Morning Mumble: The Data Dump - China's retail sales Grew...with Golden Week included. + Steel and Defaults - But hey we're not worried!

Good Morning, Good Afternoon,

Unlike the echolalia in the press, we have decided to work backwards from the almighty data dump and finish with a compelling statement of the realities of the situation. 

The market is now pricing in a stimulus - whether this is delivered or massaged into figures is another matter. We shall avoid all references to a “wappy wending” heard recently on a conference call! Li’s mishap was more entertainment than anything else, but gives the realities of the steel situation in China.

We have the mystical deflation that is occurring in food prices, retail and manufacturing both in goods inwards and outwards - Not the model one likes when leveraged and expecting non-stop stellar returns!

On Saturday (the trade data) in conjunction with today’s economic data merely represents the facts. We’ve had disappointment in imports (18.8%), exports (down 6.9%) and retail flat (11% up compared to this time last year).

What with the trade data and dump, we’re back to media copy and paste measures eluded to here and in the odd morning note and call. The PBoC are listening to the cries of those that scream blue murder at “only 6.9%” (yeah right) GDP growth (EMC has always been 4-4.5%).

The PBoC is now left compelled to slash interest rate, massage the Reserve Ratio Requirements (RRR) and stem the capital outflows. Actually, the latter could perversely damage China with a requirement to “bring home the bacon” in terms of revenue. There is now a need to also diversify away from a reliance on an overcooked and slowing economy. Sell China/US? Hmmm compelling argument.

All the above is compounded by an inflation rate, that for saying there’s been X stimulus etc…etc… (We’ll avoid the bore), the inflation rate is falling. Aided to some degree by the price of pork falling…as covered here! Also in part due to producer prices slid 5.9%, declining for the 44th consecutive month. Never mind the inventory issues and wage costs that may have further implications on non-performing loans (remember those last time around?).

With the industrial figure being below consensus, September’s reported 5.7% and near 5.6% the market has looked for reassurance in retail performance - Retail can only be described as flat. The sales however mask an element we’ll be covering here called Chinese Margins, because one suspects they’ve taken a beating as well. Footfall’s and voids at malls, giving a different view on the figures as well. A quick survey of rents paid shows some eyebrow raising questions…why if retail is improving are the very retailers struggling?

The industrial production figure at 5.6 was below September's 5.70 per cent level and below the pencil brigades’ consensus - The data validates China’s need to move towards consumption. The speed of the transition is likely to be the stumbling block for expectations, with some pain and unknown implications for growth.

One needs to see further evidence in the PMI Services for China to start to turn modestly positive of a floor being found in the economy. This may be aided by a massive glut/trend of Private Finance Initiatives/Public Private Partnerships to assist the transfer of wealth from state to comrade. (We’ve covered this previously).

We are also reminded of the Chinese Iron and Steel Association report whereby their members have reported collective losses of near $4.5B. What with the “assistance” they’ve received both in the pricing of energy, rebates and what we shall loosely call Central/Local Government grants - quite staggering if there was a level playing field.

We note that ArcelorMittal pulled the trigger on a rights issue in South Africa, that’s not only bad for Kumba Iron Ore with their revised pricing agreement but gives an indication of sector realities. The Kumba Iron Ore and Atlas Iron fan club have beaten back into action with some meaningful suggestions on occupations for yours truly!

Expect more headlines similar to this on Thursday when China Shanshui Cement Group defaults on its debt. The prudence, as reported by Bloomberg is: China Fund That Gained 24% on Bonds Sees Substantial Correction. Additionally, following on from the EMC piece of steel, where apparently Chinese Steel Mills were reacting to market forces, then we need to consider Baoshan Steel's Loss Highlights Crisis Engulfing China Mills.

As promised, at the beginning (if you’re still reading) – from the Baoshan Article on Bloomberg:

HFT One-Year Open Bond Fund was ranked No. 2 among the 270 bond funds, according to Haitong Securities.

“We aren’t worried about large-scale defaults because the central bank’s monetary policy will stay loose within the coming two years,” Shao said, adding he plans to expand his fixed income team from 16 to as many as 25 within the coming three years.

