Morning Mumble: Chinese Auto's (Designs) - reduction in sales tax + housing stimulus + Vedanta (Iron ore), Glencore (Thermal Coal + PGM) and Centamin

Good Morning, 

Near all mining/resource stocks rose until the last hour yesterday where profit-taking took place. In part due to the Chinese machine waking up in what would have been near 12hrs later.  With one day of trading before a weekend, the markets will be looking to some indication of the Chinese outlook. In addition of course to the PR (Glencore) and the overall commodity price actions. The SHCOMP finished up near 3% in thin but positive trading.

With shorting currently limited in China it’s unlikely anyone has been impacted significantly and in fact, their market is likely to have profited. There will be a read across to the higher material costs to Chinese manufacturers and producers. Despite thin volume, iron ore has been slipping and with margin requirements being higher, don’t expect too much of a recovery with supply increasing.

We've discussed the decline in liquidity in China for some time, whether in SOE's (State Owned Enterprises), private sector or Local Government, there’s a very consistent theme. The FT has highlighted what has been known about for some time: China futures market decimated by trading curbs. All the same worth a read, but more so to keep an eye how things pan out. 

News is apparently flowing out of China that new stimulus packages were announced whilst the Golden Week Holidays were in full flow. It wasn’t this week at all, the policy came into effect on the 1st October, just in time for the Golden Week! One wonders when people will read the press releases properly.

In an effort to stop the rot and improve the decline in car sales (See: CAAM Chinese Association of Automobile Manufacturers), they have cut the sales tax on passenger vehicles to 5% (from 10%). The criteria is limited to engines below the 1,600CC and time limited until the end Dec 2016. 

With a degree of humour, VW might have some good news - China are likely to implement additional incentives for cars that don’t meet the emission standards. We obviously avoided calling the scheme scrappage.

For Western Manufacturers importing or operating under a JV there will be some positives. The main beneficiaries are likely to be the Chinese manufacturers with small engines. Feel free to check out the designs see: Great Wall Automobile Company, Guangzhou Automobile Group Co., Ltd (GAC), Zhejiang Geely Holding Group, Changan and SAIC Autos (MG Rover etc...). We are obviously not qualified to comment on the design or quality, perhaps there’s some cultural differences one needs to acknowledge?

Considering the last time (2008/09) such a specific stimulus was implemented, sales peaked near 40%, albeit declined 50% year on year until now being reduced back to normalised single-digit growth.

With consumption being the key focus, a mobile population will be incentivised to spend hard. Whether it be an increased numbers of shopping trips, holidays (driving holidays are on the increase), eating or visiting family, it’s a delightable feast for the economy and the tax revenues!  Assuming of course that the Chinese buy into the enticement / tax cut.

With income growth slowing, deflation and risk of redundancy or job sharing in most sectors, being enticed to take on the liability of a car with a) via credit or b) utilise savings – it’s going to be hard to entice new customers.

Until more recently similar contractions have been seen in the housing sector, where buyers have been unwilling to buy in significant numbers. What with the newly married “living” with parents situation is on the increase again in China.

Property buyers in China know all too well about paying over the odds for assets. Last week’s adjustment to the down payment requirements for a home will aid the property sector. With a reduction to 25% from 30% it’s a notable enticement for some. Although only likely to benefit those whom are well on the road to purchasing a property – albeit purchasing off the Government is still the preferred method with such hefty discounts available.

China now has an emerging tier 1 and 2 divide (North-South Divide), where prices of property in small cities and towns are falling, whilst larger towns are seeing a renewed interest. Aided in part by a reduction in prices, free-goods and price reductions that the tier 1 market has barely had to adopt to motivate sales. (See Top 10 below – if you have to buy)

1. Hong Kong
2. Shanghai
3. Beijing
4. Shenzhen
5. Guangzhou
6. Shenyang
7. Qingdao
8. Nanjing
9. Tianjin- this may however change as investment is focused elsewhere. 
10. Chengdu

We had Vedanta seeking permission to export more iron ore from Goa. Why they’re bothering with prices at $40/t FOB, is anyone’s guess with Roy Hill and Tonkolili (Shandong) firing up. One suspects they have to be at full capacity to make their operations modestly cashflow positive.

