Author Archives: Stuart Burns

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Noble Group, the Singapore-listed trading group, started in 1986 by ex-Phibro trader Richard Elman, once had aspirations to rival commodities trader and miner Glencore and oil trading giant Vitol.

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But this week the firm narrowly avoided bankruptcy in a refinancing deal which sees Elman lose control as his creditors take a debt-for-equity swap and holders of $400 million of perpetual bonds are almost being wiped out with a $15 million payout, less than $0.04 on the dollar.

All the traders hit the financial rocks when the commodities markets collapsed earlier in the decade, but some moved swiftly to sell assets, pay down debt and slash costs – think Glencore, which today is thriving and cautiously back on the acquisition trail.

Noble, according to The Telegraph, made some bad hires and instead of cutting its cloth, it carried on with a debt-fueled acquisition spree that started at the turn of the decade but was increasingly facing cash flow issues.

As markets weakened, debt costs became crippling. The firm’s share price was hit last year by critical reports emanating from an obscure firm called Iceberg Research, rumored to be run by an ex-Noble employee, which accused the firm of using “aggressive” – though not illegal – “accounting” to “avoid large impairments and fabricate profit.”

The crux of Iceberg’s case, according to The Telegraph, was that Noble booked profits in advance that were higher than the actual cash it received. Noble’s cash flow declined and, despite launching a $500 million rights issue backed by Elman and China’s sovereign wealth fund, the China Investment Corporation, the shares continued to slide.

Today, they are down 96% from their level in February 2015.

It appears as if the firm will survive, but in a much-reduced form, focusing on trading thermal coal, liquid natural gas and dry bulk freight in Asia, largely retrenching to it roots as a supplier of coal from Indonesia to China, where Elman started the firm in 1987 in Hong Kong with just $100,000.

Elman’s story is not just a classic tale of rags to riches; it has similarities to the origins of many great trading houses.

Aged just 15, he started in a scrap yard in the U.K. and moved out to Hong Kong as the market began to open up in the 1960s. His first venture was sold to Phibro in 1972, yet he continued to work for them for over 10 years before starting Noble. According to The Telegraph, after listing in Singapore in 1997, a wave of acquisitions followed, notably the grains business of Swiss trader André & Cie in 2000.

Money was cheap and Noble went on to buy up warehouses, coal mines, ports in Argentina, and stakes in iron ore miners in Brazil and Australia. By 2010, it had a market cap of $10 billion (£7 billion) and a presence in 40 countries. Maybe Elman hung onto the reins too long, maybe he didn’t bring in enough depth of experience at board level to manage the transition to global player and challenge some of the decisions made. There may yet be a Hollywood interpretation of events in the years to come – it would make quite a story.

But vindictive as Iceberg Research’s campaign appears, they may well have been right in terms of reporting and underlying profitability. The resulting collapse in the share price only brought to light the lack of cash flow cover and poor profitability.

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Good governance makes strong companies, however tempting the idea of short cuts may at times seem.

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If you thought China’s environmental crackdown on polluting industries during this winter heating period was a one-off effort, think again.

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Liu Youbin, a spokesman at the Ministry of Environmental Protection, is quoted by Reuters as saying that Beijing intends to extend its policy over the 2018-2022 period.

“The new three-year plan will continue to make Beijing-Tianjin-Hebei its key focus but it will also focus on other major regions like the Yangtze river delta, the northeast and Chengdu-Chongqing,” he is quoted as saying.

China’s previous effort, covering 2013-2017, was a largely unmitigated disaster.

Concentrations of hazardous particles known as PM2.5 were supposed to be reduced by 25%, Reuters reports, but with near-record PM2.5 readings in January and February last year, it was clear more drastic action was required.

Northern China only managed to meet 2013-2017 air quality targets by the end of 2017, largely thanks to a campaign that forced polluting factories in 28 cities to reduce output over the winter, Reuters reports. The resulting clampdown on the worst offenders among steel mills, coke plants and aluminum smelters has had a profound impact on supply, demand and prices in those markets. So, news that Beijing intends to roll out the program to include the Yangtze and Pearl River deltas further south, in addition to regions in the northeast, means the story has much further to go.

Concentrations of PM2.5 have fallen by up to 70% to 36 micrograms per cubic meter, almost meeting the state standard of 35 micrograms. Readings in the Yangtze and Pearl River regions, which include Shanghai and Guangzhou, actually increased. As a result, readings for the whole of China only dropped by 20% for the month of January to an average of 65 micrograms, underlying the scale of the challenge ahead.

