Archive for Due diligence review

Commodity Collapse — might last a lot longer than many think

From Alaska to Mongolia, and South Africa to Brazil, old strategic plans are being trashed.

“It would take a brave soul to wade in with both feet into commodities,” says Brian Barish, who helps oversee about $12.5 billion at Denver-based Cambiar Investors LLC. “There is far more capacity coming on (line) than there is demand physically.” — “the only way that you fix the problem is to basically shut capacity in, and you do that by starving commodity producers for capital.”

// Projects on the drawing boards for a decade are now being abandoned. From mines to ports to railways. Investors this year are clearly dumping future commodities based holdings.

The Bloomberg Commodity Index, a measure of returns for 22 components, is poised for a fifth straight annual loss

This news WAKE UP CALL harks back 24 years… This index slide is the longest slide since the data begin in 1991.

It’s a reversal from the previous decade, when booming growth across Asia fueled a synchronized surge in prices, dubbed the commodity super cycle. Now, that output is coming to the market just as global growth is slowing.

Investors need to brace for a “long winter,” with the commodities bear market predicted to last for many years and oil dropping to as low as $35 a barrel, said Ruchir Sharma, who helps manage $25 billion as the head of emerging markets at Morgan Stanley Investment Management in New York.

Goldman Sachs has an even dimmer outlook.

AMONG THE CONSEQUENTIAL STRATEGIC CHANGES… … are these two. 1) Chesapeake Energy Corp. has cut its workforce by 15 percent. 2) Caterpillar Inc. may shed 10,000 jobs as demand slows for mining and energy equipment. 3) The big railroad freight companies in the lower 48 are again storing locomotive power.

For more, see: www.bloomberg.com/news/articles/2015-10-05/commodity-collapse-has-more-to-go-as-goldman-to-citi-see-losses

Another Bridge Too Far Rail Scheme? // Europe into N. Am. Via Russia!

siberiantimes.com/business/investment/news/n0160-plans-for-new-transport-route-unveiled-to-link-pacific-with-atlantic/

We may have missed this probable last great rail plan proposed earlier this year.  But it is still on the Internet for all to read.

// Plans for new transport route unveiled to link Pacific with Atlantic

By The Siberian Times reporter23 March 2015

“New cities and industries could be created from construction of high-speed railway and motorway routes spanning whole of country”reads the story line.

At a meeting of the Russian Academy of Science, the head of the Russian Railways Vladimir Yakunin presented the idea for the Trans-Eurasian belt Development (TEPR).  That was back in th Spring.

Politicians fostered the concept  “as a powerful and versatile transportation corridor that would join up to other networks and reach from the Atlantic to the Pacific, via the heart of Siberia and the Far East.”

Me?  I think it is a really bad idea.

The suggested plan has zero published economic feasibility supporting it. Just a lot of political leaders and academics. No shippers are clamoring to use the route? Why pay for the suggested long land route rail services where super sized container ships are far cheaper?

It reads like “Just another great plan, wrapped In golden chain” so to speak.

And it’s lead RZD rail supporter is no longer in that promoting job as the summer ends.

The admitted rough capital cost estimate from supporters is in the TRILLIONS of dollars.  Yet back in the spring, without documentation, Mr Yakunin of RZD insisted to reporters that the economic returns would outweigh these investments.

Viktor Sadovnichy, rector of the Moscow State University, said the network would help the Far East and Siberia feel more in touch with the rest of the world.

Or is the entire scheme simply economic nonsense?

So far, no one is advancing the cash to build it. It is just another wish list railroad idea. Investors should beware.

Amtrak’s blue ribbon Chicago report // Incredable $800 billion annual harm estimate. // What is a logical economic estimate?

Sometimes news headlines are so absurd. Is this a misprint or a economist’s big error?

A Blue Ribbon Panel convened by Amtrak is recommending co-located train dispatchers, improved operating practices, and capital improvement projects to help relieve rail gridlock in and around Chicago.

www.railwayage.com/index.php/passenger/intercity/blue-ribbon-panel-how-to-unclog-chicago.html?channel=492&Itemid=502   This is one reporting source.

The claim according to multiple sources is that improvements are needed to prevent an estimated $800 billion in nationwide economic impacts resulting from the annual congestion.

BILLIONS?     8 HUNDRED BILLIONS?

That has to be a misprint. Or a colossal economic miscalculation.