We’ll just ask readers to consider that again in Italics…and leave it out there:

“We aren’t worried about large-scale defaults because the central bank’s monetary policy will stay loose within the coming two years,” Shao said, adding he plans to expand his fixed income team from 16 to as many as 25 within the coming three years.

Atb Fraser

N.B. We note the Prosecutor on the Tailings Dam is citing Negligence on the radio and in the media…whether BHP can walk away from this is another story. Vale simply cannot afford to as the cashflow or “hope of cashflow is needed.” Samarco debt trading at a near binary bet of existence.

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: FX QE ECB KMR...Boron (not boring), what a steal!

Good Evening,

The ECB QE announcement was and did benefit the market (some quality) and dragged up some of the dross as well. Gold attempted to anchor in at $1310/Oz. and failed miserably (for now), with a good % of the Au market cashing in some very stale positions the market will look for further direction. Already the bulls are predicting $2k/oz. again! The Copper malaise continued ignoring anything QE, in fact shrugging the news off and dropping a cent or four to $2.57/lb circa $5665.87/t. 

The common-sense trades were FX movements and its now over to the market to eke out the beneficiaries of the ECB QE. With earnings under pressure from lower commodities, factory gate and exports, the jury for the ECB to cure the EU woes is out (myself included). 

Is it time for China to dump steel into the EU to suppress prices for longer and deflate consumer prices. This steel will of course be boron free (read as Tax Rebate) but there are limited alternatives with the Chinese market being awash with it. The surplus with the addition of boron (whether it was or not is another question) had previously made steel a competitive export (even for the poor performing mills) because of the 9% boron steel tax rebate that has now been cancelled. 

Russia has the potential to take up this strain from China, with the need for FX/Earnings Russia has been given the best headwind to obtain market share in hot-rolled steel exports. Russia has a weak Ruble () and Chinese contraction in steel exports in the short-term, Russian steel could be on to a winner! Evraz? OAO Novolipetsk Steel? Severstal? One wouldn't want to be holding the Indian equivalents, Tata’s costs are already difficult to manage, no market Europe for Russia? Nevermind India will do. Indian producers may become more bullish if the $1:56, where pricing will impact on Russian exports to India. .

The Chinese steel exports may contract in the short term, but Europe may find themselves the beneficiary of some cheap steel from China! With iron ore having plummeted and searching for a balance in pricing, steel prices declining 14%, if the two continue for much longer both steel and iron ore production may go into decline as well.

KMR (Kenmare Resources) proved the perfect trade today with the traders hearing the gossip of negotiations nearing an end that will give some assurances to any offer Iluka Resources wish to make (or not). KMR, as I've stated for a while at circa 2 pence becomes the pure down side protected/limited trade long. 

There's some loose gossip that Iluka Resources are not interested in to too many of the current senior management. How reliable this is is another matter and untested, but severance might be a stumbling block, could it go hostile? I doubt it as the creditors want more clarity on repayment and return on 'investment'. Iluka Resources as the larger entity will provide this if combined. With the chatter of 12 pence, it's certainly not for the faint-hearted 

Atb Fraser

Chinese afterthoughts & GKP (The pundits favourite)

The reliance on state bail outs is coming to an end in China. The excuses are many fold from "utilising this time to improve quality, lower pollution, improve economics." It’s our view China has to stop investing such a large percentage of GDP into capital investments; whether that be roads, railways or redeveloping towns.

The weighting of lenders towards specific sectors is not the only issue specifically where there has been the most defaults: Solar, Coal, Real Estate and potentially Steel Mills (two are rumoured to be looking for aid). There are number of bonds due this year in China, with the market exceeding the official figures.

The Chinese bond market should be a likened to the larger platinum producers raising capital for expansion, but unsurprisingly this has to be transferred to OPEX - a prime example being Aquarius Platinum and Lonmin. What parties should be concerned with is the "amount of cash raised compared to what is available to pay these coupons." In such a short-period of time the cash has all but disappeared. 

The most recent Baoding Tianwei Electric default is a prime example. With $328 million raised 2-3 ish years ago and it barely has enough cash to make a $500K part payment that was due on the 7th March 2014.

Chinese Bonds replaced the Development Grants that the Chinese awarded to the likes of the Solar, Coal and Steel Mills for stimulus. The investors mistook these grants for a bottom line operational profit, but someone forgot to ask how much development grant has the company had and how much less will it be receiving.