Just as Glencore’s had plugged most of the holes, yet more market woes. NH@FT’s article on Australia thermal coal price at 8-year low has been followed by Coal Problems Being Made Worse by Global Slowdown, Glencore Says (BBerg) - not the best timing for Glencore. However, one is minded to think conservatively with regard to thermal coal.

Its best to avoid sticking pins to prices specifically, especially the likes of coal where so many have been burnt before. It’s prudent to test the theory that the prices are perhaps near to the bottom - over to X2 Resources and Rio.

Like many in the commodities space, the marginal producers have been saved by costs that are reflected in dollar terms, with a benefit from a weak local currency for labour and energy/fuel costs reducers. The operators have averted (delayed) the inevitable pressures to shut in production/mothball. As the situation reverses, expect a tightening in supply to benefit pricing.

Glencore’s discounted offering is as a result of declining demand in once upon a time more stable markets that had some degree of clarity in outlook. Japan’s restart of Nuclearreactors  benefited the likes of Tohoku Electric Power, whom have just agreed with Glencore for premium thermal coal contract at $64.60/t.  A near 14% discount to the previous contract has not gone unnoticed.

The issues being experienced in South Korea and Taiwan won’t have helped the bargaining power of the thermal coal producers. Asian countries, with a majority of trade bias towards China are starting to see a tightening of liquidity in part because of reduced trade with China.

As a positive Oil, save for any major uplift in crude supply (Shale operators be warned) that would impact on pricing, its likely to have found some form of a floor. With shale producers having an appetite to hedge their production around current prices, its suggesting production is reaching some form of normality - contrary to the earlier opportunities that were missed.

Glencore appear to not be pushing the news they’ve shut in production at the Eland platinum mine in South Africa, with the loss of 818 jobs.

Over to gold - Centamin Egypt (CEY) Q32015 Preliminary Production Results reminding the market why it’s sensible to factor in lower on grades, production or machinery woes. CEY’s grades weren’t near the reserve average, so suspect costs to be impacted to a small degree.

Given a sensible headwind in grades, CEY are likely to just drag themselves over the 430K bottom line guidance by near 2K ounces, assuming production of near 110K+ ounces in the 4th Quarter. A reminder that production was meant to have annualised at a rate of 450K ounces by the 3rd Quarter if not the 4th. As stated in the Q1 production results. Date for diary, 11th November 2015.

Finally, a positive result for Northern Dynasty Minerals, where a report by Former US Senator & Secretary of Defense William S. Cohen has been released. Suffice to say it doesn’t read well for the conduct of the EPA.   

Atb Fraser

Morning Mumble: Shooting Fish in a Barrel (FED) & Ferrexpo

Good Morning,

Last nights decision making by Janet Yellen was enlightening, but an opportunity to shoot fish in a barrel (trading both indices, FX, caterpillar & Freeport McMoran). Not only was there an acknowledgement of the USD zone but more so, China is now an acknowledged risk. 

The fed considering the relevance of China says a lot. Seeing as basic economics is a level attained here on a regular basis (June 2012), its rude not to consider the implications. 

Whilst America considers the implications globally, China will be attempting to re-base its growth forecasts for a much longer period. Any adjustments made by America will be countered by China until they have evidenced growth and control on the economic slowdown occurring.

The scale of the Chinese situation should not be underestimated in anyway. We know first-hand that the economy is under a number of fiscal pressures. Regional Government/Local Authorities laden with debt, struggling with a decline in revenues, are now fearful of being indicted for fraud if they approve major projects. So Beijing, tasked with resolving the issue, not only took back uncommitted budgets, but have returned most of them (not really inspiring confidence.)

