Tag Archive for economy

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

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.

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

Best business ally of the U S freight railroads? Maybe it is the U.S. Congresd

Once we in the USA had a world class interstate and primary national roadway system. Now we as citizen stakeholders  can’t seem to get even basic financing from the Congress to keep it maintained.

Deferred maintenance of highway bridges and road pavement — once a trait of the northeast US railroads like Penn Central — are now a hallmark of the national gas tax financed road system.

Plenty of funding is politically for the new “Mexico border fence” infrastructure. But zero for expanding the highway system that actually handles close to 80% of the nation’s interstate freight by value, and about 50% of the ton-miles.

// Maybe it is time to send most of Congress back to school for a course in Economics 101.  As stakeholders in the outcome, we need 51% of the House and about 60% of the Senate to take & pass the economics course.

In the meantime, the only significant national capacity addition to the US freight network is from the private rail freight companies and some pipeline companies. And a few new toll road concessions.

Once investing in transport infrastructure was at about a 3% to 4% annual clip. We now have fallen in this past decade to probably about 1% to 1.5% rate. To maintain our overall world class transport freight efficiency, those anemic investment rates “are not going to get the job done.”

And that is the way things look in mid year 2015. Do you disagree?

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/

Morgan Stanley’s “coined” Fragile Five Now looks like “The Troubled 10” as currencies drop in value

In a special report, Bloomberg points out that regardless of which economic list you use, Brazil has taken the worst currency hit with the real down more than 24% against the dollar this year and almost 34% since 2013.

South Africa has also taken a huge currency hit.

The bad news is that there is not much hope for a recovery lead by a Chinese trade based recovery plan. And the expected increase in the U.S. currency rate will likewise hurt.

(See Bloomberg, Aug 16, 2015)

Citigroup G-10 Currency Strategy Head Steven Englander discusses China and emerging markets. Forget the “Fragile Five.” These days, strategists at Morgan Stanley are worried about what could be called the “Troubled Ten.” To read the entire article, go to http://bloom.bg/1PtkTMm

Once considered a core economic strength, now dependent commodities trading ties make these nation’s susceptible to a slowdown in the world’s second-biggest economy. China.

Missing from the list but also hit hard with recent currency devaluation for other reasons is Russia.

Since the economic geo-politic phrase was coined in 2013… the Brazilian real, together with Turkey’s lira, South Africa’s rand, the Indian rupee and Indonesian rupiah, have suffered as rising global interest rates make it more difficult for the countries to finance their current-account deficits.”

How do you see this correcting?

Three Years Ago This Coal Mine Was Worth $624 Million. // Now just $1 dollar

From Bloomberg, Jul 31, 2015

The destructive force of a collapse in world coal prices has been underscored by the sale of a mine valued at A$860 million ($631 million) three years ago for just a dollar. Brazilian miner Vale SA and Japan’s Sumitomo Corp. sold the Isaac Plains coking-coal mine in Australia to Stanmore Coal Ltd., the Brisbane-based company said Thursday in a statement. Sumitomo bought a half stake for A$430 million in 2012.

A slump in the price of coking coal, used to make steel, to a decade low is forcing mines to close across the world and bankrupting some producers.

Alpha Natural Resources Inc., the biggest U.S. producer, plans to file for bankruptcy protection in Virginia as soon as Monday, said three people with direct knowledge of the matter. It was valued at $7.3 billion in 2008.

To read the entire article, go to http://bloom.bg/1fOuf97

The emerging nation financing organization have been unrealistic in their economic loan assumptions? // True or False?

A Bloomberg report shows that the organizations that finance these huge emerging nation loans have badly miscalculated the economic prospects.

Unrealistic due diligence is a part of the reasons for failures like with Greece.

The organizations that finance should have relied on others for growth projections.

Having the people that write the loan checks make the assumptions is probably a bad idea.

Lesson learned is that they need a Plan B due diligence approach.

What do you think?

For example, in 2010, as Greece signed a bailout deal with the International Monetary Fund, who projected ability to pay and how.  Many of these forecasts of supporting loan growth and the future ability to repay were made by the IMF and the European Commission.