Still, where there is a centralized will there is a centralized way. You can be sure Beijing will prosecute this campaign with considerable vigor in 2018.

When the current heating period ends in late March, controls will be relaxed but the indications are it will not be business as usual. Although the low-hanging fruit of coal-fired domestic and small commercial premises will be the primary target, greater attention will also be given to larger enterprises and, indeed, whole industries.

China continues to need steel, aluminum, zinc and a range of other energy-intensive metals, so the most likely outcome is tighter regulations and investment in more advanced, and, hence, cleaner technology.

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That is admirable, of course, but it will also encourage a more rapid move up the value chain for producers looking to get payback on their new kit.

We have written before about the GFG Alliance and, in particular, within that Executive Chairman Sanjeev Gupta’s Liberty Group that has bought distressed steel and aluminum assets in the U.K. over the last 10 years. Last month, Gupta’s Liberty Group announced plans to add Europe’s largest aluminum smelter in Dunkerque, France, to its portfolio.

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Liberty already owns the Liberty British Aluminium smelter at Fort William in Scotland (formerly owned by Rio Tinto). But in what may prove to be another timely move, Liberty has announced plans to build a 2 million a year alloy wheelmaking production facility alongside the Fort Williams smelter, scheduled to begin production by 2020. We say “timely” because the U.K. is expected to exit the E.U. by March 30, 2019; although transition periods have been discussed, it is not clear what the tariff framework will be during any extension beyond that March date.

Source: The Society of Motor Manufacturers and Traders (SMMT)

The U.K. automotive industry is one of few success stories, exporting some 80% of its 1.67 million cars last year and nearly 55% of its 2.7 million engines. As the above graph from SMMT shows, output is down a little from last year due to a double whammy of uncertainty around the economy’s future due to Brexit and a general move away from diesel engines following the emissions scandal (and what that may mean in terms of changes in government policy).

GFG’s move is timely because the U.K. imports much of its alloy wheels at the moment; the imposition of tariffs will mean domestic suppliers will have a distinct advantage.

In GFG’s case, this will be enhanced by the location. With the smelter right next door, Liberty Group intends to ship liquid metal from the smelter directly into the casting works, giving the economics a distinct advantage over plants elsewhere that buy in primary metal ingot and remelt it.

The top 10 makers of alloy wheels are either global brands like Enkei and Ronal, or national champions like Germany’s Borbet or America’s Arconic and Superior, or China’s Foshan Nanhai Zhongnan Aluminum Wheel Co. Although the U.K. produces 1.67 million cars, its supply chain is highly integrated with continental Europe, a supply arrangement that is clearly at risk post-Brexit with no vision of what a post-Brexit landscape would look like — or what kind of post-Brexit landscape the British government even wants.

According to U.K. government websites, alloy wheels for automotive application represent the fifth-most attractive opportunity for domestic supply after components like engine castings, steering systems and engine forgings. Alloy wheels are valued as a £210 million per annum supply opportunity. GFG’s plant is planned to produce some 2 million wheels, or a fifth of all U.K. demand.

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Regardless of the tariff environment after Brexit, the new plant appears to make a solid financial case. However, if as expected the British government manages to make a complete hash of a “free trade deal” — that is, they don’t get one — the plant’s credentials look even more compelling.

Normally when supply is constrained prices will rise, but China’s steel market is presently at the mercy of several dynamics.

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On the one hand, Beijing is constraining polluting industries like steel and coke production. Those same policy decisions, however, are hitting industries that consume finished products, such as construction (at least in the industrial northeast, where environmental pollution action has been most active).

Arguably, steel prices would have fallen further as a result of the constraints put upon the construction industry if it were not for the the constraints put on steel production, which has restricted supply. What is difficult to gauge from official figures is quite how much impact restrictions due to environmental measures have caused and what, if any, impact of a relaxation of those restrictions will have.

Average Daily Steel Output Drops in December, Still Up 5.7% for 2017

According to Reuters, China’s average daily steel output fell by 1.9% in December to 2.16 million tons per day from 2.205 million the previous month. Even so, full year output in 2017 still rose 5.7% to 831.73 million tons.

In part, this is due to higher output earlier in the year boosting the annual number, but also because the National Bureau of Statistics has altered what it does and doesn’t include in its numbers. China closed an estimated 140 million tons of illegal induction furnace capacity in the first half of 2015, a sector that has not been included in production numbers because it is not approved.

