Finance Reaper

Is Global Trade Growing?

Suez Canal update.

This is a regular theme of mine and it all ties in with the constant reference to the shipping, Iron Ore and Steel theme. The spring rebound seems to have limited momentum with the year on year picture only marginally ahead. More importantly is the breakdown of what and where. What is being transported and where is it going?

This chart shows the direction flows through the canal. As you can see the southbound lane is keeping things afloat with January recording near 48% growth. It is important to know the product mix to understand the demand. Commodities were the driving force of the upswing with Ores and Minerals +189%, Cereals +226%, Coal and Coke 165% and LNG and Crude Oil +117%. Given the breakdown of destinations southbound it is quite reasonable to say that China is the primary destination. The intention of the Chinese to raise the inventory level of many resources to western world levels has help drive this flow of commodities. The current level of oil inventories is estimated at around 42 days of demand verses 90 for the USA. But what of the demand of manufactured goods?

I have taken a complete flyer on this one and converted southbound canal traffic data to reflect Chinese demand. In April 2009 when trade was in the carzy (see top chart) container imports were declining year on year and accounted for only 45.55% of total imports. However, by April 2011, containers were growing by 14.4$ annually and accounted for 59% of total volume. The latest data for April 2012 indicate an anemic growth level and the overall share having fallen to 52%. All in all this does not suggest the future is bleak. Just this weekend the authorities cut banks reserve rate for the third time in six months (To my mind this merely slows the rate of deceleration in the economy). It does make the point that as certain inventory levels start to look excessive, this pillar of support could give way rapidly. I am thinking more of industrial commodities rather than Energy or Food.

What of Europe? April 2012 saw a year on year contraction of overall trade with containerised traffic (which accounts for nearly 60% of total) down 1.1% verses a growth rate of 12% in April 2011. Chart 2 highlights the delayed reaction of Northbound growth following the reflation packages from China and the rest of the world. Austerity now has its hand firmly on the tiller. I suggest the crew lash the main sheets!

Tags: China, Iron Ore

Are Steel Producers a Buy?

The building block of life.

BRICs and Steel part 1 was published late January. Since then, shares in the sector (STEEL) have fallen between 20-30%. The attached charts of ArcelorMittal (World No1 player) and US Steel show the stocks on major support lines. I am not a professional technician (only a lowly landscape gardener/designer) but the 200 day moving average crossed below the 100 day average  on the downside.  I guess it warns of a total failure in the share price. However, having seen a significant pullback to date and trading in the support area, I am not going to suggest a collapse. What I will say is that if you are in the recovery camp and believe that the central banks can add sufficient economic stimulus, then this would be a good time to buy. Of course, anyone familiar with my blogs on the heavy industries will be aware that I believe that the huge over capacity will prevail for many years. China will try and export its way out of a growing inventory position. Its steel makers are producing at a breakeven cost. The only way steel makers can elicit some profit is for the Chinese government to ease monetary policy at a breakneck pace (not going to happen until inflation is under control) or Iron Ore prices fall. Iron Ore faces three significant headwinds. First, demand. Yes I hear you! New car sales in the USA are growing rapidly but do me a favour. Go and calculate the weight of 14 million cars in 1995 and then weigh the estimated 14 million cars of 2012. I bet 2012 weighs 20-30 less. Construction is still growing in China but at a slower pace. Shipbuilding orders are collapsing. European overall steel demand? Car sales falling rapidly whilst countries like Spain who built 800,000 properties in the boom will have only 60,000 in 2012 (see also Ireland… Never was a slik purse!) Second, recycling. Per ton prices for ships going to the knackers yard are falling due to too many ships and not enough beaches. Recycled steel generally needs no Iron Ore. Third, Inventory. As I have highlighted on several occasions, inventory is at record levels. Yes I know production of steel is at record levels but demand is not keeping up. A recent report by Hexun indicated that 500 of the total 1600 Chinese shipbuilders will close in 2012 (reference my blogs on Shipping).

The BRIC nations plus Australia have boomed with the price of Iron Ore. As the chart shows, from sub $20 to $200 in 10 years. I believe the current price of $145 is vulnerable to a further 10-20% pullback. How the large producers Vale, BHP, Rio Tinto and Fortescue handle this scenario is anyones guess. Cost reductions via a curtailment of machinery/transportation investment may be the result. Since the BRIC and Steel blog Joy Global has fallen 30% with the more diverse Caterpillar down 16%. I am of the belief that the mining stocks still have a lot of downside. Shipping stocks have fallen around 25% (ex AP MoellerMaersk only -12%). If Iron Ore demand weakens, they are all vulnerable as to are the banks that have direct debt exposure (see previous blogs).  Lets not forget Coal, another important factor in Steel production. Maybe fracking and a decline in Steel demand will lead to more towns like Jim Thorpe which at one time had more millionaires than any other town. I have stayed there and whitewater rafted in the nearby river. Lovely place!

Tags: bunker fuel, China, Iron Ore, Jim Thorpe, mining machinery, Shipping, steel

US Economy

BNSF Rail freight update.

Regular readers will be familiar with this chart. Updated to end April. Points of interest. Vehicles are still going gangbuster! However, as you can see, Metals and Metallic Ores have started a downward trend in the last few weeks. Housing materials have seen an uptick over the same period. Food, having been growing at an annual rate of 4% earlier in the year, has turned negative year on year. The total volume (black dotted line) year on year rate has declined from its spring peak every week since March 10th. Interestingly, Food has a good correlation with total volume. All in all, to my mind, this chart confirms my continued belief that the record warm winter America breaks records…Swinter in USA drew demand forward. If economic expansion is to be resumed, car sales will have to be maintained at the current strong pace and housing starts will need to grow further. I have mentioned on many occasions that with the US budget deficit growing at an unsustainable pace the tailwind of government debt growth will turn to be a significant headwind. If you want to see what that turnaround looks like, you need look no further than Europe.

