Morning Mumble - belatedly: Chinese Steel - stranglehold continues unabated + Cue increases in Customs Rates & Anti-Dumping measures + Anglo's woes, with Tribal and Shaky Ground in China.

Good Morning, Good Afternoon,

Its been a very busy past week with the travel and meetings.

Continuing on from last Tuesday's theme - disappointingly for British steel producers the impact of China's need to export deflation is now being felt (ITV). Unusually, the ITV have been on the ball for once. With a closure/insolvency at Redcar and now a further 1,200 UK job disappearing at plants in Scunthorpe and Scotland, the end if nigh for higher cost producers.

The majority of steel producers are incapable of competing on a skewed playing field. With "energy pricing readjustments" being the favoured play in China, since the removal of the boron rebate (subsidy). Commercially this made sense, as most western construction companies started to avoid the higher content boron steel as welding joints was an issue (integrity).

China has not just benefit from advancements and investments in technology at the steel plants, but been aided by subsidies and "energy pricing adjustments" enabling them to produce significantly cheaper. the benefits of incentives benefit the . We'll come back to the Chinese energy consumption figures later, as there's a suggestion the economy is still contracting with circa negative 0.3-0.5% in energy consumption in the first 8 months. (The GDP figures will also evidence this.)

India responded in June (Economic Times/India Times) by increasing the import/customs tax increases to attempt to maintain a balance where their native producers. This has had limited impact and India may have to impose outright anti-dumping measures. Initially te India Government are likely to introduce 22-27% customs / import tax and this will be implemented shortly.

In January 2015, the EMC highlighted the issues of dumping of steel in Europe by China. The shorts were ArcelorMittal SA (AMS: MT) and Evraz (EVR) plus 'a few others, albeit thanks to some brilliant technical analysis by Hugo, it was played appropriately. 

Steel stocks, despite buy backs, have had the writing on the wall, where the competition was an tsunami like wave of supply into world markets. The affects have been witnessed in the share prices of almost every producer.

EMC- Boron (January 2015), its noted that the boron tax rebated ended early January 2015, yet just the other day a reader was amused by the Telegraph on boron in steel (from August)  referencingcontent from 2008. Readers will be aware of the bias here towards other news sources including our own as they are are much more reliable.

In contrast to the economic woes, just down the road from where Tata has mothballed the Llanwern site, Liberty Steel has been reopened the Newport rolling mill site (Times of India). A brave stance with the current outlook. 

In due course we shall look specifically at the Chinese (indirect) subsidies that are causing eyebrows around the globe that making Governments question the ability to produce at such costs. Its something to consider..

With a similar theme, and a quick recap with a decent read across from AccelorMittal and Kumba Iron (EMC: Kumba) - Anglo American are leveraged, operating in 'various entities and sectors' that have experienced pricing pressures. Made worse by a complex structure are operations that are hard to manage, including the allocation of funding and costs controls that provide for limited upside in the current environment. An example being Anglo/De Beer's Diamond operations need considering with the wider company structure below. 

A wider look from Bloomberg©. - Click on Image to Expand.

Anglo Corporate Structure

The market has appropriately read across from BHP Billiton's (BLT)'s recent debt Hybrid Part 1 & Part 2 and now acknowledges the mammoth task of Anglo's debt/leverage.  More to come for certain on this with Q3 due out 22 October. 

Thanks to an on the ball chap/analysts noticing the Rapaport item - there are reports of yet more carnage for De Beers (Anglo Diamond division). Rapaport has suggested that De Beers (owned by Anglo but more importantly the previous saviour of the group) has suffered at the last sales event. Additional reading: Current rough prices unsustainable and unacceptable.

The car crash being that prices were off yet again, suggestions of "larger diamonds being on the tables and the prices still taking a hit. So what did the buyers/sightholders do? Leave with near 70-75% of allocated diamonds on the tables. Revenue won't be near consensus of $450M but likely to be 200-250M on the last sale. Now De Beers/ANGLO can't even tempt buyers with larger/better stones at a discount. (EMC view).