If major companies are defaulting on repayments within 2 to 3 years of the issue of Bonds, it raises a significant question about how bad the balance in the economy is or is not. The latter has caused the deleveraging of positions in the Copper and Iron Ore, with consequences being felt in the product pricing such as steel with oversupply as an additional problem. 

Ironically, if one is to look at the Rusal IPO and listing in Hong Kong, the figures rather glaringly stated what was going on not only in China but Russia. The Russian state bank is alleged to be looking at bailing Rusal out. From one perspective, bailing out international lenders at this time with the Crimean issues is very unlikely. "Lenders" are likely to compromise on a deals albeit at the last minute.

The property bonds, are not only pricing risk in on Copper, but also on the entire over-cooked/leveraged sector. With Zhejiang Xingrun Properties clearly unable to pay its $500+M bond's what next?

Well my view is simple, in order to meet growth targets etc...China ironically has to let these defaults occur to avoid further over-cooking in other sectors. 

First China had Coal Defaults (albeit bailed out), then Solar defaults, then Buildings and/or Real Estate. Its only time before these positions unwind so must the leverage in Copper, Steel (the most heavily leveraged one way steam locomotive that's running out of track!), Iron ore, and Oil. This will be a short-term correction but more pronounced.

With Iron ore likely to be 61-65 a tonne 12-18 month average and that is slightly higher than our revised consensus of 55-57$. I acknowledge it’s bounced a little, but I put that down to speculators doing the same as I and buying back their short positions.

The knock on is that aim market will suffer with economies of scale not being to a magnitude to become more efficient. The prime example being the Gulf Keystone, which was it really a surprise?

Some idiots, had a belief that two Chinese chaps in the Gallery at the trial meant a buyout. Correct me if I am wrong but the best time to sell Gulf keystone was when they raised the bonds Pricingof Convertible Bonds but more importantly when one of the head honchos sold ten million. 

Its acknowledged that it was a transfer under a financing agreement but let’s face it, it’s still a corporate activity between two parties (aka a sell). Namely, that corporate activity involved a person whom was meant to be enhancing shareholder value but strangely was not maintaining any exposure. 

As a thought, with the Bonds under significant stress, higher cash burn, and limited production, what's the odds of it going forward? But strangely, why has the market been so slow to react and will GKP be able to raise monies at a level that is affordable for the development. It’s looking more likely that a stressed farm in deal or massively discounted Rights Issue will occur perhaps a SEDA just to cheer the holders up some more.

Genel are funded, have cash and are certainly a cheaper option in terms of director salaries than say, GKP. However, any deal would have been done long ago, and with the risks GKP have, any suitor would surely be wise to wait to see how poorly the company is before approaching.

Interesting times, but its worth consideration with a spat of corporate bonds being inked over recent months, will there be defaults? Hmmm, these 5-6% high returns in a bond are not really worth the risks of companies whom have not got the prowess nor history to back up their assertions off repayment.

GKP have not defaulted, but it will certainly have some stress and or costs attached to make payment. I would not be surprised if equity was exchanged for the repayment at a discount to market for parties to load them off to cover their own liabilities. 

It’s nice to see blogger comments working properly, I'm aware it’s been a non-goer for some time. I can read them merely not publish most of them despite trying. Even those negative ones, extolling positives about my character and shorting actions (I think everyone knows there haven't been any of those!).

Perhaps shorters should be called realisers of true value, it sounds more acceptable. This is from someone that disagreed with the shorting principles of negative betting only 4-5 short years ago. It was a realisation that people were more likely to back a dog and hold it tighter, that I realised shorting was easier to start, realise and assess companies than longing. 

There are benefits though, trading is more exciting, and shorters have a mind-set that is ironically positive, don't moan about taking a hit, but most importantly of all have to make their own decisions.

I would go as far to say it’s addictive, what better validation than making money when the majority think the price will appreciate? The underdog of the market, the contender for the most abuse.

As a final thought for those thinking about all things trading wise, I will not be sharing my data, but what percentage of AIM companies have missed their self-reported targets? Doesn't bode well for the longs out there if there's so few companies where targets are being met. 

Just a thought...

All the best, Fraser (Sat outside in the UK in March without thermals)