Archive for Economic Recession

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 Strategic Planners to to rethink their now outdated assumptions from supporting logistics projects in diverse places like Mozambique, Botswana, Mongolia, Brazil, and even in the Canadian/Alaska Yukon region.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

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

Reported drop on heavy metal steel scrap price in China

Eastern China steel mills have cut ferrous scrap prices.

Source is Singapore (Platts)–27 Aug 2015

Jiangsu Shagang Group, the largest scrap user of China, on Thursday cut its buying price by Yuan 40/mt ($6/mt) in view of a recent drop in rebar prices, a company source said.

After the adjustment, Shagang will pay Yuan 1,330/mt ($208/mt), including 17% value added tax, delivered to Zhangjiagang, Jiangsu province, for heavy melting scrap 6 mm and above.

“With the bearish outlook on domestic steel markets, I think scrap prices are likely to repeat the previous low levels,” said a source from a mill in the region, adding that small induction furnace mills had successively cut their buying prices earlier when rebar prices began to fall.

All of this sends a lower traffic signal for railroad traffic.

Most analysts have failed to predict this rapid a fall in scrap prices that two years ago were in the $360 to $400 approximate range per metric tonne.

China stock drop // So Large That Losses Eclipsed BRICS Peers, Twice

From Bloomberg, Aug 26, 2015

Take the combined size of all stocks traded in Brazil, Russia, India and South Africa, multiply by two, and you’ll get a sense of how much China’s market value has slumped since the meltdown started.

Bloomberg calculates that China alone has accounted for 41 percent of equity declines worldwide since mid-June.

The scale of China’s stock market drop also exceeds the entire size of the Japanese stock market.

What will be the size of its commercial business drop, given such a large scale loss of investor confidence?

in the same period we already see Brazil hit by a recession as calculated by two successive quarters of slower growth and a negative year over year second quarter economic growth of about 2.5%.

How is this all affecting your strategic planning?

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

Rail freight data shows ten to eleven percent China contraction year over year

21 August report

Not yet widely reported.

State news outlet Xinhua on Tuesday reported that China’s rail freight volume had dropped by nearly 11% (10.9%) on a year-on-year basis during the month of July 2015.

The rail freight handled was 278.9 million tonnes for the month this year.

For the first seven months of 2015, China’s rail freight has dropped by 10.2% to 1.98 billion tonnes compared to the same 7 month period in 2014.

The data was reported by the National Development and Reform Commission.

The NDRC blamed “plunging demand for transportation of major commodities, including coal and metals” for the weak rail traffic numbers.

There was no real growth in rail volume even though China’s official GDP is reported to be growing.
http://www.mining.com/forget-slower-growth-worry-about-chinese-gdp-contraction/

Who gets hurt the worst in this 2015 summer market fall?

One theory is that the stock market harm this time, unlike the crisis in 2007-09, seems to be hitting the emerging-market economies the hardest.

The US economy has proven resilient in the past. It is often consumer led.

Recovery in the emerging markets may be harder. They are likely more dependent on China as resource buyers for their comeback. Even China does not yet have a consumer discretionary income available market.

What is your opinion? Sent from my iPhone on Friday the 21st of August

Multiple business news sources report what appears to be much slower China Economic Growth.

Aug 20th to Aug 21st 2015

Not very transparent, the Official Chinese government economic growth reports are now being even more widely questioned.

Data from reputable private (independent) forecasting groups suggest that instead of a government source of about 6.8% to 7% range in China GDP growth this year, the real numbers might be closer to 5%. — and in the worse case assumption by a few news observers as low as 2%.

These numbers are way below the heady days of near 14% growth that fueled the Chinese market demand commodities during the boom years.

Bloomberg reported that a private estimate of Chinese manufacturing fell to the lowest level in more than six years… The preliminary Purchasing Managers’ Index from Caixin Media and Markit Economics was at 47.1 for August. Numbers below 50 indicate contraction.

============ Markets around the world are reacting in the midst of Chinese economic uncertainty. The U.S. Stock markets were down significantly the past two days. And as just one other metric, the measured slump in the South African stock market and the rand currency as seen the lowest level this week in almost 14 years.

This market uncertainty is going to affect a lot of proposed railway freight projects around the world.