We highlighted Dominion Diamond Corp (TSX/NYSE: DDC) last Tuesday as well. For those followers of fashion, it’s worth noting Rio Tinto has a 60% interest in Diavik Diamond Mine and numbers came in below expectations. With diamond production down 15% but more so, recoveries down 25%. Mind you, at least they'll have less to hold in inventory. 

Today, continuing on from our view on the profits warning in Tribal Group back in June May, EMC: TRB 15 May 2015. The company's theme has not changed at all. There is a trading update that's best to leave to Tribal to explain -

Tribal Group plc ("Tribal"), a leading provider of student management systems and services for education management, issues a trading statement to update its outlook for the second half of the year ending 31 December 2015.

In recent years Tribal has been successful in winning large software projects in our chosen markets. The expectations of our larger customers continue to evolve and attract the interest of new competitors, and our success in winning large contracts remains difficult to predict. At the same time, despite being well positioned in the market, the focus on our larger customers has resulted in Tribal being less successful in building a pipeline of medium-sized and smaller opportunities to complement these large deals.

We have also seen the extension of certain large customer programme timelines, which has resulted in the deferral of revenue and higher project delivery costs.

In light of these trading conditions, we now expect our revenues for the current year to be lower than the prior year, and we expect our operating profits to be significantly below our previous expectations.

The Board initiated a review of the Group's operations in the summer. Despite implementing initiatives to drive sales and increase our operating efficiency, we have been impacted by the more difficult trading environment. We are strengthening our sales leadership, fundamentally reviewing of our sales priorities and processes, and better aligning our cost base with our ongoing activities.

The process to appoint a new Chief Executive is advancing well, and an update will be provided in due course. [Ends]

One has a suspicion that the Chief Executive search hasn't gone as seamlessly as thought. What is the debt position of the company and more so....see bold (additions from EMC) that should be thought provoking. There are some positives, we didn't need to highlight the entire announcement. That's Tribal's third strike on the bases of profits/performance updates and as such the caveat of caution applies, expect a kitchen sink approach upon appointment. 

To save time, we'll merely edit the view from EMC May...

Tribal Group (TRB) gave an update into the AGM. a trading update. With timelines going out further, one would be wise not to ascribe too much value in light of a second third warning about the timing of and Keith Evan's departing departure, the warning signs were there! Having missed the previous year’s targets, the terminology is far from positive, but with a new 'man soon to be at the wheel' there's some hope, after a kitchen sink episode and some hope of an improvement in outlook. Yet another company struggling with its guidance and outlook. 

We'll leave the GDP announcement for China to the wider press, having already formed a view last week, there's some items that will need more time, than allowed currently. 

Thank you to a reader, this CNBC item Chinese property is worth noting. China’s economy built on shaky ground. There's some useful insights that were missed at the end of clip but worth finding...

Atb Fraser

PM Bolt-On: SABMiller, Commodities: Iron Ore & Base Metals - China & Glencore's coal neighbour + a little bling! + DOM, CWD & Majestic Wine's realities!

Good Evening,

There's significant demands on time at the moment, so apologies. 

Agreement has finally been reached between AB InBev and SABMiller. A rewarding trade for those going for the overnight 'thrill'. The discount to the £44 deal should not go unnoticed and evidencing how savage the arb market is ncurrently (BG included).

The benefits to Molson Coors (NYSE: TAP) should not be ignored but prudence dictates that profit taking would now be wise. 

Those longer term readers will remember Duncan Fox - who is no doubt relieved that the MegaBrew deal has been inked (*subject to regulatory approval). Duncan was  seen discussing SabMiller the other day (BBerg). Duncan can now look forward to the daily implications and sale of a stake in China Resources Snow Breweries.

In commodities there’s a growing trend that Europe are partially buying the story, the US consolidating it, but Asia are selling it (perhaps Asia is not in denial about the outlook). Iron ore has levelled around $54.5/t, but will not be assisted by the World Steel Short Range Outlook for 2015-2016. Worth a read, rather than taking the media reports.