Some Analysts are convinced China is under control now - this is merely a knife catching exercise with hopes of some panacea of a stimulus. However, in the absence of a coordinated approach, not only with infrastructure projects but a commitment to sensible investment and deleveraging, one would be wise to not ascribe too much value to it. This of course won't exempt the market being in denial and momentum. It’s more prudent to consider that “China are attempting to gain some control on the situation.”

Having spoken with Li and his travelling compadre whom have become the roving reporters (read as holidaying).  Working shifts in SOE’s (State Owned Enterprises) and larger factories have been adjusted, resulting in reduced working hours (and pay). The SOE’s are more obligated to maintain employment levels, but the knock on effects are not to be ignored.

Capacity at steel mills has not returned to near the magical 85%, but commitments to produce maintain employment levels. No wonder China wants to open SOE invested permitted, another sector requiring gift-aid status.

The PBOC/China have not only been erratic in their economical actions but limited to the depth. China have prudently loosened in-bound/inward investment rules but its i) not that enticing and ii) simply not enough. The time for China is running out, not only due to corporate leverage being unsustainable whilst deflation occurs, but those with “commitments” being forced to unwind exacerbating the situation across sectors.

Automobile sales are under pressure, with enticements at greater discounts and margins being eroded, how much is priced into our Germanic listed manufacturers’ forecasts? With contradictions of house sales growth in 50 ish% percent of the statistics, when will they deduct off enticements including the costs of mortgages being paid for X months, if you purchase now?

So, like the rest of the world, the Fed is simply forced into waiting to see what China does. Infrastructure on its own is simply not enough. The dollar trading zone is significantly bigger than the economy, and the Fed have woken up to the Chinese and Global Emerging Markets implications.

The US, whatever the trade levels suggests, is much more exposed than the simplicity of trade balances. Thus, any changes in policy without assessing the damage of the US decline in exports, reduction in Chinese growth and depreciation would be flawed. 

Despite the view that companies are simply investing badly evidenced by debt for dividends and share buybacks. Perhaps the QE crack cannot be weaned off the economies and companies that are utilising the low borrowing costs to sustain models that are built on quick sand (leverage). 

Not only does China impact on the dollar in buying a significant percentage of global commodities, but more so, has in direct link with a significant number of economies that also trade with America. Ignoring the situation would be to the detriment of America.

For consideration is Voldemort Zone that's been pinged across a number of times, over recent days. Rather good summary of the situation. The consideration goes a little further, where, if China continues to under-perform as current trading would suggest, then can the US ever attain their 3.5% interest rate projections. Perhaps its a signal for a series off zones a la underground?

Everything Janet Yellen discussed yesterday (Fed linkto press conference) sounded more and more like Japan. Save for China committing to a stimulus, there's limited growth and non-existent inflation. More so, one has a suspicion inflation is but a mere thing of the past in western economies. 

Allowing for the FED projections over the longer term, its going to create a productivity and earnings drive/exodus across every sector. With limited inflation, save for innovation, companies will have a hard look at out-sourcing and GEM manufacturing. China's cost base has increased significantly both on fixed costs and leverage. They are going to remain non-competitive in a number of sectors and without adjustments in their currency and cost base - something China has no aversion of doing.

Ferrexpo (FXPO) come out an inform us today their main bank is insolvent. Is this a risk consideration for Globo (GBO)?  FXPO had $174M with F&C, whom are also their largest shareholder. 

Does anyone smell a distressed seller in the market soon? What about FXPO's ability to make payments? We are led to believe the figure could be reduced a fraction by the timing of payments, circa $15M. Further digging is required, but with suggestions this morning that its wise to right off all the $174M, that would be a sensible place to start. According the National Bank of Ukraine, “According to the National Bank, the lion's share of bank assets was associated with lending business of the shareholder.”

