Good Morning,
We had little surprise that China would cut interest rates,
now at 4.85% and effect from yesterday. Its China's attempt for secondary
stimulus in the housing market and the various benefits of attempting to
improve aggregate demand (AD). Although the economic stimuli to date appears to
have merely slowed the fall.
The stock market "readjustment" is now a full-swim
aided by pure bear market. The cut in interest rates unlikely to prop the
market up, as the bull trend came to a dramatic end. Quite how the Chinese
expected to shore up the Shanghai Stock Exchange Composite Index (SHCOMP) and
Shenzhen Stock Exchange Composite Index (SZCOMP - the tech related index a k a
the Chinese Silicon Valley) is mystifying.
The SHCOMP has fallen just over 20% at 4,123.484 and the
SZCOMP did 22% over the fortnight at 2,404.719, with margin being the most
common-phrase around China for those trades. Without any bounce, expect further
forced selling on SHCOMP and SZCOMP.
EMC: China
Australia Mirror Trades has a number of similarities including the
massive increases on stocks as outlined. What is of concern is the interest
rate to GDP growth. With the EMC being far from an economist. It’s prudent to
consider if interest rates are 4.85% then should there be a cut in expectations
for the GDP of China? Currently expected to be 7%, with a basic trend implying
a slowing of growth in China and factory productivity and gate prices far from
picking up.
The Chinese are simply becoming risk averse, and any
temptation to buy assets despite the aggregate costs all reducing. Property
prices (Sales
Prices of Residential Buildings in 70 Medium and Large-sized Cities in May 2015 Chinese
Government Statistics) both commercial and residential, continue to fall or
simply not sell at all. The measure of the 70 Cities, although is warped
slightly, shows falls of between 6.9% and 0.9% on property sold compared to the
previous period. What is not measured, are the incentives to progress the sale,
which are also eating into developers margins.
Not only is the stimulus meant to aid the commercial
entities, we have the Chinese Local Government near doubling the size of debt
swap program. It doesn't mean much, but considering how leveraged and hard up
local government (LG) is, any green shoots of cheaper borrowing will be
welcome. Where there's a hidden "nearly unemployed" figure that's
growing in LG's and SOE (State owned enterprises).
With the PRC (People's Republic of China) searching for a
panacea for a slowing economy that has so far been absent. The PRC have
attempted to cover all the corners of the economy, but without any improvement
in China's economic climate, expect more trimming of borrowing costs and direct
QE, if the latest round has little to no impact.
As a reminder, the PRC has attempted to improve financial
liquidity by injecting cash into the banks. This financial injection also had
specific provisions to target development (little impact) also known as pledged
supplementary lending (PSL). The PRC has reduced borrowing costs consistently
since 2012 (falling asset prices) but also cut banks’ reserve rate ratios (RRR)
in an attempt to give greater scope for lending (limited impact). Likewise, the
loosening of home ownership and mortgage criteria has not had little if any
effect.
Its ironic, that whilst the Chinese are tweaking their RRR
and interest rates, the converse is happening with LG bonds. Where just
recently there’s been a confetti like approach, as LG's have issued near the
entire amount of 2014 Debt just in the past 7 weeks (11th May-26th June 15),
and the market is betting those costs are going to rise.
With the PRC and PBOC (People's Bank of China) now being
forced into buying LG bonds to maintain a sense of stability with the wider
market objectives it's not going to be pretty. Expected further news of PSL’s
in due course, where the PBOC will no doubt have to focus on LG bonds with a
targeted rate of circa 3.10% to maintain stability.
LG's have circa 23 Trillion Yuan of to refinance and in the
current market conditions, its going to be a corporate parent styled
transaction (PSL). If the PBOC do not get involved in LG bonds, there's a risk
of debt costs spiralling and stalling any growth planned or intended by the
LG's themselves. It would be prudent to watch the Chinese bond market for a
spike later next week if the same trend continues, no doubt after a brief
fall.
For any recovery, one would be wise to look to the National
Golden Week (黄金周 (国庆节)
(02nd October 2015) to indicate the recovery in the property sector. Typically
the peak season for residential property. Will it happen?
This weekend is all about Grexit, As stated at the time the
newly formed Greek government back in January had an agenda. Now with capital
controls in place even in the short-term it’s not looking pretty. The
referendum, although I though the offer had been withdrawn, is going ahead
whether there is a purpose to it or not. The view being that Greece needs to
get through their peak tourist season with a Euro. Although the odds of this
happening are slowly shrinking.
The lack of compromise could have wider implications for the
wider group of the EU, namely Italy, Spain and Portugal. Where the austerity
and inferences of "who is calling the shots at the EU" creating a
negative sentiment, that if Greece exits, expect others to consider it. The
breaking of even one in the EU ranks (Greece) will have dire consequences,
whether risked or just perceived for the entire EU block.
