Category Archives: Energy

Energy

Iron Ore… More Oversupply… More China worries

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Iron Ore correction

 

Same as with copper. China slowdown means trouble for iron ore. More supply and less demand.

China is the world’s biggest buyer of iron ore, accounting for 63% of global imports last year. China will import a total of 872 million tons in 2014, and 916 million tons in 2015 according to official Chinese estimates. However, this figure is likely to be revised down. The country’s crude-steel production may total 802 million tons this year, from 803 million tons estimated in December, and increase to 819 million tons in 2015. This improvement doesn’t reduce the oversupply. Macquarie’s China steel survey also highlights disappointing demand indicators after Chinese New Year.

UBS points out a downside risk to 3% China’s steel growth outlook. Added to this the China credit concerns and the fact that Chinese port inventories are up 57% year-on-year adds to a concerning outlook for demand. As I wrote here months ago… Careful with China.

Moving to the supply side, the fact that producers are happy to increase output even if prices fall to $70 (breakeven) means that large iron ore producers like Rio Tinto Group and BHP Billiton Ltd will not take action to reduce oversupply. According to Macquarie BHP & Rio continue to invest pro-cyclically “whereas we believe it should be the dividend that flexes to reflect business conditions while keeping capex steady through the cycle”. What’s more, recent acquisitions are a reminder that both have been poor at picking the cycle historically.

New iron ore supply from Australia may total 92 million tons this year, pressuring prices in the second half, according to Standard Chartered in a Bloomberg news report.

Standard Chartered bank predicts a global surplus of 136 million tons in 2014, increasing to 170 million tons in 2015, from a 77 million ton deficit last year.

I see the same pattern as with crude, coal and copper. Excess supply brought to the system to “accommodate” the “high growth” in Chinese demand is meeting the reality of overly optimistic expectations of Chinese industrial output growth.

When producers overestimate demand from the largest customer by far… Things get nasty.

Remember what I said on copper… domino effect. Good for importers, though :).

Private Equity and Cheap Money

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PRIVATE EQUITY

 

22/3/2014 El confidencial

“We are in the middle of an epic credit bubble…the likes of which I haven’t seen in my career” Joseph Baratta (2013)

Larry Summers said a few months ago that Western economies were“doomed to go from one bubble to the next” . However, bubbles are not prevented, they are stimulated. And most economists spend more time justifying them as new paradigms than warning about them. A few months ago I commented in El País that “I do not see an incipient credit bubble, I think that it is already happening. A different issue is what it takes to explode it, even if an army of official economists deny it , as they did with housing. ” We know it’s there, but not when it will be punctured.

The U.S. Federal Reserve announced this week the withdrawal of monetary stimulus in 2015 , after almost two trillion dollars spent and 11 million people taken out of the labor market and not counted as unemployed , as I explained here.

What is the problem? Monetary policy has not benefited the ordinary citizen , only financial market participants. But the risks are paid by the citizens. Easy money has inflated financial assets, but the consequence of reducing unnecessary expansionary policies always gets paid by the people with more financial repression.

The middle class lost in the crisis, had no access to the easy money of the Fed party and will pay the hangover.

With the announcement of the end of the sugar rush fix of the economy,  we begin to see as well the withdrawal of the money that went to emerging markets and high-risk assets . We are already seeing the impact on emerging markets, the “sudden stop” that I commented here.

Another symptom of the bubble of easy money is manifesting in the rapid sale of private equity stakes and the historical highs in exits and IPOs. Large investors who put tens of billions to work with the heat of low rates and monetary stimulus from the Federal Reserve are now retreating.

Buy well and sell better. That’s the goal of any investor. Notice that I have not used the words expensive and cheap, wrongly used in the investor world, because those are concepts that are subjective and depend on the mood of market participants. Now we live in a period of euphoria and anything looks cheap. Well, when I started working in the City a colleague of mine told me “do not look at who is buying but who is selling.” And now is when private equity and venture capital funds are selling more and better.

According to Brean Capital , in the last six months, 75% of companies taken public in the United States trade below the IPO price, and 30% of them have been put on the market by private equity firms selling their stakes . The number of  M & A (mergers and acquisitions) deals has reached a record so far in 2014. More than 4,880 operations, a total of 552.4 billion US dollars , back at the record levels of 2007, according to Dealogic .