The sector was significant though, and its loss during 2017 was a significant factor in the strength of rebar prices as conventional blast furnace producers ramped up rebar production and prices to take the place of lost output from these illegal induction furnace producers. Since then, Beijing has been encouraging state mills in the installation of modern electric arc furnaces (EAF), in large part because of their lower environmental impact. It is the growth of these EAF facilities that lifted production in the latter part of the year and contributed to a switch from pig iron to scrap as a raw material source.

Iron Ore Prices Show Volatility

Although China’s iron ore imports rose 5% in 2017, hitting a record of 1.075 billion tons, iron ore prices have show considerable volatility of late as speculators struggle to gauge what demand is going to be like once heating season restrictions are lifted.

Both iron ore and coking coal prices have been sliding in recent days, but the expectation is they will bounce back during the first quarter.

What happens after that remains to be seen.

With steel output restrictions lifted by late March, steel production will almost certainly increase, finished steel prices could weaken and steel mill margins could suffer. Q2 and beyond will depend on the strength of domestic demand, particularly from the construction sector.

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With new iron ore supply continuing to come onstream, it will be interesting to see if miners are able to maintain prices as demand picks up or if current concerns about port stocks prove right and an excess of inventory and supply results in prices falling further.

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News that Goldman Sachs is advising investors that Wall Street is set for a sharp correction should come as little surprise following five years of almost uninterrupted growth in equity markets.

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The investment bank’s prediction that a correction was a “high probability” is almost a no-brainer when you hear the comments of Peter Oppenheimer, chief global equity strategist at Goldman Sachs which were reported this week in The Times. The S&P 500, which tracks the share prices of America’s 500 largest public companies, and the MSCI World Index, which tracks about 1,650 companies across the world, are in their longest periods without a correction of more than 5%.

“This does not mean that the market must have a correction,” Oppenheimer said. “It just suggests that one is overdue.”

Goldman’s comments are echoed by Bank of America Merrill Lynch, saying Wall Street is very likely to suffer a short fall in the next few weeks.

Some might consider Goldman’s comments as prescient in view of this week’s selloff in government bonds equities on both sides of the Pacific, Others might wonder whether Goldman had already shorted the market, helping ensure its prediction became self-fulfilling. The selloff in equities was fronted by the international selloff in government bonds.

The Financial Times reports that the yield on 10-year U.S. Treasury hit 2.733% in Asian trading on Tuesday, after reaching 2.72%, the highest level since April 2014, the previous day. It has since pared its losses, settling just above 2.68%. After hitting record highs on Friday the S&P 500 and the Dow Jones industrial average both closed lower this week, along with Japan’s Topix and the Hong Kong Hang Seng. European stocks seemed less troubled but still close lower as profits were taken.

Interestingly, Goldman does not see the correction as the end of the bull story, saying global growth is running at about 5% — the strongest pace since 2010 — in a broad and synchronized economic recovery.

The bank sees any correction as an opportunity to buy, saying a correction of 5% this year which still only take global equity markets back to where they started 2018 and would be unlikely to cause much concern or damage. Typically, market corrections during long-running bull markets average some 13% over a four-month period, but take only four months to recover the lost ground. The depth of this selloff may be clearer from next week onwards with the current focus shifting towards the earnings season releases from the U.S. and Chinese market heavyweights in the tech sector.

Markets were also looking to Donald Trump’s State of the Union address this week as to whether it includes the long promised — but so far ineffectual — infrastructure spending that was such a significant part of equity market enthusiasm immediately following his inauguration last year.

Why would we worry about equity markets at MetalMiner, you may ask?

It’s simple: commodity prices have shown a strong correlation in recent years to equity markets, contrary to the position just after the financial crash when commodities and shares went in opposite directions. Maybe not surprisingly, oil has come off this week despite little change in supply and demand, and ignoring the growing threat of implosion in Venezuela.

No bull market runs forever and this has been going for some time. Many expect sharp rises in borrowing costs as central bank rate rises later this year or next to be the trigger for an end to the run.

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So, it’s possible Goldman have this right and all we will get is a correction. Let’s hope they are right.

We have long since stopped believing official China growth data. If that’s the case, what is the “real” growth rate in China and should we care that the numbers appear to be manipulated?

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Officially, China grew by 6.8% in the final quarter of 2017, taking annual growth to 6.9%. Yet, it is increasingly felt that the National Bureau of Statistics (NBS) numbers are massaged to iron out peaks and troughs from year to year and to support the authorities’ target growth numbers – to make the Party look like it is in total control.

In reality, The Telegraph suggests that 2016 official growth figure of 6.7% was probably overblown, with growth in reality being lower. Following an uptick in activity during 2017, this has resulted in the official figure for last year having to be reduced, as to report growth of more than 7% would have added to a disparity that builds up over time. Inflating poor years has to be balanced by underreporting good years, or eventually the statistics suggest the economy should be twice the size that it clearly is.

