London Calling wakes up to "Black Monday"Published by MAC on 2015-03-09
Source: Business Spectator, AAP (2015-03-09)
Is it worse than what's gone before?
Today could signal the worst day in years for coal and iron ore markets - at least in Australia which holds the world's fourth largest reserves of the black stuff, and is the premier source of the crucial ingredient for manufacturing steel.
Australia also hosts the globe's biggest bulk export terminal, and coal and iron ore are the world's weightiest commodities transported by sea.
The crisis is primarily due to plummeting Chinese demand, spurred by the regime's stated intention to slash pollution - a mission that's largely been prompted by citizen agitation.
Of course we've heard this kind of tale before, and the markets have always bounced back. Haven't they?
Well, yes - and no.
As Daniel Palmer points out (below in Australia's Business Spectator) the bottoming-out of the iron ore price has only been matched once before in recent years - when what Warren Buffet memorably dubbed "the nuclear financial winter" hit home in early 2009.
It did recover at a point during 2014, as Chinese demand moderately increased.
But now the bull has thundered out the gate, and the bears slunk back onto the floor. A major reason for this is that BHP Billiton, Vale, Fortescue - and Rio Tinto in particular - have launched aggressive expansions, designed primarily for profit, but also to wipe out higher-cost producers. Their ploy seems to be succeeding.
We shouldn't expect the industry and its advocates to acknowledge the reality of what is happening.
One of the latter (cited in the first article below) reckons India may take-up the Chinese slack in coal. Despite all its talk of boosting renewable energy, the government there has so far failed to heed the growing resistance to depending on a carbonised economy. But this may change - as it was beginning to do under the previous government.
Rio Tinto is also quite happy to see the demise of smaller iron ore competitors, claiming this will bring the market back into balance. London-listed African Minerals, not long ago one of the two biggest iron ore players in Sierra Leone, has just gone into administration after failing to repay its debts, taken over by China's Shangdong company.
Rio Tinto has also much-vaunted its new model of mining - never mind the attrition in employent, bound to result from substituting humans with robots and machines).
A dark day coming
However, there's one financial guru who doesn't buy into this attempted mollifying of investors.
Crispin Odey, founder of the eponymous London hedge fund Odey Asset Management, considers the current situation a "wonderful bubble" - and one which may go global.
For him it may indeed be a perfect storm. Odey has recently been selling equities or "shorting" shares (betting on a fall in their price), and says the current near-collapse of oil and commodity prices will be "remembered in a hundred years time" [Guardian 20 January 2015].
Many may scoff at him.
But others will recall that Crispin Odey was one of the rare indiviudals who actually predicted the 2008 financial crash.
[London Calling is written by Nostromo Research. Opinions expressed in this column do not necessarily reflect those of any other individual or group. Reproduction, with acknowledgment to the author, is welcomed under a Creative Commons licence]
Aust coal industry facing weaker Chinese demand
8 March 2015
The Australian coal industry is facing the prospect of weaker Chinese demand as the world's biggest greenhouse gas emitter works to cut coal consumption by 160 million tons within five years. China plans to reduce its coal consumption and increase its use of non-fossil energy to 15 per cent by 2020 as it moves towards cleaner energy such as hydropower, nuclear, wind and solar because of widespread air pollution problems.
Coal is Australia's second biggest export earner behind iron ore but many Australian coal producers have been posting financial losses in recent years.
CMC chief market strategist Michael McCarthy said it was no surprise that China had made a significant announcement about reducing its use of brown coal ahead of commodity contract negotiations this month.
"It's not a positive for Australian thermal coal producers and it adds to the gloomy scenario that a lot of commodity prices are reflecting already," Mr McCarthy said.
"It's not a disaster either, given the huge reduction we've seen in the coal price in the last 18 months."
He said China's announcement was "a bit light on detail" on how the energy would be replaced.
"There's clearly going to be a replacement somewhere," he said. Still, Mr McCarthy said a reduction in brown coal exports to China could result in India soaking up extra supply.
"Given the cheapness of coal relative to other forms of energy production, Australian coal producers could be selling more coal to India rather than China," he said.
China recorded its first drop in coal production since 2000 last year, as the nation pulls back on its use of the fossil fuel, but still only 10 per cent of China's major cities met the country's air quality standards in 2014.
The world's most populated nation has banned seven million high-emission vehicles from the road, shut down 50,000 coal-fired furnaces, installed filtration equipment in power plants and factories, and added new sewage treatment plants.