It would appear “a shareholder has failed to fulfill its written commitments to support bank liquidity and standards within the agreed terms, including not reached the recommended indicators of reserve requirements of the regulatory capital adequacy and liquidity.” One assumes this is Kostyantin Zhevago, CEO of ermmm FXPO?

Atb Fraser

No proof-reading unless Indiana is about!

Morning Mumble: A valium edition - a recap, from China to the oil price requirements on government expenditure - flying pigs poignantly timed for Macau's disappearing Billions...but it's ok it's only 3-4% of the Macau Junket liquidity ++ KGF being Screwfixed!

Good Morning, 

One would be wise to make sure they have coffee or Valium!? Some missives from the past couple of days. 

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	$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). 

Morning Mumble: Chinese PMI Services & Manufacturing Data (deflation), the western capital ducks fly home.

Good Morning, Oops, Good Afternoon after typing up and forgetting to publish. 

With such a glut of PMI data, the inbox was rammed with everything from the positives of the Czech data to the woes of China and Nikkei India Manufacturing PMI™. 

The Chinese Caixin General Services PMI™ & General Manufacturing PMI™ data pre-empted the sell-off in Rio Tinto (RIO), BLT (BHP Billiton) and Fortescue Metals Group (FMG) in Australia. This was whilst the profit taking on oil occurred (the money for old rope trade of August). Why papers are suggesting traders got torched, when in all probability, the shorts caused the spike en mass closing.

Chinese/Indian PMI data has not supported the Iron Ore (FE62) price, in fact adding greater discounts to inferior products (discount for lower quality iron ore) - watch out Atlas Iron at 3 Aussie cents a share, the graph won’t look too bad! The FE62 price has had some support, thanks in part to a redirection of supplies because of Chinese WW2 celebrations and the Athletic events in Beijing. 

The events impacted/distorted orders provided some market support thanks to the air pollution orders covering August 20- 3rd September? There was also immediate premium applied to the majority of commodities handled at Tianjin after the explosion. Tianjin’s major imports after cars/autos are light trucking and containers, are Ethylene (15% of national supply), 15% of Wheat imports and 30% of the domestic steel exports. Not a minor port, but capacity easily filled elsewhere. 

There appears to be a conflict in the Chinese leadership, one perhaps that could end with a few changes. As one new source of information put it, the Chinese are now witch hunting people even for saying "sell" on Chinese Bulletin Boards. 

We had known for a while about the issues in the Chinese stock market. Likewise, Li's trading accounts being suspended and his two or was it three interviews with "regulatory forces". Now Li now has no working trading account. On the plus side, Li's one of the lucky ones being "permitted/allowed" to withdraw all his monies. 

The actions of the Chinese Government is now one of fear, with arrests across all areas of the stock market. The charges are listed as, i) manipulation ii) profiting from the Chinese Government intervention iii) assisting others to profit iv) spreading rumour (whether false or accurate) v) accepting bribes to provide information of Government intervention. 

We'll just rephrase the i-v, i) Chinese Government purchases, ii) alleged Chinese senior government selling stock amazingly just as the "Government Team" is buying, iii) brokers and "team Government" assisting all iv) Chinese news channels encouraging buying and open threats to those considering selling anything v) as item ii, where "the senior hierarchy" have been almost immune to the stock market movements. 

Risk off today? Why not, we love a market that's incapable of assessing fundamentals and is merely crowd driven. Although the disappointment is coming to those with South Africa exposure. Not only have wage and energy costs not helped matters, but more so the political outlook and 'uncertainty' may impact on operations as redundancies become more significant. 

Anglo American's woes have been made worse thanks to Alrosa. Anyone want to buy a 'once upon a star decent entity known as De Beers?' It would appear not...not only the price reduction, but Alrosa it appears have realised 'forcing ones contractually obliged long-term sight-holders to purchase might be a bad idea!' 

