Archive for Asia

BRICS Hail $100 Billion Reserves Pool! Realistic? Or a fools assumption?

The BRICS group of nations represent more than a fifth of the global economy.

The news sources issued by their public relations people are tonight talking up closer financial ties.

They are off to a summit in Russia on the subject.

A grand concept? But who will write the checks?

Most of the BRICS actually qualify for World Bank aid for a reason.

Is the new BRICS institution going to “borrow from Peter to pay Paul, so to speak.

Of Brazil, India, Russia, China, and South Africa, only China may have sufficient “reserves” in these troubled times to send money to the others.

Funding trillions of dollars in global rail and port and highway projects from this group “seems to be a streatch”

What do you think?

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

Greece gets 7 July headlines, but the real economic story is in China

Greece gets all the financial headlines while the real economic story may be in China.

The Bloomberg report tonight Jul 7, 2015 points out that Chinese shares lost to negative territory on Tuesday. The benchmark Shanghai Composite Index was down finished at 3,727.13 points. The Shenzhen Component Index slumped 5.8 percent to close at 11,375.6 points. (Xinhua/Pan Yulong)

A wave of 1,249 Chinese companies halted trading in their shares.  That is estimated at over 40% of those listed.

Also, CHINESE regulators unveiled new measures to prop up the value of small-cap stocks in the latest attempts to stem a rout that’s wiped more than $3.5 trillion of value.

To read the entire article, go to http://bloom.bg/1Tk4PyJ

China domestic steel peaking? Might it result in cancelled rail projects? Or steel dumping?

From Bloomberg, Jul 7, 2015

China’s demand for steel has peaked, if the Japanese experience of the 1970s is anything to go by. That could spur more trade conflicts as the nation ships its excess production overseas.

To read the entire article, go to http://bloom.bg/1HLoZ2R

A few key observations:

The current decline in Chinese steel output may signal that the growth period for the commodity has ended in a country where the pace of economic expansion is slowing.

Risaburo Nezu, a senior research adviser at RIETI, a think-tank linked to Japan’s trade ministry, expects a prolonged slump, with an absence of growth in demand likely for the next 10 or 20 years.

“Once a country attains a certain stage of economic development, demand for steel stops growing,” Nezu said last week in an interview. “China is left with excess capacity that’s said to be 300 million tons to 400 million tons, equivalent to three to four times Japanese output.

If true, there are economic consequences from Brazil to Mongolia and South Africa to Japan. This will impact rail and mine and port greenfield projects around the world. Are planners prepared?

The situation in China “could trigger more cases of trade measures among steel suppliers” to protect earnings, said Yoku Ihara, president of Growth & Value Stock Research.

Bloomberg reports that “Steel demand in China will shrink this year and next in the first annual contractions since 1995 according to the World Steel Association in April.

Crude steel output will shrink as much as 2 percent this year, the first contraction since at least 1990, according to the China Iron & Steel Association.”

“Globally, supply of steel will exceed demand by 657 million tons in 2016 compared to an estimated gap of 645.8 million tons in 2015, according to an estimate compiled by the OECD.

This threatens a glut of drawing board plans for global mines, ports, and rail projects. Most based on very high China growth of the 2003-2012 period.  Now an obsolete assumption.

Can China finance Eurasia Railway One Belt & One Road Strategic Plan?

The mid year 2015 Chinese stock market fundamentals and the overall Chinese structural debt may put a crimp in this debt financing of proposed rail/road foreign projects.

This cited Journal of Commerce report remains extremely optimistic about China’s willingness to write the necessary big foreign investment checks.

Time will tell. Time is always the acid test of any strategy.

Even if financed, these Chinese sponsored rail projects may not see the first trains until well after my death.

But the maps look “cool”.

See the map and JOC story at http://www.joc.com/international-trade-news/investment-floods-china%E2%80%99s-one-belt-one-road-strategy_20150703.html?mgs1=b66dkpfYOY

Untameable China stock market | The Economist report two days ago on trends

The recent Chinese stock market mini-crash has underlined the fundamental role of debt in Chinese share-trading.

The Economist reported that Goldman Sachs reckons outstanding margin financing, at 2.2 trillion yuan ($355 billion) earlier last week, was the equivalent of 12% of the value of all freely traded shares on the market, or 3.5% of China’s GDP.

Both “are easily the highest in the history of global equity markets,” its analysts noted.