THINK ABOUT IT

$800 billion is the capital cost to build about 130 or more Panama Canals

That is about nine to nine times the market value of the Union Pacific Rail company.

Or about 40 times the annual operating expenses of the very large BNSF railroad.

Is no one looking at these relatively easy economic comparisons?

There may indeed be economic net benefits to support more Chicago CREATE joint public/private economic benefits. But this inflationary statement is not the way to make “the pitch.” ==============================

The panel that oversaw the study was chosen by Amtrak President and CEO Joe Boardman. It reported its findings with two university and policy groups on Oct. 1, 2015 in Chicago.

The panel released a study it commissioned from Frost & Sullivan and MSY Analytics which shows that the massive delays to passenger and freight rail traffic in the Chicago Gateway create an economic vulnerability of up to $799 billion every year…

As an economist, I find that number unjustifiable. And I cannot find the published documentation to support it.

If you assumed a half billion to maybe one billion annual economic harm, that might be believable.

What do you think?

Stunning graphs on resource capital project spending is a “wake up call” for planners

From mines around the world to the dependent rail and port projects, the changing global economics commodity cycle suggests a downer “Bear” market for projects that add to global capacity and output.

This down cycle could last from a short 2 to 3 years OR AS LONG AS 7 or more years. Strategic Planners to to rethink their now outdated assumptions from supporting logistics projects in diverse places like Mozambique, Botswana, Mongolia, Brazil, and even in the Canadian/Alaska Yukon region.

What ever capital plans for building the supporting ports and railways they had developed by big engineering companies — the underlying due diligence economic assumptions are now likely “under water” so to speak.

Billions and billions of proposed dollars in drawing board completed project engineering can no longer pass an economic feasibility test for recovery of he rail project capital P&I.

Instead these industry planners should brace themselves for at least another two years of shrinking budgets and outlays. The earliest signs of a “subdued” resource recovery might not be until early in 2018 say some experts.

But even this prediction might be too bullish. Why? Because metal prices have already fallen 12% further than they did during the bear market in the 1990s. In that bear market, capex only recovered to its pre-crash (1997) level after seven years (2004),” according to Mark Fellows.

Mark Fellows, director of consulting for a mining research firm reports that “while sustaining capital expenditure is down 13% since the peak in 2012, capital expenditure on new developments has been even harder hit.” “Spending on brownfield expansions is down 25% while greenfield project expenditure has plummeted by nearly one third” on a global basis.

Mr Fellows concludes this by comparing the current 2013-2015 downturn to the previous bear market in mining which ran from 1997 to 2002. He therefore argues that the current witnesses global capex cutbacks are far from over.

The report is published by SNL Metals and Mining. DOLLARS OF PROJECT EXPANSION PLANS AT RISK

The report finds that total capital spending across all mining companies has declined by around $70 billion since the 2012 peak to just over $150 billion forecast for this year. As one business case example, the project investment at BHP Billiton this year will be $10 billion below its 2013 peak. The world’s number one miner only has four projects in the works, two of which are almost complete, compared to 18 mine and infrastructure developments just two years ago.

In a Mining.com press story by Frik Els on 21 September 2015 titled: “This is the scariest mining chart you’ll see today”, the investor alert numbers are brought out visually.

This is another piece of economic trend evidence in my blog’s strategic theme of changing times for traffic that feeds the dreams of massive new rail freight projects.

“a Bridge Too Far” analysis?

Only the strongest as low cost per ton-kilometer cost new rail projects might be competitive.

Too many rail projects on the drawing boards are simply under designed as to the necessary competitive productivity to prosper as investment grade scenarios. Trains would be too small because they often lack big train technology design features of the most successful resource rail carriers. Axle loads too small. Train lengths too short. Clearances too shallow. Net to tare wagon rates are too low

Too many are now ill advised rail schemes. “Schemes” in North American business language generally means a buyer beware concept plan”.

In Africa alone, I estimate that as many as two thirds of “announced” rail line freight projects may be too risky to build as currently designed around old market demand and old post World War-2 rail engineering standards. That could mean as much as $25 to $34 billion of “schemes” seriously require a second due diligence look just in Africa.

Africa is not alone. The billions in proposed rail engineering in the Canadian Yukon/Alaska region also need serious market demand re-examination. If not by the project sponsors, then certainly by the investors they will approach. Brazil, Mongolia, Swaziland, Senegal — all of their rail design and expected market traffic assumptions need serious review for their current planning.