Independent assessments of 2017 growth are lower still. The Telegraph quotes Capital Economics, which believes growth to be nearer 6% for 2017, but their models agree that 2017 was better than 2016, saying they estimated GDP growth at 5.1% in 2016.

How this puts projections for 2018 is interesting, as most observers think there was a slowdown in the last three months of 2017, with official figures putting it at 1.6%, while independents, like Pantheon Macroeconomics, are putting it at just 1% for the same period (down sharply from an estimated 1.9% in the third quarter).

The reasons for a slowdown are not hard to see, as two factors are at interplay.

Drive Against Pollution

The first is Beijing’s drive to curb polluting activities, such as construction.

Output growth slowed in steel, cement and glass recently, as the government tried to rein in polluting industries in northern China. These restrictions will be eased at the end of the winter heating season and, as a result, activity is likely to pick up again in Q2.

Weakening Property Market

The property market in particular has weakened in the past six months, The Telegraph observes, noting average residential property prices rose by just 0.2% in December.

This raises a question, if construction activity and, therefore, the supply of new properties was constrained, logic would suggest prices would rise. The fact prices are easing may have more to do with the rising cost of borrowing in China following efforts by Beijing in early 2017 to limit the supply of money and dissuade growth in the shadow banking sector.

Interbank lending costs have risen as a result. If the Fed raises rates during 2018 as expected, global debt costs will rise regardless of currency. The knock-on effect may be that an increase in construction activity is rewarded with a fall in property prices later in the year.

As credit has become less readily available, the article notes, there has been a considerable slowdown in retail sales growth, falling to 9.4% in December from 10.2% in the year to November. A combination of a cooling property market, falling retail sales and an export market facing protectionist headwinds supports the hypothesis that growth in 2018 will be lower than last year.

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The Telegraph article concludes with Capital Economics’ prediction that growth this year could be just 4.5%. It will be interesting to see what quarterly numbers the NBS claims China is achieving as the year unfolds.

Coca Cola’s new lineup of Diet Coke flavors. Source: The Coca-Cola Company Image Library

In two weeks, Diet Coke is introducing four new flavors: Ginger Lime, Feisty Cherry, Zesty Blood Orange and Twisted Mango. They will come in a skinnier silver can, reminiscent of Red Bull’s popular caffeinated hit, and, it is hoped, will reinvigorate Coke’s fortunes by appealing to a younger, millennial buyer, CNN Money reports.

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The soft drinks market has been on the decline. According to the research group Cowen, diet soda sales fell 2% in the last three months of 2017.

The brand leaders, though, are falling faster.

Diet Coke sales fell by 4% and Diet Pepsi by 8%, while sales of the National Beverage Corp.’s LaCroix improved 43% in the sparkling and still flavored water category, as buyers switch not just to water but non-additive, more health-focused drinks. Diet Coke’s new offerings will be sold in slimmer tins, but the 12-ounce volume format remains the same – they will just rattle around irritatingly in your car cup-holder.

The move to slimmer cans is done for more profound reasons than just annoying me on long car journeys. The slimmer shape mimicks the younger image of successful brands like Red Bull — at least, that is Coke’s reasoning — but there may be a further advantage.

The slimmer cans give the impression of containing less fluid and research reported in the Washington Post suggests that may actually boost sales. David Just, a professor of behavioral economics at Cornell University, is quoted as saying their research performed over the years shows that people are incredibly responsive to labels. For example, participants, having been told that the food put in front of them was “double-size,” left 10 times as much food on their plates as those who were told their serving was “regular,” even though both groups were given the exact same amount of food.

The opposite, Just says, happens when servings are labelled as small. If products are marketed as minis, or are presented in a way that suggests they are somehow less, they can actually increase consumption.”

Much will depend, of course, on whether the new flavors find favor with consumers. Anecdotal evidence suggests they may not. Indeed it has to be said the firm’s previous attempts have not been a success, with new variances being withdrawn after just a couple of years.

It’s been a hard slog for reduced and sugar-free versions. Even with the tsunami of bad news about sugar, less than half, or 43%, of Coke sales are made up of Coca-Cola Zero Sugar, Diet Coke or Coca-Cola Life. As such, that raises the question as to how popular these new flavors will be, fancy cans or not.

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For the canmakers, the new, slimmer cans will require an investment in tooling to meet Coke’s volumes but technologically will present no issues, as plenty of products are sold in similarly shaped containers already.