Reports suggest that the projections assumed such things as Greece’s debt-to-GDP ratio would peak below 150 percent of gross domestic product in 2012. Their forecasts also projected that Greek GDP in 2015 would be 8 percent larger than in 2011. T

his optimistic vision of the future was based on underlying assumptions that Greece would go from having the lowest productivity growth in the euro zone to instead having an improvement to becoming among the highest. That means becoming relatively as strong in some metrics as the productivity of Germany!

That’s incredible. Greece probably never had a chance.

Are the new 2015 assumptions going forward any better? Are the same rosy colored economic improvement forecast being made for loans elsewhere from Mongolia to Africa?

To read the entire article, go to http://bloom.bg/1gnRs2x Sent from the Bloomberg iPhone application. Download the free application at http://itunes.apple.com/us/app/bloomberg/id281941097?mt=8

Bloomberg report reveals how the middle class global growth is quite different then most interpret it to have been

From a Bloomberg report

How does that growing global middle class progress really stack up?

The first decade of the 21st century saw global poverty halved and the size of the global middle class nearly doubled. But don’t get too excited about the coming of a new engine of growth. Why not?

The “middle class” is a matter of thresholds, and they’re all relative.

MISLEADING STATISTICAL REPORTS in the past about the Growing Middle Class revealed in new report.

To read the entire article, go to http://bloom.bg/1CpdqM9 Sent from the Bloomberg iPhone application.

Here are a few highlights.

During the last measured decade, nearly 700 million people stepped out of poverty. What does that mean?

It means in part that the share of the world’s people living on $2 or less per day declined from 29 percent to 15 percent.

However, the majority of those people “took only a moderate step up the income ladder, changing their status from poor to low income”. That according to a Pew report.

Here is the new analysis of what occurred.

In 2011, more than 56% of the world’s population lived on $2-$10 a day.

Pew says that is why it has modified the definition of the middle class as those who live on $10-$20 a day. That would be about $14,600-$29,200 a year for a family of four.

The share of people within this redefined  income range rose from 7% in 2001 to 13% of the global population in 2011.

Was that the image of change you had?

Excellant due diligence analysis of changing rail values as companies by William Greenfield

This Is pretty thought provoking from an economics view of how railway operating companies can be valued as by investors in these changing times.

The logic is written by William Greenfield . Remember. This is just one benchmark approach.

WHY ARE most profitable railroad railroad company stocks down in mid year 2015 so far? Mr Greenfield points out that Railroads are in the transportation industry and for the last 15-20 years they have enjoyed one major advantage over all other forms of transportation – expensive oil. Other forms of land transportation, such as trucking, use more oil per ton-mile then a train. Therefore, when setting up a supply chain for distribution, an enterprise was willing to look at rails even though they aren’t the fastest or the most convenient (the train can’t go where the tracks aren’t laid).

Once you understand this connection he argues that you begin to see that railroads benefit from high oil prices. The senior railroad company managers know this.

He points to the commercials from rail companies like CSX Transportation (NYSE:CSX) that tell the listener how a train uses only 1 gallon of fuel to move 1 ton of goods over 480 miles.

While these commercials are telling you how great trains are for the environment relative to, say, trucks, they are also telling you their greatest economical advantage – not having to pay for a lot oil.

This of course also tells us that their greatest weakness. The weakness is cheap oil.

Due Diligence as an investor in rail companies.

In order to really get an idea of what we can expect from NSC, and really from any railroad going forward, Greenfield argues that we need to go back to a time when oil was last at ~$50/barrel (or lower) after adjusting for inflation.

Check the Seeking Alpha web site for his historical chart to see the detailed logic as his evidence.   (WTI Inflation-Adjusted (Chart from Macrotrends)

Log onto http://m.seekingalpha.com/article/3345245-norfolk-southern-6-degrees-of-oil?app=1&auth_param=d2tlu:1aqv27c:d0ceb761aa628f5514860c9326cfc30d&uprof=44