With Chinese shadow banks and peer-to-peer lenders also offering cash to investors, the amount of hidden leverage in the market is estimated to be as much as 50% higher. That debt helped fuel the initial stock rally. It is now adding to the pain, as leveraged investors rush to sell their holdings to cover their debts.

The Economist argues the case as to long term impacts on further China economic development as this market confidence struggle plays out.

Go to: http://www.economist.com/news/business-and-finance/21656867-bad-week-chinas-stockmarkets-could-be-felt-years-untameable-market

Also see the BBC for second source economic reports on this China story.

Cheers!

 

 

 

 

Alarming Monday economic stock market news out of China on 6 July 2015

The Greek Sunday austerity vote may be “peanuts” compared to the market news impact out of China.

There is an Interesting graphic comparison by Bloomberg between the historical changes in Wall Street during 1929 and China in 2015. (see the Bloomberg graphic)

Perhaps the Chinese government may be more successful in intervening today then was the limited private game plan during 1929.

Clearly, there does appear to be a significant confidence sell off in today’s market. The parallels look interesting but need to be tested by time in the year to come before we will know. Here are some interesting statistics. The two graphic stock price trends are separated by 86 years and 7,300 miles, but Chinese financiers are turning to the same playbook according to Bloomberg that were used by their American counterparts to fight a crash that’s wiping out stock-market fortunes on an unprecedented scale.

Investors in China are hoping it works out a lot better this time around.

IN 1929|

“When five of America’s most-powerful financiers met at the House of Morgan at 23 Wall Street on Oct. 24, 1929, the immediate impact of their plan to pool resources and prop up the market was encouraging: the panic of Black Thursday gave way to a recovery and the New York Times lauded the bankers for putting a floor under share prices.” “The boost to confidence didn’t last long. The 1929 price rout resumed by the following Monday, with the Dow Jones Industrial Average losing 13 percent.

The gauge would go on to drop another 34 percent over the next three weeks, as the attached chart shows.”

IN 2015

How long will the recent support measures in China last?  The measures might have a fleeting impact according to Hao Hong, a strategist at Bocom International Holdings Co. in Hong Kong. A group of 21 Chinese brokerages pledged on Saturday to commit 120 billion yuan ($19.3 billion) to a large-cap stock fund, designed to stabilize shares.

This action plan comes on the heels of a three-week rout in the Shanghai Composite Index — the biggest drop since 1992. The brokerage move coincides with a “flurry of other market-boosting measures including a halt to initial public offerings and regulatory moves to discourage short sellers.

 

IPOs Suspended in China as another intervention game plan

Over the weekend, the China government suspended initial public offerings and the central bank said it would provide liquidity for margin trading.

Stemming the loss pattern? These actions come after the Shanghai Composite has tumbled 29 percent in the past three weeks.

That has already erased a whopping $3.2 trillion of value. Yes, TRILLIONS.

A major concern is that “leveraged traders may be liquidating their previous equity bets”.

“Excluding banks, the Shanghai Composite Index was trading at about 31 times trailing earnings.”

On Wall Street in 1929, it was the great banking houses of J.P. Morgan and Guaranty Trust Company that tried to stem the economic tidal wave.

To read the entire article, go to http://bloom.bg/1fe0PSb

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As you have your Monday morning coffee…

Early July 6th and late July 5th news reports indicate that the Hong Kong Exchanges & Clearing Ltd. Had dropped a noticeable 12 percent as of about 1:30 p.m. That would be its biggest decline since October 2008.

A Double Dip recession? Probably.

The Bloomberg Commodity Index fell as much as 1.8 percent to 100.0574, — the biggest intraday loss since May 26th. This gauge is down 4.1 percent this year in tracking declines of base metals and crops.

The MSCI Emerging Markets Index lost 2.5 percent to 940.52 at 1:35 p.m. in Hong Kong. That has wiping out this year’s 2015 advance.

South Korean shares appeared to be headed for the steepest loss since 2012.

Trading houses like Goldman Sachs Group, JPMorgan, Chase & Co. and Bank of America Corp. appear from news reports to have advised their clients to sell shares on the China perceived rallies.

Most reporting in the USA media seems meanwhile to be focuses on the Greece austerity referendum vote rather than these economic events in China.

Clearly, global resource driven railway projects from Mongolia to South Africa and Senegal to Brazil are now even more threatened as to economic feasibility.