For more, log onto Mining.com

Chart Sources: SNL Metals & Mining

Greenfield cap ex spending chart

Bear market recovery projection for commodities chart

Caterpillar projections to investors. // Looks gloomy market wise

Caterpillar is reorganizing only four years after making its biggest acquisition ever, spending $7.5 billion on Bucyrus International Inc.

The company faces what it says is the first four-year sales decline in its 90-year history.

In a Bloomberg report: Caterpillar `Bites the Bullet’ as Oil Rout Compounds Mining Pain the metrics are presented.

The last time Caterpillar Inc. cut thousands of jobs, a mining slowdown was to blame. Now the main culprit is oil, as slumping prices batter drillers.

The investigative reporter Sonja Elmquist wrote on Sep 24, 2015 that the world’s most valuable machinery producer by market cap announced a plan to cut as many as 10,000 jobs, or 9 percent of its workforce, through 2018 as the effects of crude’s collapse ripple through the industry.

The measures — including the second reduction in sales guidance in two months — represent the biggest round of cuts since 2013, when the company reduced its headcount by 13,000 as sales to metal producers declined along with prices.

According to Bloomberg Intelligence. “They’ve finally opened up the manila envelope that says ‘doomsday’ on it and they’re executing the plan that they hoped they would never have to execute,” Sameer Rathod, a San Francisco-based analyst at Macquarie, said by telephone.

No one is sure yet as to the shape of the long term market recovery timeline.

The company will cut as many as 5,000 workers this year and another 5,000 by 2018. It reduced a 2015 revenue projection by $1 billion and said sales are expected to drop 5 percent next (2016)…

SHARES WAY DOWN    —

Caterpillar at the time of the announcement fell about 6.3 percent to a five-year low of $65.80.  The stock has lost 28 percent this year, the biggest annual drop since 2008.

As a comparison, the MSCI Emerging Markets Index has fallen 18 percent in 2015 while the Dow is down 9.8 percent.

The company’s consolidation plan may affect more than 20 plants…

To read the entire article, go to http://bloom.bg/1KDMgQr

Update on Ethiopia’s Light Rail System as it starts operating // Sept 2015

Multiple reports confirm the start of light rail service in the capital of Ethiopia on 20 September 2015.  The start of service on Line #1 is actually relatively close to the promised service date.  Funding approved in 2011 assumed a two year construction timeline.

The 16.9 km north-south Line 1 line links Minelik Square with Kality and has 23 stations. A 17.4 km east-west line from Ayat to Tor Hailoch is also due to open soon. The two routes share a 2.7 km section between Lideta and Stadium.

This light rail service which includes elevated sections and tunnels, runs from Addis Ababa’s main industrial area on its southern fringe, through the trading district of Merkato to the historic center of Piazza.

I had a chance to review the affidavit Addis Ababa light rail construction process in the capital back in the summer of 2013.  Project construction and the logistics handling of imported rail materials was well organized by the Chinese company.  The track ballast section and some early rail laying were substantial as to the engineering design and initial construction delivery of product in the field.

One of the tunnel projects was a huge physical undertaking.  Well done when I inspected it.  No question that the Chinese companies can build rail projects very well according to plans.

PLANTING THE C”AN DO” FLAG IN FRONT OF AFRICAN RAIL PLANNERS

The east-west light rail line skirts the African Union’s headquarters.  This location marks a great advertising opportunity of the Chinese capabilities with this line placement in front of the African wide headquarters.

Both light rail lines are built by China Railway Engineering Corporation (CREC).

CNR Changchun (now part of CRRC Corporation) has supplied a fleet of 41 low-floor vehicles, which have a maximum speed of 70km/h.

DEAL FINANCING TERMS

China is financing 85% of the $US 475 million project. It is a loan. Not a grant.

The government agreed to borrow the funds in June 2011 from the Export-Import Bank of China.  The to be paid back rate was at the 6-month Libor interest rate plus 2.6 percent and a grace period of three years.  This from Ethiopian Finance Ministry data.

State-owned contractor China Railway Engineering Corp. was the recipient of the export financing.

The financing of the remaining 15% is arranged from other sources by the Ethiopian government.