Exits of private equity, selling to another company or through IPO, reached $30.400 billion so far in 2014, more than double the figure in the same period in 2013 and close to the maximum of the same months in 2007 ($31.4 billion). Private equity takes advantage of market euphoria to reduce exposure.

Private equity firms have grown exponentially in the years of the money printing party and, admittedly, have played a positive role by investing in new businesses, start-ups , development and infrastructure. Thus, these firms have generated average annual returns of 21% (IRR) and managed to multiply the money invested by completed project by 1.6 times since 2008 … with an average debt to equity of 29 -33%. In 2013, according to The Wall Street Journal , the large private equity executives have pocketed $2.6 billion in bonuses.

These have been golden years for Wall Street. But in that same period we have seen productive investments fall to 1998 levels, as we mentioned in “The US Growth Mirage” . The Federal Reserve has encouraged speculative transactions while real investment is penalized, as CEOs like Rex Tillerson or Steve Wynn warned.

Assets under management of private equity and venture capital firms increased by 13% annually over the past thirteen years. And have soared 60% since the implementation of expansionary monetary policies. It is no coincidence. Bernanke and Obama have been a blessing to Wall Street.

Many venture capital firms have given good returns and have proven to overcome the image of vultures that make companies borrow and then destroy them.The sector has created positive net employment since 2008. But its role is not to increase productive investment. They are not entrepreneurs, they are asset managers.

In an environment of moderate global growth, with Chinese slowdown, problems in some emerging economies and without the gasoline of an aggressive Federal Reserve, the possibility of generating the returns described above is much lower , and that’s where the best managers can create value in periods of less euphoria.

What are the first consequences?

  • The pursuit of growth for growth stops . Over 70% of the funds raised by venture capital has gone to emerging countries. It is likely that, before a rise in interest rates, capital prefers to move to safer but mature economies such as Europe and the United States.
  • Liquidity is more important than high returns in the long-term. Given a scenario where the extremely generous valuations in which the funds have been able to sell calms down, moderation  prevails. That’s where it’s more complicated for investors to accept periods of five years without being able to withdraw their money.
  • Many of the investments made ​​under the premise of an environment of eternally expanding global money supply and low interest rates are subject to capital losses. Some poorly managed may fall, and that is very healthy.

Expansive bubbles and easy credit always explode. Always .

A moderate investment environment will certainly have a further impact on countries accustomed to extreme liquidity. But it is essential to curb excessive credit fueled by expansionary policies, bring back investor sanity before this bubble is impossible to contain and brings unpredictable consequences. Because crises, either through inflation, devaluation or financial repression, always end up being paid by ordinary citizens .

Commodities … Still In Nowhere Land

Energy, Global Economy, On the cover, Sin categoría

Brent down c2% MTD at $106.94, WTI down 3.7% MTD at $99.34/bbl. Brent-WTI spread rises 28% this month to $7.6/bbl. Market is not reducing exposure to oil despite sanctions between Russia and US having no discernible effect on supply. Russian exports to OECD Europe fell to about 3 mbpd in 2013 as more Russian crudes flow to Asian destinations. However, the overall volumes still accounted for approximately 36% of total net crude oil imports into OECD Europe. Russia is also a key oil product exporter to Europe, especially of gasoil and fuel oil. According to the International Energy Agency (IEA), of total net gasoil imports of about 620 kbpd to OECD Europe in 2013, around 69% on a net basis came from Russia.

According to Oil Movements OPEC needs to cut supply by 1mmbd to avoid a market oversupply.

DOE saw crude stocks rise by a sharp 5.8mb (consensus +2.75mb) to 375.9mb. Production continued rising to average above 8.2m b/d for the first time in decades. Crude stocks in the US remain in the top half of their 5-year range. Weekly demand declined 0.4mb/d to 8.5mb/d while imports moved up to 0.4 mb/d.

Coal moves up 30bps MTD at $81.60/mt. The Merrill commodities team believes the coal supply overhang will persist in 2014 and reduce forecasts for Newcastle coal to $74/mt as an average for 2014, down from $82/mt previously. They also expect front prices in Europe (API2) to hit $70/mt at some point during 2Q. This is consistent with a cautious view on Central European power prices.  South Africa, Colombia, and Australia output set to grow while Chinese, European demand will likely remain weak.