Rail Planners may now need to develop Plan C and drop their earlier small Plan B changes as the global economy undergoes another series of “economic body blows”.

It is possible that the market in China may stabilize. But the trend and economic cycles of history are a cause for investor concern. Markets react poorly to circumstances shown in the above reports.

The six year global struggle to come out of the 2007/2008 recession is clearly not yet over. A further three to six year recovery period may be the pattern out towards 2021. Events and data in the coming six to twelve months should tell us all more.

Mongolia premier pledges to end Tavan Tolgoi coal mine & railroad delays

From the Financial Times news report comes this upbeat news from Mongolia.

The headline:

Is this just more public relations political hype? Another “junk” rated bond issue to please voters? Is this necessary? Probably a bad idea. Again.

More long delayed plans for the east-west low margin financial feasibility railroad towards Japan? These sound more like a belief in Santa Clause than a sound strategic recovery for the nation.

I would wish more then this for my many Mongolian friends I have worked with.

The good news is that there is a way to make Mongolians strategic winners” if they pull together on tactics and engineering that are sound best practices.

Cheers!

For the FT report, log onto: http://www.ft.com/intl/cms/s/6e7a241a-20c7-11e5-ab0f-6bb9974f25d0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F6e7a241a-20c7-11e5-ab0f-6bb9974f25d0.html%3Fsiteedition%3Dintl&siteedition=intl&_i_referer=#axzz3erCpC6bE

Here are a few of the reported public relations statements in the news report. ——- Saikhanbileg Chimed indicated that “Mongolia planned to launch another sovereign bond as the country seeks to get “back to business” following two years of slowing growth in gross domestic product, plummeting foreign direct investment and rating agency downgrades of its junk-rated “Chinggis” bonds.”

“Official approval for investors to start work on the Tavan Tolgoi (TT) coking coal mine in the Gobi desert should follow soon after a review of the investor agreement in parliament this month, Mr Saikhanbileg told the Financial Times in an interview.”

Investors in the project include China’s Shenhua Energy and Japan’s Sumitomo Corp. “TT will be unlocked in the very near future,” he said.

HOWEVER—

“Several members of Mongolia’s parliament have raised objections to financial and legal aspects of the TT investor agreement, raising the possibility that the mine… …could suffer a similar fate to that of Oyu Tolgoi, a $5bn copper mine, where an expansion project was unblocked in May only after two years of wrangling. This year, Mongolia resorted to a mobile phone referendum to shore up public support for the project…

The minister still believes in 220km rail line from the mine into China — delayed now for more than three years.

Mr Saikhanbileg also told the FT reporters that he also believes in a second potential rail project that would run east-west about 1,300km to reach coal markets in Japan and the US, a Mr Saikhanbileg said.

BEWARE:

This E-W rail line is a much higher investment risk according to my due diligence research on Mongolia rail options dating back to 2006.

Investors need to carefully reexamine these projects with updated due diligence.  Mongolia needs a real heavy haul big train design to make their expectations a reality.  That means trashing most of their prior rail designs.

It also means a fresh due diligence review of the feasibility options. In particular, it is a bad idea to depend upon a due diligence feasibility report that is prepared by the builders.  They are not exactly Independant.

Competition for met coal sales to China in the summer of 2015

Reuters data http://mobile.reuters.com/article/idUSL3N0Z823E20150622?irpc=932

China’s imports of coking coal fell 24.2% to 14.7 million tonnes in the first four months of the 2015 from the same period last year.

Australia has about a 50% share of China’s imports Yet, shipments dropped 26.2 percent in the first four months as China’s steel production has fallen.

China’s imports from Mongolia increased by 9% to 4.5 million tonnes. It could have been higher if only Mongolia had a working export railway by now.

The next two largest coke coal suppliers are Canada and Russia. This year their shipments to China fell 14% and 39% respectively.

My technical observations.

MONGOLIA FUNDAMENTAL PROBLEMS as a COMPETITOR

The Mongolia customs price in northern China is about $46 a tonne as of April 2015. To that has to be added the rail cost to reach eastern Chinese steel producing markets. That adds a lot to the price given Mongolia’s poor rail infrastructure. It has zero heavy haul rail capability.

The quoted price from competing sources are $105 to $106 from Australia ~ $110 from Canada, ~ $93 from Russia mines Price to Japan Third quarter contracts for delivery from Australia to Japan were settled at $93 a tonne for premium hard coking coal, according to two people familiar with the negotiations says Reuters.