ON-GOING MAINTENANCE

The 39-station network will be maintained by CREC and Shenzhen Metro Group under a $US 116m five-year contract.

The Ethiopian client for the continuing rail service is the Ethiopian Railway Corporation (ERC).  The ERC rail company is a government corporation with a very small staff.

TRAIN OPERATIONS

The first three to five years of light rail train operation will also be by the Chinese and not the ERC.

At one point back in 2013 the Ethiopians sent out a global request for a  consultant team to build up the Ethiopian internal organization into becoming a world class operating management team.  Then they could take on train operations management themselves.  But that internal skill building process so far appears to not have happened.

Instead of internal managers inside the  Ethiopian Railways Corp, the light rail service will be run day to day by Shenzhen Metro Group.  For at least five years.

LIGHT RAIL TRAFFIC FORECAST

The light rail total system may eventually carry 60,000 passengers an hour, according to project manager Behailu Sintayehu.

Passenger FARES will be subsidized

The maximum one-way fare on the network is about $US 0.29 to $0.30 (cents).

The light rail line operating costs is projected to be about 1.5 billion birr a year to run. Fare box revenues will not cover all of that annual operating cost.

“The government is subsidizing this transportation system. This is not for commercial purpose, it’s for the public” said a local official source to reporters.

Sources also reported that the subsidy to allow such low passenger fares will in the long term have to come out of “expected” freight operating profits from the not yet completed new standard gauge international railroad line.

This cross subsidy practice might be a logical strategy if trucking companies subsidized the passenger buses on highways But they do not.  In the long term of daily rail to truck competition, this creates an advantage for truckers.  It is incredible how state planners historically are blind to this integrated transportation fact of competition economics.  The Ethiopians are no exception to such economic flaws in policy thinking. As the become better trained in economics, this may change their thinking.

==========================

MORE INTEL about this light rail system

THE LONG DISTANCE LINE

The freight and intercity passenger train new railway construction underway will connect the Ethiopia capital city with the port of neighboring Djibouti.

Service there may begin sometime in 2016 say current reports from Bloomberg.

Trains on this inter-nation line might also be operated by a Chinese contractor instead of by the local Ethiopia rail organization.  Too early to tell yet. There is no published report on the success or timeline of building such skills inside the Ethiopian Rail Corp organization.

The long distance line will be standard gauge (1435mm) track.  But not 33 metric ton or doublestack container train capable.

The Ethiopians have settled for a lesser freight train capacity that they received from the Chinese builders rather than adopting the North American commercial and engineering big train technology standards — and having the Chinese contract companies modify their engineering build to standards. The result will give the Ethiopian rail company a rail freight haulage capability equivalent to a 40 to 50 year old post WW-2 North American operating performance. This means missing their chance to become the best of class within the African world of freight railroads.

POWER SUPPLY

Electric power to supply these light rail and intercity train sets in a more dependable manner is to come from the Chinese financed Gibe III hydropower dam’s reservoir set for operation in 2016.  The reservoir has started filling, with its 1,870 megawatts capable of almost doubling Ethiopia’s generating capacity. This will presumably allow for a dependable service day to day performance using straight electric locomotives rather then modern diesel-electric locomotives.

MISSED DOUBLESTACK CONTAINER OPPORTUNITY

With electric power from overhead wires catenary systems, the overhead clearance for doublestack container trains could be restricted.  This overhead wire electric system as currently designed as to height above the top of the rails is another rail marketing (commercial business competition) flaw that could have improved.  How? By increasing the wire height to more than 6.7 meters above the top of the rail.  That would allow doublestacking container trains to have a far superior cost per container advantage in direct competition with highway trucking.  In the US that rail rate advantage can be as large as 50 cents to $1.40 per container moved kilometer.

These simple manmade engineering design changes would have given the resulting rail line a superior economic advantage against long haul trucking.

S. Africa Rail Gauge Conversion Policy Change Announced by Government

Sep 22, 2015 report…

South Africa now has a government transport policy to plan out a widening of the country’s existing railway tracks to international standard gauge. The geographic scope covers as much as 20,000 kilometers (12,427 miles) of track just in South Africa.

This scope would take decades to physically complete. It might cost as much as 1.5 trillion rand ($110 billion),

Cape Gauge existing track width between the inner sides of two rails is 1067mm as a design. Standard gauge design width is 1435mm.