Atb Fraser 

PM Bolt-On: A Chinese missive, from Dudley, through the GDP, to Venezuela and "can you" because Icahn't.

Good Evening,

A gaunt through the week’s events, having only been back at it a day or three and travelling, its taking some time to get back into it. Does anyone else find it concerning how predictable central banks are becoming in their actions for short-term praise? Rather than longer-term policy benefits? Not exactly exuding confidence in the markets, but for the populist investors it’s a license to print money.

Someone got up one morning and realised the dollar impacts on the global economy, l’économie de base/basic economics. Only two days before, William Dudley, head of the New York branch Fed, told a conference that it was “important not to overreact to short-term market developments”.

The poignant part being Dudley accepted that the argument for tightening monetary policy as early as September seemed “less compelling to me than it was a few weeks ago.” (FT :). Fed’s William Dudley cools talk of September lift-off.

With a sense of relief felt by the markets, we had good news for the US economy, with revisions of the GDP to 3.7% (annual equivalent), up from 2.3%. Those in the know are now are campaigning for a rate rise, having only a few days previously been remonstrating for prudence on interest rates are now (WSJ). Just don’t tell the bond king Jeffrey Gundlach.

We have had Venezuela cryingfoul and inferring the need for an emergency OPEC meeting.  With some suggesting American production was going to fall (and inventories), oil about turned and rocketed. The concern being this didn't catch many (if anyone) off-guard, unless of course you’re a trader snoozing at your desk at 4am (GMT) and making significant profit, surely this never happened. 

Was this bottom (bounce) the obvious call for every-man and his dog? It certainly looks that way with all the various commentators agreeing. Momentum and sentiment set the volume alight with a mighty bounce. With the issues of liquidity in China and the realities of emerging markets, it’s likely the markets won’t deny the realities for forever.

All one needs now is further liquidity crisis to impact on the global bounce. What say you for further Chinese market woes, with the suspended bankrupts coming out of the closet or better still, “a large failure?” This will be evident not only in the capital outflows but productivity.

To continue the theme, China'srichest man says its time for government to abandon high growth rate 'fantasy'. Irony really, what with a company built on leverage and the need for growth? With international deals getting bigger, it’s starting to signify a complete cooling in the Chinese domestic market (ex-growth or limited and suspicions of a recession). With Wanda buying the Ironman Triathlonowner for 585 million pounds (if you include the debt), it’s a deepening sign of what is to come for China.

With memories of Japan in the 80/90’s, we have had FOSUN on the acquisition trial with Club Méditerranée (FT)  and partnership with Thomas Cook (Reuters). Remember this is on the back of acquiring stakes in Cirque du Soleil and Jeff Robinov’s Studio 8, plus Meadowbrook  and more (UK Property's JVs to come). Anyone for the high top?

Latterly, we have Albert Edwards via PM@FT, with a suggestion we have a 99.7 per cent probability that we are now in a bear market.  Worse, the professor of economics, Christopher Balding wanting to hug the Chinese, perhaps in sympathy.  What of the Chinese taxation revenues in decline?

There’s suspicions that China isn't perhaps telling all, with a focus on consumption. Whether a valid theme, it certainly questions any significant bounce. Especially in those economies more reliant on commodity sales. Or perhaps one should rephrase, were reliant, leaving shortfalls in their budgets. 

Certain countries are now ‘attempting’ to entice those with wealth to come and buy into the bigger picture, of course without trace. Surely not, the DoJ et al, do need a new dog to kick for compensation as banks have rolled over and coughed up the moular. Whatever next? Dubai property crash?

In the US markets we have Icahn acquiring a stake in Freeport-McMoRan (NYSE: FCX). One of the favoured leveraged miners shorts of 2010-15 (to be exact 4 years in total), now coming back with a decent cost cutting exercise to enable the company to keep the lights on (contrary to EMC thoughts).