Back in 2012, the price was $330 a tonne.

The contract price tends to influence the spot price.

However, sellers need to price to a more reasonable long term contract rate to survive periodic economic down cycles.

Bloomberg reports negative China steel growth.

From Bloomberg, Jun 18, 2015

“Chinese steelmakers are deepening the first production cuts in a quarter century”…

As manufacturing steel production drops, there are economic signs to look for.

Possible “dumping” of finished steel.

Stockpiling of Chinese imported iron ore and coke.

More investor uncertainty about emerging nation blueprints for new mines, ports, and railways.

To read the entire Bloomberg news report, go to http://bloom.bg/1GTU0PI

Crude steel output will shrink as much as 2 percent this year, according to the China Iron & Steel Association. That is the first contraction since at least 1990.

A recent up tick in raw material costs for steel and a collapse in steel prices has pushed the Bloomberg Intelligence China Steel Profitability Index to the lowest in almost seven years.

To understand more about the prospects for adding more to the supply side of global trade, we need to know even more about the market demand side.  As China’s growth slows…    …so too will the need for more and more imported resources from greenfield projects.

So which greenfield projects will still be needed?

Mongolian Coal plan to Suppy the two Koreas may be a “boutique” market at best

Some news reports with grand headlines look more like political posturing than great commercial breakthroughs. What is the full story behind a press release?

This is the latest headline grabber, “Mongolian Coal Firm Signs Four-Nation Deal Including North Korea”.

The story was picked up by multiple news agencies, including Bloomberg as reported by Michael Kohn http://bloom.bg/1J75rG0

investors may require additional Independant due diligence about the rest of the story.

Here are a few professional observations based on my six years coverage of Mongolia’s railway exporting problems. The essential theme is that “distance matters”.

Getting to the Pacific Ports via the round about Russian connecting eastern Trans SIBERIAN rail route is physically possible. But at the distance involved, it may be a bad logistics route when costs per ton-km are calculated.

Plus, there may be too many SIBERIAN coal mine origins along the long route path to compete with these remote Mongolian origins. In the long run, Mongolian origins at best will likely be a marginal provider. If the route is too long. Is there enough volume to “show the flag”. Yes. Long term profit sustainable? Not unless the rail freight rate is priced as almost a donation.

Why would RUSSIA RZD “donate” scarce track access paths for !omgolian origin shippers that compete for export sales with a siberian mines? Geo-Resource politics might be a complex reason. Who can say?

From a publicity stand point, yes it appears that arranging the circuitous route can be “hailed as a major achievement” as stated to the news media by Batbaatar Bandan, the company’s chief executive officer. “For Mongolia to have four-country cooperation, I think it is historic,” he said at the signing of a memorandum of understanding. Note: this is a MOU. That is not a contract commitment.

The company would sell the coal to Mongol Sammok Logistics Co., a new joint venture between South Korea’s Sammok Shipping Co. It is also an arm of the Mongolian government says one source.

HOW FAR?

The coal has to moved more than 4,000 kilometers (2,500 miles) by train to the North Korean port in the city of Rason, via Russia. And then it has to rely on friendly rates and reliable train operation between the North and South Korean governments in order to cross North Korea into South Korea Sounds a bit risky.

Yes, they will likely move a trial load. But that proves little about long term reliable and sustainable route profitability. The shipper, Sharyn Gol, claims to reporters that it is “in a position to export several hundred thousand tons of coal per year.” From a due diligence view, that is a rail volume “niche market”.

Some claim a possible annual volume at some unknown future time of perhaps 300,000 metric tons of exports a year. But there is no pricing agreement yet.

Investors should probably check for “the rest of the story”. ———

The alternative is to take up the Chinese offer to use the China rail network via the Mongolian southern proposed rail gateways to reach the CHINESE Pacific ports and then use ocean barge or ocean ship to reach the Korean markets. That commercial offer was made almost a year ago by China and as of this point in the summer of 2015 appears “dead in the water”. There were limits I believe as to which rail inland gateways could be used, but all of the southern routes out of Mongolia are far shorter to reach the Pacific ports versus going through RUSSIA.

And distance does matter as a logistics cost. The Mongolians have collectively as a nation been wrestling with this rail access issue for almost a decade.