South Africa Transport Minister Dipuo Peters announced the policy to reporters on Tuesday. The gauge conversion would bring the network in line with about 60 percent of other countries, boost capacity and reduce transportation costs, she said.

In response, Transnet Acting Chief Executive Officer Siyabonga Gama said that while the company supports a move to standard gauge, the policy “needs further investigation” to determine its viability. “We did an assessment and we found out that if we had to create 15,000 kilometers of track, we would need up to 1.5 trillion rand,” he said in an interview after the announcement. “It would be a very expensive exercise.”

STRATEGIC FLAW

The assumption is so far that almost all tracks would be converted to 1435mm. Economically, it is more likely that only the strategic high traffic volume density routes and some feeder lines would financially justify the expense of conversion. .

The economic benefits come from more stable train operating wagon movements and possible high clearance doublestack container train economics. Containers stack two high on rail cars cut the expense by as much as 35% to 45%. Stack container trains have been operating successfully in the United States for 30 years. Two decades!

Stack trains cannot physically be operated on Cape Gauge or Meter gauge tracks.

Regardless of the eventual network size, the project could take decades to fully complete. A place to start might logically be between one of South Africa’s premier container sea ports and the Johannesburg regional market.

Meanwhile, much of Africa’s rail planning is already focused on standard gauge 1435mm track for all new railway projects. Ethiopia and Kenya just as two eastern African examples.

Minister Dipuo Peters strategic announcement is simply acknowledging a prudent rail modernization approach for South Africa.

Bravo!

To read the entire article, go to http://bloom.bg/1KxjCiS Sent from the Bloomberg iPad application.

Honolulu rail transit capital budget at about a 19% higher cost

Once budgeted at a capital cost of $5.26 billion, the project engineers now estimate a 19% over run. That is above and beyond whatever contingency percentage they had built into the project bid. Contingencies typically range from 5% to 12% at the final engineering bid stage. The total cost overrun is cumulatively close to a one-third range.

Would the project had been approved by the legislators and government administrations if they foresaw tis kind of project cost change?  Maybe not.

The project construction problems have added another year of delay.   2020 will now be the earliest completion date for the entire system.

At over $6 billion, the Honolulu system is about the same capital cost of the upgraded Panama Canal project due to open sometime in 2016.

http://www.staradvertiser.com/news/breaking/20150915_Honolulu_rail_shortfall_now_projected_at_over_1_billion.html?id=327783761 Sent from my iPad

Maybe as many as 15 Years of Weak Crude and other energy prices

“WHAT IF:

What if the world is shifting from an “investment phase” of a 30-year commodity cycle to an “exploitation phase?” 

How does this professional assessment of future markets cause you as a railroad or freight carrier to change from Plan A to maybe Plan B or even Plan D?

 

From Bloomberg, Sep 17, 2015

A glut of crude may keep oil prices low for the next 15 years, according to Goldman Sachs Group Inc. That is a very long period.

This strategic commodities report cites in part Jeffrey Currie in an interview at Lake Louise, Alberta.

Goldman’s long-term forecast for crude is at $50 a barrel, he said. He also observed that “the risks are to the downside given what’s happening in the other commodity markets and the macro markets more broadly.”

Lower iron ore, copper and steel prices as well oil and natural gas –PLUS weaker currencies in commodity-producing countries — have reduced costs for oil companies, according to Currie.

The world is shifting from an “investment phase” of a 30-year commodity cycle to an “exploitation phase,” with shale fields as an important source of output, he said.

To read the entire article, go to http://bloom.bg/1JcGYJu

Morgan Stanley Sees `Long Winter’ for Commodities // Based on historical bull to bear pattern

A commodities outlook news report by Bloomberg, Sep 14, 2015 The commodities bear market may last for many years, with oil dropping as low as $35 a barrel, as production cuts haven’t been sufficient to wipe out the global surplus, according to Morgan Stanley Investment Management Inc.

A 200-year history of commodity prices shows they typically move between a decade of bull market and two decades of a bear market says the Head of Emerging Markets Ruchir Sharma at Morgan Stanley.

It takes many years to clear the additional capacity that a bull market generates, he said. “China continues to be the central player as far as demand is concerned,” he said. “Even if the Chinese economy stabilizes, the industrial part of the economy is likely to be much weaker.”

To read the entire article, go to http://bloom.bg/1iJ4poN