and the like, the rule of 5% short is near non-existent. Li cannot get a short on for love nor money, with technical problems and various other 'reasons'. The Government is attempting to stop any form of selling, from suspension to undertakings from large brokerages (24 now) not to sell. 

Well some are adhering to the no-sales-agreement, but limited time to explain what is happening on “opening", for which followers should check. Simply, China collectively buys stocks the herd are running to the door with, the likes of Yeast Angel and then post lunch the price tanks as the buyers disappear but it’s not 8% down, only say 4%. That's if the entire market isn't in a trading halt by the end of the week. 

There's a number of brokers that have serious liquidity problems. Some of those were "told off" for excessively lending and rolling over positions only 7 months ago. The gossip is they've blown up (financially a la CHF) because clients are unable to liquidate positions that may have been in profit, because they're suspended and are unable to cover serious losses. Until the brokerages have been able to access emergency margin provisions put in place by the CSF, 'traders' accounts' will remain suspended. Another win for the policy makers, limiting sales!

Yesterday, with safe havens been sort in the west in light of China and the EU boil that needs lancing, Greece. Silver was surprisingly weak, the obvious shall occur for those leveraged silver producers we love to kick on weakness (HOC/FRES). The same for gold, with a modest bounce well below what was expected. 

It looks like American Futures traders have such large positions (short) that any headwind of buying is wiped out. The decimation caused by the over-speculation a few years back, has left the gold market unbalanced. Some traders committed such levels of $ in 2012/13 that the thought of speculating long has left the market void. 

The last time the mint ran out of Silver in November 2014, the price spiked near 20% over three months, the same happened yesterday. The difference being the entire absence of Chinese speculators in commodities, the “bears” will have this market for longer. The Chinese cashed in significant positions this week, no doubt as their margin was squeezed in the equity positions, liquidating positions in Nickel, Silver, Iron Ore, Tin and pretty much all commodities. 

The prime example being Nickel, where the Chinese are happy to accept near physical spot prices, with limited futures trading the price fell through the $5/lb support like a brick. Same for Iron Ore, price setting iron ore outside of the market at $45/t well below the market $49/t. With the usual suspects, Rio Tinto (RIO), BHP Billiton (BLT) and Fortescue Metals Group (FMG) all taking a kicking. 

FMG is entirely absent of any support for obvious reasons, being the higher cost producer of the majors. At AU$1.67 a share the $2 support is but mere history, with $1 a share likely, but wisdom dictates to take profits. One hopes those Atlas Iron holders don't hug this stock through the pain, although riskier for the bears with the possibility of event risk.

For those with a memory on this Wednesday morning, Rio is only 240 pence off the 12 month target of 2200 pence, with most Companies tapering back their assumptions / targets to circa 2800-3000 it may just be still too much. It was Deutsche Bank at 4200 pence at the time that raised a few eyebrows a year ago. That case of wine will be thoroughly enjoy from a good sport whom accepts differing opinions are positive for the market. 

The above a complete validation for conviction short Amur Minerals (AMC). The company is still over-valued on all levels. Admittedly depreciating quicker than anticipated but far from complaining. The project is uneconomic and after yesterdays' fall, and the company is "perhaps" worth cash.  

This nicely brings us on to Monitise (MONI) whom are the unfortunate beneficiary of another selling shareholder. MONI inform us that they have been notified by Visa Europe...that it will reduce its shareholding over time while continuing to work with the Company throughout the duration of its current commercial agreement. Those holders in the stock will be used to a declining SP, so perhaps an opportunity to average down further and then hug the stock? Better still embrace the “2016 profit forecast!” Cash is king, and MONI burn it like no tomorrow and whether its profitable or not in 2016, the positive cashflow may not be! 

Some bizarre events on Aga Rangemaster (AGA) today...more later perhaps. With gossip of the deal being off...surely the company would have updated!?!

Atb Fraser