Whether one should read too much into Icahn’s8.46% stake is open for debate. Icahn’s ability to buy value in commodities is questionable, as evidenced by their ventures into Chesapeake with 10.98%. It’s not a great call in the short-to-mid-term.  Over the longer-term, there’s a reduced risk of failure in FCX thanks to cost cutting, but why buy into a slump until the variables have played out?

Freeport-McMoRan (NYSE: FCX), have completed the unthinkable in avoiding the “majority” of a fundraiser in excess of the announced $1Billion. Not only does it indicate the bottom of the “trough in their cash demands” as Morgan Stanley seem to think, but give some hope for the future.

If commodity prices appreciate from here, FCX have done just enough to avoid significant issues with their announcement -  spending cuts in response to “Market Conditions”  read in conjunction with their previous Oil & Gas  capital budget commitments.  

What pantomime will next few weeks bring? A predictable element of about turns, anticipated volatility with the big boys "torching each other on a daily basis." Protection anyone??? 

In the current climate, it would be wise to consider business models, especially those “bidding” on certain contracts at the moment. Where the needs of winning a bid should not be at the expense of profitability. We shall be hearing about this later in the year…rest assured, even those larger entities with “currently” good balance sheets.  

Finally, it would be rude not to finish off with a validation, even for "foster carers" of the stock-market, JD Capital are exiting capital southbound!

Atb Fraser

Morning Mumble: Prozac Anyone? Maybe a Coffee? Dr Copper & all taking a spanking - whilst likening Glencore's webcast to Star Trek's Captain Kirk & Engineer Scotty...plus the need to actually do a full days work whilst on Holiday. RIO finally surpasses the 2200 target price.

Good Afternoon, 

Back up, albeit briefly... 

It's been a while! Although far from inactive - it has been fun to relax and enjoy the holidays.

The views and positions here have pleasingly been validated by the market. A pleasant bet being honoured on RIO hitting (and surpassing) my target price of 2200 pence today! Now, with a tangent look at Glencore, with some analogies to Star Trek.

We'll ignore what the critics stated about the target prices here and on FTML, with some pleasing emails of acknowledgement. Stopped clock or not (as some called it here) there was no deviation. Not because of stubbornness, but the indicators have only become a) apparent and b) a lot worse than even those reading here thought. So why would one change their view over the longer-term? Perhaps revisit the analysis but certainly not change this view, at the moment.

Initial analysis started to appear more positive after Glencore’s webcast on the 2015 half-year report. If you have a position in any stock, in any country, it's sensible to consider the webcast and in particular the defensive body language displayed and the wide range of earnings guidance. Also, as a validation, a quick visit to Fortescue Metals Group (FMG) annual results that aided the selloff in Australia last night.

In the webcast (45 mins onwards (Q&A) section), it was noted that some analysts were rightfully enquiring about the leveraged nature of the balance sheet, specifically what flexibility there is in the working capital. 

The market is now waking up to the acknowledgement of Glencore’s wider guidance of $2.7-$3.7bn (Page 9 in Presentation). Being near 2 months into H2, one surely should have been able to be more specific or is there lot of hope being priced in? It does suggest there's a lack of confidence in their operating divisions including Russian Wheat export taxes, Canada grain harvests and the copper / oil woes and finally, China.  Is this representative of the current wider global theme?

Least we not forget Glencore's thermal coal adjustments. Despite assertions of profitability and low costs, why did Glencore have “no other option but to scale back 18MT’s of thermal coal per annum.” Is it implying that Glencore are not understanding the full extent of the market deterioration in commodities, or perhaps across the board? Not a good thing if you operate in such fields.

There are a number of issues Glencore's copper division appear to have missed. One being that the "sudden" appearance of significant physical, that is suggesting a destocking of inventories. We are even starting to think that it suggests the Asian market had stored significantly more than what the market had allowed for in warehouses and of those cashing out (by pulling levers).

