Tag Archives: International

CO2 collapses 41% MTD

31 March, 2014Energy, Global Economy, On the cover, Sin categoríaCommodities, Energy, global economy, InternationalDaniel Lacalle

CO2 continues to collapse (-41.8% MTD, -16% YTD) after the EU intervention has failed to address the massive oversupply of free credits and demand continues to fall. CO2 trades at €4.5/mt (31st March 2014). It traded as high as €35/mt in 2008. -87.7% from the peak, or a massive -30.7% per annum for a “politically designed” commodity created to desincentivize CO2 emissions.

Same story over and over: Oversupply meets falling demand:

– Oversupply: The market reserve mechanism was introduced by the EU because even once CO2 backloading is applied, the oversupply of CO2 in the EU ETS will trough at around 1.5bn credits. The reserve mechanism will be used when the total number of allowances in circulation, defined for a single year as all the allowances and international credits issued from 2008 to that year, less the total emissions produced and any already in the reserve (basically the oversupply of the system) is above a certain level. This means that oversupply of emission rights in any given year will continue to be around 2bn tons of CO2 to 2020 in the most optimistic scenario. The supply of CO2 (EUAs) has exceeded demand by at least 20m Mtons almost every month since 2010.

– Demand down: In the EU, 2013 verified emissions for the EU-ETS will be 3.8% lower yoy, and will reach 1.79bn tCO2, while ETS demand for 2014 is expected to fall another 3%.

According to SocGen, CO2 emissions for the largest four sectors in the EU-ETS comprise nearly 95% of all emissions, historically. Combustion installations are by far the largest contributor, emitting over 70% of all CO2 in Europe. Verified emissions for combustion installations in 2012 were 11% lower than their 2007 peak, mirroring similar decreases in electricity consumption across Europe. Emissions from energy-intensive industries, like mineral oil refineries, pig iron/steel, and cement clinker/lime production have essentially stagnated since 2009, after a material drop coinciding with the beginning of the recession.

The European Union is 30% of the emissions of the world, but (hold on) 100% of the cost as no other country has adhered to emission trading schemes. Therefore, a slowdown in industrial production and a debt crisis that could delay the extremely aggressive and optimistic plans for a low carbon economy announced for 2030, added to the slow but sure slowdown in power demand is proving that a system that was artificially created is causing the demise of a government-forced scheme that ultimately was only a tax.

CO2 (as I mentioned in 2009) is a “fake commodity” artificially invented, where demand and supply are imposed by political entities… and it still does not work. Neither the Copenhagen, or Cancun summits, or the efforts of several investment banks and environmentalists have helped to raise the price. Interventionists were rubbing their hands at the prospect of increasing the price of CO2 through more than questionable environmental policies, and now they need to find inflation through imposition.

Unless we see a much more drastic approach from the EU to address the oversupply of EUAs the picture is not positive. But at the same time, a drastic approach attacks the economic recovery and adds a burden to industries all over Europe, so I would not count on it. According to Citi it would require a 14% increase in power and industrial demand to start to address the oversupply of EUAs.

In summary, lower industrial demand is driving emissions lower, and a miscalculated free rights scheme continues to show a massive oversupply.

See more at: https://www.dlacalle.com/why-co2-collapsed-20-in-two-days/

Further read: https://www.dlacalle.com/co2-collapses-to-all-time-low/

Conference “Is Spain on the Road to Recovery?” London School of Economics 19/3/2014

27 March, 2014Conferences, Global Economy, Interviews, Media, On the coverEntrevistas, International, Macro, SpainDaniel Lacalle

Conference with Luis Garicano, Emilio Saracho and Pablo Zalba moderated by Ferdinando Giugliano at the London School Of Economics on 19th de March 2014

Conferencia con Luis Garicano, Emilio Saracho y Pablo Zalba moderada por Ferdinando Giugliano en la London School Of Economics el 19 de marzo de 2014

Photos:

https://www.facebook.com/media/set/?set=a.650354208367712.1073741825.111595245576947&type=1&l=79ce02a329

Podcast:

http://youtu.be/QBx1VyaiGec

Why is Copper collapsing?

25 March, 2014Global Economy, On the cover, Sin categoríaCommodities, Copper, International, MacroDaniel Lacalle

Copper has collapsed -12% so far this year and is trading below 2011 lows. Copper is a risk indicator of the weakening Chinese economy and the slowdown in global industrial production.

Reasons:

– Much of the low-quality loans in China use copper as collateral, up to 30% according to HSBC, as it is an indicator of industrial activity and closely linked to Chinese growth. When the market begins to question the debt repayment capacity of many Chinese companies in difficulties, margin calls are triggered and copper falls with it.

– It’s the most common commodity linked to industrial production. Copper price is a good indicator of the global economy as fluctuations in price are determined by industrial demand. Given that Chinese demand represents approximately 39% of global copper demand, the slowdown of its economy has a big impact on the price.

It’s a double impact: Financial and demand-led. What was supposed to be a good hedge is actually a double risk on the economic slowdown.

Lower demand, supply rises

The estimated surplus of refined copper was revised up from 327 thousand tons to 369 thousand tons for 2014 and is forecast to exceed 400 thousand tons in 2015.

Chile, China, Brazil, Peru and Mongolia seek to increase production in 2014 and 2015. Global production is expected to grow by 5.2% and 5.5% in 2014 and 2015.

In 2011, Chile accounted for 34% of the world’s copper production, approximately 19% of the revenues for the country. USA is the fourth largest copper producer in the world, after Chile, Peru and China, and Australia is fifth. All these countries aim to increase production and produce more. When prices fall producers seek to increase production to maintain revenues, a typical -and misguided- attitude of pro cyclical commodity producers.

China accounts for 39% of copper demand, followed by Europe 17%, other Asia 15%, U.S. 9%, Japan 5%. The rest are minor consumers.

A moderation in growth in demand for refined copper in China, from +8.5% to +6.5% for 2014 and 2015, along with the lower European demand, means that overcapacity increases by nearly 81,000 tons annually. China has seen its stockpiles of copper grow by 4.6% to 207,320 tonnes. It is estimated that the total copper stored in China exceeds 725,000 tons.

Demand down, supply up and a financial hedge gone wrong… Domino effect.

Private Equity and Cheap Money

24 March, 2014Energy, Global Economy, On the cover, Sin categoríaBond Bubble, global economy, International, MacroDaniel Lacalle

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 .