The World Steel short range outlook factors in a number of assumptions that have yet to occur. Especially as a significant number of major projects are more than 50% complete and delays happening with new projects. All creating a hesitancy in opinion, it’s understandably difficult to measure the longer-term outlook without further flag waving stimulus from the Chinese Government.

Previously with any stimulation, there was a bias towards infrastructure, now with an emphasis on consumption, save for the Housing sector (the maintain stay), there could be a number of wild cards. Expect some focus on recycling, waste management and development of services.

What shouldn't be ignored are the indicators of increased inventories - sales not keeping a pace with production, exports down, imports down and pricing pressures evidencing the low factory gate prices. The only issue is...that's both in the US and China. It’s no wonder that FED rates are looking like they will be lower for longer. 

In Coal, there’s an inkling that a deal isn’t far off between Rio & X2 Resources. Rio's yearning to divest the Allied & Coal assets may, with X2 Resources willingness, have implications for Glencore’s margins. MickDavis (The Sydney Morning Herald), if the time is now, it may just put pressure on Glencore to merge the Australian asset with X2 being the operator.

The synergies are notable and Glencore must be kicking themselves that, save for a white knight, now lack the financial muscle to complete on the Rio deal. It’s ironic X2’s timing of a $2-3B deal, not only could imply the bottom of the market in coal/thermal coal, but more so strong arm Glencore into accepting a joint venture. Rio’s Bengalla sale to New Hope Coal (ASX: NHC) implies X2 would need to pay near $3B, but $2-3B is a sensible range.

Irrespective of such a coal deal, and Glencore's hopes a bull market in commodity prices, the reactions have been muted so far. Glencore’s newsflow continues unabated, and not always welcome, with Jim Chanos coming out and admitting he's "a potential purchaser."

It’s not the headlines that Glencore needed, as it shows Chanos’s is short the stock and highlights their woes. A brave call after such moves, but not without some sensibility in the statements.

The whole idea was if there was a downturn in the commodities markets the trading acumen would help offset the hard assets. It didn’t work that way. If that was the reason to put this thing together one has to question that strategy,” Chanos said.

Not forgetting that Glencore’s actions meant they’ve yet again gone into a corner where others are loathed to go. Remember Glencore attempted to shut in thermal coal production for a longer period and failed miserably. What happened to thermal prices when Glencore turned production back on? Down!

We are increasingly hearing of a drought in diamond financing at the moment, with Qatar being slow to finance new deals the prices are suffering (Idex Online). There is a possibility Qatar's financing options are limited at the moment. In part with the purchase of an agricultural business off Glencore (rumours) and taking a bath in a few stocks.

Retail demand appears subdued, but with contradictory news suggesting its more Global Emerging Markets than Western economies. Validated in part by the Alrosa and De Beers issues ref: Prices including allowing sight-holders to walk away from the tables. 

More to come on this in due course - worth considering why the need for the Dubai Diamond Exchange (DDE) to host a financing event. Is there going to be a recovery or more of a softer lander for prices? Alrosa's and De Beers' prices cuts will not have helped matters and the Russian currency gain is making any form of support difficult, with the Ruble/USD FX benefits.

With updates due soon from De Beers (Anglo American (AAL)), Alrosa MCX: ALRS, Rio Tinto (RIO), Dominion Diamond Corp (TSX/NYSE: DDC), Lucara Diamond Corp (TSX: LUC), Petra Diamonds (PDL) and Gem Diamonds (GEMD) – the market will obviously gain a better understanding of the situation.

Will Dominoes pizza (DOM) follow in the footsteps of Gregg's reporting and appreciate tomorrow? There's a lot of hope and expectation built in - with an early exit in the Rugby by England and the X factor / Strictly benefits losing appeal, will the pricing perception finally sink it? 

What justifies Countrywide's (CWD) premium rating? Not a lot...and looking more like a sell. With the capital markets day going down by certain preferred analysts like a damp squid, its getting hard to justify any premium to the valuation. 

And Finally, the market has awoken to the realities of Majestic Wines (MJW) yet again, with such headlines as Naked Wines Launches "Text for Wine" service, would you be long? No doubt some more consolidation due in the sector in due course. 

Atb Fraser

Apologies re: Grammar.