Having had a target price for Glencore of 165 since from Xstrata (XTA) merger completion on the 2 May 2013. The risks are still there in China, Russia, Canada, in fact every area that Glencore has an operating divisions, but more importantly net debt and its ratings, inventory valuations (and consequences of hedging), whilst being in a global deflationary environment.

Glencore are in a position of being forced to sell off assets, allegedly non-prime/central to Glencore's needs. We note Glencore announced the sale of Tampakan, Falcondo and Sipilou on the 14th August. The buyer, a subsidiary of the Alcantara Group (via their subsidiary Indophil Resources NL) appear to have benefited from Glencore's woes. Not forgetting that the sale also proves the case that yet more volume is hitting the market. Or are Glencore and the market believing that Indophil purchased these assets to do absolutely nothing with them? “Give o’er…” as Polonius said in Hamlet!

There's going to be a temptation by funds to start averaging down given the current price compared to the IPO. We'll ignore the warped belief of the investment case for Glencore, but some 'averaging' down will give risk to shorts in the interim. Without further woes in the price of oil, copper and agri-commodities it's “about the price” (for now), with more volume likely around the 150 pence.

Simply, Glencore is no-longer a conviction short, until further testing and understanding. Namely, “how bad is it really in China?” China’s next about turn in policies, devaluation and protectionism is likely to answer that. To the detriment, of course, of their trading partners – both Asian and global.

It’s ironic that Glencore go as far as to blame 'aggressive' short-selling on copper woes. Hang on a minute, don't Glencore have a copper trading desk? It would be a fair statement if they were but a "mere" producer blaming the woes of the market, rather than a fully integrated Goliath.

It’s rather taking the biscuit to point the finger when you have a capital intensive trading / marketing division? Were GLEN the counter-parties of such positions? What is the impact of the Russian export taxation on profits, with most trading houses with active positions from June taking a large hit?

If we liken Ivan Glasenberg to Captain Kirk and Steven Kalmin to Scotty the "engineer" from Star Trek, it is bemusing to review the discussions in the webcast regarding debt, working capital and trading/financing deals (Circa 50 mins onwards). 

When pushed on the debt position, debt rating and the hypothetical situation of $2/lb copper, Capt. Kirk/Ivan explained the benefits of being a trading house etc...Where there is flexibility in business model. Steve aka Scotty was able to step up the power or reduce it accordingly by these magic levers to reduce working capital, change the interest rate on internal lending to trading / marketing or look to derisk financing positions with third parties. Warp speed anyone? Perhaps Scotty in reality is “giving all he can Captain?!”

Admittedly there's evidence in the webcast of both Capt. Kirk and Scotty not understanding the business. Glencore need to reduce their debt by about $8B and essentially by as much as the carrying value of the inventories. Why was there no comment on the reduction in volumes across their divisions? After all it’s essential to trading to have volume.

Glencore’s biggest concern is its inability to call the market. One would have thought the overall theme of a market would have enabled better guidance rather than statements about “China being weaker than anyone envisaged.”

Likewise, Scotty suggested, that one can simply reduce inventories and/or working capital in addition to intra-company loan rates. This may actually be harder than what Glencore have previously done in the past. Especially in light of volumes of commodities available in the short-term. Their selling, could actually warp (speed) the market further (at least in the very short-term).

Glencore have failed to consider the currency benefits of a strong dollar on the marginal producers, that are given (yet more) lifelines. Especially as America “hops along” to an interest rate increase (but no doubt delayed by 9 months+).

The currency beneficiation has not only helped the likes of Kaz Minerals and FQM stay in business, but most other leveraged players. The ability of producers to ramp up to reduce the costs further, whilst  putting a glut on the market, is under-appreciated (at present).