With a secondary currency more likely than ever, what next
for Greece. Perhaps pain up front is the preferred model? Over to the wider
Greek citizens to decide their own sentence. So the Market will ebb and flow
based on (mis)information and events over the next week. The resultant impact
is already being seen in commodities, with most losing key levels of
support.
Amur Minerals (AMC) gives an update on Kun-Manie.
One is a little confused by the optimised design as there's a number of
assumptions which contradict the current viability. Kun-Manie will no doubt be
viable 'at some point in the future' but it’s certainly not soon. With limited
time to cover it full, it's wise to look at the assumed costs.
AMC have not adjusted the SRK Pre-Feasibility Study (PFS)
assumed price from 2007 for the price of Nickel. There's a lot happened since
then and the Nickel sector has changed considerably. Not only is AMC up their
results and the update, but one must assume that investors have considered the
fact the project is uneconomic.
Nickel is currently $5.45/lb, well below the $5.60/lb
support considerably away from the assumed pricing of US$7.50 per pound
(US$16,534 per tonne) and US$9.50 per pound (US$20,940 per tonne), Internal
Rates of Return (IRR)(post-tax) of 21% and 32% respectively, or a minus figure
at current rates! There is no reason to change the view on this stock! The
company need buckets of cash to develop this asset, and in the current market,
who would be a lender?
Lonmin's managed sale by Glencore should be given an award.
How they managed to achieve the price they did is staggering! The company,
holders specifically are waking up to the realities of not only doing business
in South Africa but of assets that are borderline uneconomic in the current
climate.
The PGM prices failed to recover globally despite LMI being
on reduced production. So there's unlikely to be any change with them going
full guns. With a growing unsavoury contingent burning workers buses and cars,
its not looking rosy for LMI!
During normal production activity a problem occurred in the
solvent extraction (SX) section which resulted in a significant quantity of the
organic inventory being lost to the dumps within a very short time frame. After
inspection, it was identified that one of nine weir plates in the recently
commissioned SX mixer settler had fallen out of position, resulting in the
ability of the organic inventory to escape from the circuit via the raffinate
and onto the dumps. The reasons for the failure of the weir plate are currently
being investigated by site management.
On Saturday the problem was rectified and the plant was
started again but at a much lower flow rate. This will continue for several
more days until the site team can stabilise the plant and determine the full
extent of the loss of organic inventory, any impact on the pipeline
infrastructure and the duration of time that the plant will need to operate at
reduced production capacity before the organic inventories can be replenished.
If one is currently investigating the failure, surely the
rectification of the problem raises the question of the risk of it happening
again. Hmmm...Would it be wise to consider the director sales again? With
impaired production and reduced capacity, mining is never simple. Forecasted
production will not be 13K/pa this year, one suspects it’s likely to be 11,700
with a finger in the air.
The market was expecting a lot more from the Gulf Keystone
(GKP) update, where cash is not where it needs to be. The production
and marketing update is positive, but likely to be insufficient in
cashflow terms. Essential for a producer with limited cash of US$68.7m with
intentions to fund increased output to 100Kbopd.
One hopes GKP will get their payments (both present and historic), although
they state they're in discussions with the Kurdistan Regional Government's
(KRG) Ministry of Natural Resources (MNR). Perhaps instead of discussing, they
could just obtain payment from the MNR?
In the absence of payments coming soon, expect GKP's assets to be sold for
limited upside. A producer that's cashflow is limited by other entities, that
appear uncontrollable? Also, as a final thought, is the third party oil
transaction a related one to previous management? Just a thought?
The bears finally got their patience rewarded in HSS Hire with a trading update that is not positive at all. The
company was only IPO'd 9 February 2015. Christmas cards all round for another IPO
that raises questions over the valuations. Hat-tip to JPMorgan for
flogging prudently.
With corrections across the indices over the weekend, led by woes in China, the
FTSE and DJI all took a battering. Reminds all round to be aware of weekend
volatility on positions.
Petroceltic (PCI) contemplate a bond issue. One supposes it wise to state
that, although it does exude confidence in the bond market, or are the terms
just accepted as being dire. One to watch...this could have issues if such a
bond issuance fails and the banks come a knocking for $50M+. Does it also
suggest a deal is being done on the Ain Tsila development? Surely it would
have been sensible to grab all the monies at once, especially for Ain Tsila?
Unless of course PCI are dipping their toe in the water!
Finally, Fortescue Metals Group (FMG) breached its AU$2 a share market closing
at AU$1.93. The bears are out with their trumpets for all to hear with
predicts as risky as $20-30/t. The Chinese clearly gave out their indications
with a cautionary warnings from Xinchuang Li (EMC) and EMC Mundane Iron Ore Again.
Atb Fraser