Iron ore price sinks to new low
8 March 2015
The price of iron ore lost another 2 per cent on Friday night, moving further away from the $US60 a tonne level it breached for the first time in six years the session prior.
At the end of the latest offshore session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US58.20 a tonne, down 1.9 per cent from its previous close of $US59.30 a tonne.
The numbers represent the fifth straight red session for the commodity amid a streak that has seen it lose 10.7 per cent in just 10 trading days.
Ominously the bulk of the falls have come in the past two sessions, with Friday night's 1.9 per cent fall following a 4.5 per cent slump the day prior.
Immediately prior to the recent 10-day reversal, iron ore had enjoyed its best run all year in climbing back above $US65 a tonne amid hopes of a recovery in Chinese demand as the start of construction season approached.
But nerves have again set in as investors weigh a lower growth target in China, mixed economic data and a surprise rate cut from the People's Bank of China, all of which are confirmation the economy of the world's largest consumer of iron ore is hitting a few speed bumps. Iron ore was last at levels this low in the first half of 2009 as the financial crisis caused mayhem on markets, with its current price almost 60 per cent below where it was at the start of 2014.
Beyond demand worries, investors are also eyeing surging supply from the world's largest miners after Vale, Rio Tinto and BHP Billiton all announced record production numbers in the past month or so.
Supply concerns were further exacerbated by reports on Thursday last week of record iron ore shipments out of Port Hedland in February.
The port, in Western Australia, is the world's largest bulk-export terminal and used by the likes of Rio, BHP and Fortescue Metals Group.
Rio, meanwhile, has warned that an oversupply will persist in the near-term, though it believes the long-term fundamentals remain sound. "The continued ramp-up of committed supply is expected to once again exceed the growth in iron ore demand in 2015," the miner said in a strategic report released Friday.
"However, with further exits of high-cost producers anticipated, the market will be more in balance.
"The demand outlook for iron ore remains sound with expected contestable iron ore demand growth in excess of 100 Mt/a by 2020. In the longer term, there is significant potential for growth in demand in emerging markets such as ASEAN and India due to population growth, urbanisation and rising incomes."
Hedge fund giant warns on market shock
8 March 2015
Prominent hedge fund manager Crispin Odey has said that economies dependent on China, such as Australia, are in grave danger of entering recession amid ‘demand problems’, while also warning a global market shock may not be too far away, according to The Australian Financial Review.
Mr Odey, founder of London-based Odey Asset Management, has taken a set against the Australian market and local currency given his bearish outlook for Chinese growth, with the banks likely to have a “bad time ahead of them”.
"China is everything to Australia in lots of ways," he told the AFR, adding that the only thing the nation can do to dampen the impact is to cut rates. Mr Odey added that the world now found itself “in the midst of a wonderful bubble”.
"I just think that you and I have got grandstand seats here [to an imminent market shock] and my point is having found myself in the second quarter of last year selling a lot of equities and starting to go short, I found out just how illiquid it all was. You never actually see it until people try and get out of these things," he said.
Rio Tinto to axe hundreds of jobs as part of drastic restructuring
9 March 2015
Hundreds of jobs are to be cut at Rio Tinto’s Australian coal and iron ore operations, as well as around the globe, as the company embarks on an internal restructuring considered one of the most aggressive since CEO Sam Walsh took helm in 2012.
The move comes just weeks after the miner announced a 10% drop in annual earnings and launched a $2 billion share buy-back to return cash to investors. Rio warned then the measure would imply further cost cuts to help offset the damage done by the ongoing slump in commodity prices.
It also comes on the heels of a fresh and steep drop of iron ore prices. Last week the commodity fell below $60 a tonne, down from $140 a tonne at the start of 2014. Seaborne continues to be weak, with the 62% Fe import price including freight and insurance at the Chinese port of Tianjin hitting Monday $58.58 per tonne.
Since the end of 2012, just before Walsh assumed as CEO, the company’s workforce has gone from 71,000 to below 60,000 by December last year.
The company recently announced its intention to merge the copper and coal divisions, reducing Rio Tinto businesses to four main groups with diamond and minerals, aluminum, and iron ore divisions.
Uranium mined by subsidiary company Energy Resources Australia will join the diamonds and minerals group.
“My aim, as your chief executive, is to strengthen our business to ensure we are the most resilient in the sector,” Walsh told employees in an internal memo late February. “We need to be more responsive and remove bureaucracy to maintain our competitive advantage and deliver sustainable returns to shareholders.”