Silicon Valley and the modern-day entrepreneurs it has spawned cannot be accused of lacking blue sky thinking.

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Some of their ideas appear whacky and subsequently disappear from the news almost as soon as they are proposed. Others, however, have gone on to become real success stories, challenging our lack of vision and belief.

Take Elon Musk, for example. While he had his supporters for Tesla, there were many more detractors in the early days. Those detractors said he would never get his niche electric car company to a scale able to challenge the incumbents.

Here we are just a few years later and Tesla is worth more than Ford (optimistically in our opinion, but still in the market’s eyes).

SpaceX was ridiculed even more as a rich man’s ego trip, but the firm has achieved more in its few short years – on a much smaller budget — than the lumbering giant that is NASA.

So before we write off the following, think on the above. Elon Musk’s 2013 paper on the future of the Hyperloop (a futuristic, high-speed train running in a vacuum tube) seemed so much hot air back then. It has since been quietly gathering support, and undergoing tests, such that now results suggest that while his original Los Angeles to San Francisco route may not happen anytime soon, other routes and applications could be viable.

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India is often touted as the next China — a similarly sized population is expected to offer vast potential, particularly coming from a low per capita usage of metals, energy and just about everything else.

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India just needs to be freed from bureaucracy and the shackles of its earlier obsession with socialism and it will boom, supporters have been saying for years.

Yet India’s growth has persistently fallen short of expectations, often to the dismay of Western firms investing billions in what they have hoped would be the next big thing.

It’s not that India isn’t growing. At 6.5%, it is almost certainly growing faster than China this year. Despite claims of “on target” 6.5% growth in China, a more realistic measure is probably 4.5%, according to Roger Bootle, chairman of Capital Economics, writing in the Telegraph.

Nevertheless, China has achieved an unprecedented rise in living standards, with perhaps the greatest achievement being the creation of a prosperous middle class numbering in the hundreds of millions.

It is this middle class that has allowed the switch from export-led to domestic consumption — without their combined demand auto sales, white goods and the construction sector (and the list goes on), it would be dead in the water.

India, by comparison, has a paltry middle class.

The top 1% of Indian adults, a rich enclave of just 8 million inhabitants making at least $20,000 a year, equates to roughly Hong Kong in terms of population and average income, The Economist says. The next 9% is akin to Central Europe, in the middle of the global wealth pack.

Even the top 1% would struggle on $20,000 per annum to afford $20,000 for a small BMW or over $1,000 for an iPhone.

The next 40% of India’s population neatly mirrors its combined South Asian poor neighbors, Bangladesh and Pakistan, hardly in the market at all for Western-priced brands. The remaining half-billion or so are on a par with the most destitute bits of Africa, explains a report in The Economist.

So why has India apparently failed where China succeeded?

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Three-month zinc on the London Metal Exchange was up 1.3% at $3,426 a metric ton in official midday trading on Monday, having earlier touched a peak of $3,440 a ton — its highest since August 2007, Reuters reports.

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Like all base metals, zinc was been driven higher by a weak dollar — but that is far from the only driver pushing it to outperform all other base metals so far this year.

Inventories Continue to Fall

LME zinc inventories have fallen for 13 consecutive weeks to their lowest since October 2008. There was a further drop of 10,000 tons to 116,675 tons just late last week.

Meanwhile, Shanghai stocks have declined more than half over the past year, Reuters says, as supply constraints persist. As a result, Treatment and Refining (TC/RC) charges for concentrates and refined metal have fallen as refiners fight for cargoes to process.

A Market in Deficit

The reason physical metal is in short supply is no secret.

The market is in deficit, by 504,000 tons during January to October 2017, compared with a deficit of 202,000 tons recorded in the whole of the previous year, the World Bureau of Metal Statistics reports. Buyers had hoped 500,000 tons of capacity at Glencore’s Lady Loretta mine in Australia would be back onstream by now, having been closed due to low prices in 2015. Although the company promised to restart production in the first half of 2018, so far there have been no deliveries.

Higher prices have encouraged tailings at the previously closed Century mine in Australia to be opened up for processing; but again, significant deliveries are still pending.

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Zinc Could Rise Even More

Meanwhile, speculative positions have grown, betting on further price rises.

That is not without some basis, as robust demand has been constrained by tight supply and with Chinese smelters hit by Beijing’s environmental campaign to close energy-intensive manufacturing activities during the winter heating season. Reuters quotes ING analyst Warren Patterson, who said if economic and manufacturing data remain strong, there is potential for further upside.