Admittedly there's some hope, Glencore think the worst is over in agriculture - with the new wheat export tax now having visibility. Glencore appear to think there's near balance of supply and demand in copper and the market price is false. Ironically those statements were made just before the PMI data for China (1). The market is waking up to just how leveraged and unstable/weak China was, but one suspects not how weak it is. Could Glencore have been overly optimistic, so far it would appear they are, and perhaps will still be. 

An example being copper piping, where over the weekend Li informs us there's a couple of cargoes going for a proverbial song. Has someone perhaps been caught on the hop contractually? More on this later, if we manage to find out a price.

Yet in contrast to these cargoes (as a snap shot), analysts are banking on China spending on the electricity supply grid and infrastructure. This may actually be a pointless exercise as energy use has reduced near 3%, one cannot see China being able to afford the previous levels of wastage to support the economy.

Whilst avoiding being gleeful of near 4 years work in commodities, one suspects the market is now at risk of capitulating to a bear market, with the wider ramifications needing further analysis.

For copper, there are contradictory indicators coming out of the sector. We have Platt's* on the one hand forecasting growth in 2015 of near 5% whereas ICSG (International Copper Study Group) at negative 3%* (Source: ICSG PDF File). That's some range considering what the implications are at an economic level, although more recently there have been a few production issues in the market that may provide support (based on a reducing supply). 

Like in China, are we now going to see the forced selling of stock pledged/secured against loans or mortgages globally? What of the collateralised loans? Or perhaps with a hope of security “in cash” now being forced to sell. An example being the sale by Martin Rowley of First Quantum Minerals. Whatever the reason behind Martin’s sale, one suspects there’s going to be more globally, whether current or former management of most companies. It’s certainly the case in China, Asian and Pacific economies.

Freeport-McMoRan (FCX) are a prime example of expanding into the rout of commodities. They are yet to press the button for equity (perhaps due to lack of interest). Are they waiting for glimmers of hope in the commodity prices? One suspects they cannot wait much longer without a restructuring/raising.

China have significant problems that without a multi-pronged approach to their economy, without some form of foundation building rather than bubble focus, their economy will continue to raise concerns. The next trend (reiteration) is likely to be PFI (Private finance initiatives) or PPP's (Public Private Partnerships).

The Chinese have very cunningly been creating their own supply chains, whether Aluminium, Steel, Copper, Nickel, Coal to petroleum. This is evidenced in Taiwan, where they have felt the might of China in the semiconductor market.

Taiwan’s semiconductor exports were significantly larger than China, their market was near 3 times the size of Chinese in 2009 but is now is en par with the Chinese market. Like solar panels in Germany, this expansion into a commercial space and supply has hurt them. Many Emerging Markets will have to consider the implications of the determination of a weakness in their currency, with a reducing demand and reducing level of investment in their countries. Examples being Taiwan, Thailand, Korea and Japan.

If one considers read across of the semiconductor market in Taiwan to the copper draw/demand on copper in China. Then China’s demand/needs may not change that much, but what may is the demand from predominantly emerging Asian markets that have relied upon China. These markets have only just woken up to the fact their industries have been replaced/replicated.  

One cannot ignore the compliment from a devout critic of the views here, where "the macro environment commentary on China/Asia and India is very accurate and almost psychic here", (to quote one reader. Maybe it's only one reader!

May be a little biased of course, but one would be hard to disagree in light of the carnage on the markets and ensuing ‘recorrection’, reading back and comparing here with the realities of the PMI data and those of the bulls of the commodities. 

Why did this blog post became so popular over the weekend, EMC: Fanya Metal Exchange. What of others? Perhaps it was after this article about angry investors capturing the head of Fanya metals exchange (FT). Quite how much commodity do physical ETFS have, what are the implications for the Jo'burg PGM ETF's etc..With humour, should one be factoring in security costs for under-performing companies?  

Atb Fraser

*Platt's from memory does not distinguish between refined and unrefined copper whereas ICSG is focussed on refined copper. 

1) Add Diary of Release Dates for PMI information to your diary. 

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