Within 48 hours of this type of alert news reporting on China’s manufacturing slowdown, the US stock market fell by another 3.2% on Friday the 21st (~530 points).

A coincidence?

Investors take up hedge risk in high speed Spain-France project. // What could go wrong?

To the chagrin of a creditor group that includes Avenue Capital Group, BlueMountain Capital Management and Neuberger Berman, the rescue of a troubled very high speed passenger railroad whose loans they bet on has failed to materialize.

The group bet on a funding to save a premier advertised Spain to France high speed rail line. TP Ferro was a 2003 joint venture between Spain’s Actividades de Construccion & Servicios SA and Eiffage SA of France. They won a prestige 50-year concession for a 44-kilometer rail line to link Figueres, in Spain, and Perpignan, on the French Mediterranean coast. The goal was to fund that small link to connect Barcelona and Madrid to the rest of Europe’s high-speed train network. What could go wrong?

Quite a bit actually.

Delays and geo-polotical issues with the rail project has left them holding losses in TP Ferro Concesionaria SA. And according to Bloomberg reporters the investors have little recourse promise from the the Governments in Spain and France. Neither government wants to lend a hand to international investors, banks and construction companies.

Avenue, BlueMountain and Neuberger Berman bought some of TP Ferro’s 445 million euros ($492 million) of loans at about 70 cents on the euro last year. Now that is valued at about 50 cents, according to two people familiar with the matter. The rail company filed for insolvency proceedings on July 17 after the governments turned down its bailout requests and an international tribunal rejected its bid for compensation.

WHAT NOW?

If TP Ferro’s debtholders, which also include lenders Banco Bilbao Vizcaya Argentaria SA, ING Groep NV and Bankia SA, fail to reach an agreement with the owners and governments to restructure the debt in court, the working theory is that the company will be liquidated and its concession to operate the railway will end. That would leave TP Ferro with no assets.
Bloomberg notes that about 92 percent of companies that enter insolvency proceedings in Spain are liquidated, according to rating company Axesor’s most recent data.

For a more detailed report log onto Bloomberg and read the entire report “Hedge Funds Near End of the Line for Bailouts on Railway Bet”, by Luca Casiraghi and Katie Linsell.

http://www.bloomberg.com/news/articles/2015-07-28/hedge-funds-near-end-of-the-line-for-bailouts-with-railroad-bet

BRAZIL — more signs of severe economic recession from a Bloomberg report

The reported numbers are from a story authored by Christiana Sciaudone

August 17, 2015

“In the midst of its deepest economic and political crisis in a generation, Brazil is contending with a business climate so punishing that major projects across numerous sectors are being frozen or shrunk, while small businesses slash prices and shift focus.”

“Political instability is enormous, and it’s paralyzing Brazil,” said Eduardo Fischer, co-chief executive officer at homebuilder MRV Engenharia & Participacoes SA, in an Aug. 5 interview.

In Brasilia, the nation’s capital, “decisions and actions that need to be taken are being delayed, questioned or defeated, and nothing happens.”

Multiple economists are predicting that the Brazil economy will contract about 2 percent this year,.

National unemployment is at a five-year high.

Brazil’s real is the worst-performing major currency in the world this year.

The airline has seen corporate demand drop by as much as 40 percent.

Embraer, the best-selling regional jet aircraft manufacturer had been counting on new products to boost revenue…    … and is also awaiting payment of $370 million…  Its production of new models can be expected to see a year long delay…  or longer.

Brazil’s auto manufactures also have watched demand plummet, with sales down 20 percent in the first half of this year compared with the same period in 2014…

Both GM and Volkswagen AG are temporarily shuttering local factories and putting workers on leave.

Long ago announced new Brazilian railway projects…  …can expect more delay and uncertainty in this economic climate.

So far, the recently announced BRICS new development bank is offering no solutions.  And a once promised Brazilian foreign aid to Ethiopia railways looks to be unofficially “unlikely”.

Much of this was predictable if proper due diligence has occurred during the many project reviews.  The signs of risks were there.

For a full report — log onto http://www.bloomberg.com/news/articles/2015-08-18/from-planes-to-cafes-brazil-s-economy-on-hold-as-crisis-deepens