CO2 falls 14% MTD €6.14/mt as ETS demand still sliding by 5mt.

US gas is down 4.1% MTD at $4.43/mmbtu. Weekly natural gas storage withdrawal of 48 Bcf was bearish, less than the consensus median withdrawal estimate of 59 Bcf.  Total working storage is now at 953 Bcf, 932 Bcf below last year’s 1,885 Bcf and 876 Bcf below the 5-year average of 1,829 Bcf.

UK gas is down 14bps MTD at 56.45p/therm as the Ukraine dispute continues to have no real impact on price.

Following the completion of the 55 Bcm/year Nord Stream pipeline in 2012, a lower portion of Russian gas
shipments to Europe transits through Ukraine. The current mild winter weather across Europe has allowed stocks at gas storage facilities to remain higher than historical averages. According to Platts, UK gas storage is 55% full, compared with 21% at the same time last year, and storage in Germany is 60% full, compared with 41% at the same time last year. In Italy, storage is 51% full, versus 48% full last year

Power prices continue to fall in Germany (-1.8% MTD) at €35.40/mwh.  Profits for German mid-age coal-power units fell 2.8% last month vs. January, prompting EnBW to announce plans to decommission 250 megawatts of capacity at hard-coal plant in Heilbronn.

Nordpool is down 50bps MTD at €30.75/mwh driven by poor demand and higher hydro levels.

At the end of February, hydropower reserves reached their highest level in Nordpool countries since 2010, Spain since at least 2007 and in Portugal since 2011. This has contributed to a decline in power prices, which may continue later in the year, as the hydropower surplus is consumed according to Bloomberg.

Copper at $293.85 (-7.8% MTD) while Baltic Dry rises 28.8% this month to 1621… Signalling the China slowdown (copper) amidst a small improvement in global trade (BDI).

Precious Metals

According to Deutsche Bank, the mid-cycle correction in the gold price since the end of December is at risk of unravelling heading into the second quarter, likely triggered by an improvement in real economy data in the US, a pronounced rise in US real yields and a strengthening in the US dollar.

Industrial Metals

Near term headwinds could persist due to weak macro data from China and a lack of meaningful recovery in industrial activity, but market sentiment is slowly shifting on expectation that China’s government could loosen funding restrictions for property developers and speed up construction projects to support economic growth

Commodities … Weakness despite Ukraine

Energy, Global Economy, On the cover, Sin categoría
Brent -0.6% MTD, WTI -1.1%. Brent-WTI spread +8.2% MTD. In the US, DOE data showed crude built 1.43 MMBbls vs. expectations for a 1.08 MMBbl build. Cushing crude inventories were down 2.67 MMBbls on the week and now stand at 32.1 MMBbls vs. approximate capacity of 66 MMBbls. Gasoline drew 1.60 MMBbls vs. expectations for a 0.88 MMBbl draw and distillates built 1.41 MMBbls vs. expectations for a 1.03 MMBbl draw. All products built 0.03 MMBbls. Refinery utilization was down 0.6% vs. expectations for a 0.3% decrease. Refinery utilization stands at 87.4% vs. a 5-year average of 82.4%. The 4-week average gasoline demand was down 0.9% YoY, and 4-week average distillate demand was up 1.0% YoY.
Japanese growth was revised down 30% to 0.7% in 4Q 2013. Aramco reduced Arab Light premium to Asia 20 cts/bbl, to $1.55 over average of Oman/Dubai grades; also cut Extra Light 20 cents, to $3.50/bbl; both had been expected to rise 15 cts. Shows how well supplied the market is. China’s overseas shipments declined by 18.1 percent in February from a year earlier, the biggest drop since August 2009, the General Administration of Customs reported on March 8. A median 7.5 percent increase was projected in a Bloomberg News survey of 45 economists.
Escalation of the conflict in Libya, as the country’s PM ordered an attack on a North Korean tanker which reportedly loaded $36m of crude from the rebel-controlled Es Sider terminal, if the tanker leaves the port. The rebels said any attack on the tanker would be interpreted as a declaration of war. Continue reading Commodities … Weakness despite Ukraine →