Tags: Iron Ore, Rail freight, steel

BRICs Steel and the UK (update)

UK Money Supply…As I mentioned in my earlier blog Where is all this money coming from?  P=MV or Nominal GDP=Money Supply x Velocity. I know the old fashioned M4 data (see below) is no longer favoured by the Bank of England, as it includes too many financial transactions, never the less it has a story to tell. If you innocently take the direction and depth of contraction in Money Supply and couple that with an expression of Velocity, you come to a conclusion where GDP is heading. So the big question is, What is the Velocity of money doing? I have a rather simplistic idea of Velocity. If shop vacancy rates are rising, which they are, it polarises demand into the bigger high street names but is a negative for Velocity. If disposable incomes are falling, which they are, and inflation remains stubbornly high, which it is, then that is a negative for Velocity. If Taxation is rising, which it is, that is a negative. Asset prices are also an important factor. Forget about stock markets as they have gone sideways for the whole of this millennium. The biggest positive influence on Velocity has been Real-Estate (Housing). In my simple world I believe that the increase in house prices (to the owner occupier UK citizen) between the mid 1990`s and 2007, gave him/her an addition 20% annual uplift of disposable spending power during that time. If I am right in thinking house prices will decline by 5% this year, that uplift is reversed and only compounds the contraction to disposable spending mentioned earlier. So, to sum up, Money Supply (old fashioned) is contracting and the influences on Velocity are negative. If I wanted to be outrageous, I would say that this implies a contraction in the UK economy of 3-5% over the next 18 months.  Below is the annual % growth/contraction of M4.

In the words of the late prime minister Harold Macmillan

`A successful economy must be based on the production of wealth and marketable goods, We must transfer away from an over-reliance on services, back to production. We cannot go on borrowing for ever` Economageddon..The end is near

BRICs and Steel…I have raised the importance of heavy industries to the world economy many times, generally, with references to the shipping industry (around 90% of goods have had a sea journey).  My concerns have centered on the level of capacity and supply in the worlds biggest market. Recent developments in the Shanghai Steel market  have given me reason to update. Whilst daily steel output is at a record 2 million tonnes per day, consumption is failing to keep up. Spot prices have now fallen back to early March lows. Inventory paydown has been a driving factor. Over the last 5 years, inventory has fallen by 20% during the busy spring period (nine weeks). This year, inventory (which was not low to start with) has only fallen by 10%. This has also lead to a slight decline in Iron Ore prices. We are nearing a very important point in the global economy!!! If China does nothing to ease monetary policy by the end of May, things will turn ugly. Steel companies in China had a disastrous Q1 losing around $1bn. If demand is not stimulated by the state, prices will fall. This is not only a negative for the vastly over supplied steel market but more importantly the BRICs and Australia who have built a large part of their success on the export of Iron Ore. Of course, this scenario would be the straw that broke the camels back for the Shipping Industry. Keep a weather eye on the Baltic Index as it may be an early indicator of weaker demand. I have written extensively on these subjects and just this scenario earlier in the year BRICs and Steel  Iron Ore The Perfect Storm  The Plimsoll line is clearly visible!

Tags: China, Consumers, Housing, Iron Ore, steel

UK Economy (update)

GDP and Government Debt

With tax receipts in yesterday’s report showing a decline (year on year) in Income Tax and no, post inflation, growth in Production, VAT or Corporation Tax, it is no real surprise that GDP was a disappointment. Plus, as I said yesterday, some of the warm March impetus will not be available until the revisions.

GDP had several positive and negative influences…….. Positive: Govt Health sector, Sports Activities, Amusements and Recreation, Office Admin, Computer Programming, MotionPicture/Video/TV programme production, Retail Food and Beverage…. Negative: Financial Services, Construction, Mining/Quarrying, Agricultural/Forestry/Fishing

The warm weather will have had a positive influence on outdoor activities with the added bonus of early spring shopping. This does not bode well for the second quarter although the extent of any negative influence is hard to tell. What I can say is that the extreme weather seen in April has slammed on the breaks to any spring awakening. Hopefully the Queens celebration and the Olympics will be a able to lift the gloom after what will be  negative Q2 GDP. Construction of new houses will have been given a boost (Q2) from the Governments incentive to first time buyers of new homes. How sad this ill judged incentive will only benefit the developers sell overpriced new homes to the young who will then be trapped in negative equity.

UK Economy.

I have written many blogs on the state of the UK economy. I believe they have and will continue to prove correct. The earliest entries back in December and January highlighted the deep seated problems. I think the media frenzy this week, on will we or wont we avoid a double dip recession is quite frankly bordering on the pathetic. If GDP for Q1 is minus 0.1% the headlines will condemn the government. If it is +0.1%, all is well. With the figure being released with only around 70% of the data makes for revisions later. The fact that retail activity blossomed in March with the early spring means it may have come too late to make the first estimate. If I had to guess I would say slightly negative now with an upward revision later. But I don’t care about the past. The most important data release this week is the government borrowing estimates for March. Last month the borrowing figures were a negative surprise to the market. Of course one months data is not sufficient to paint a trend. I was then and am still of the belief that the governments finances are on a very poor trajectory. Income tax receipts (March) are unlikely to be robust (see UK Unemployment) with so many high income jobs being lost in the city. March is not a big month for Corporation receipts so no big shocks there. VAT will be positively influenced by the warm weather (as seen in Retail Sales). On the negative, Interest payments are behind the curve for the quarter and could be much higher than the usual big quarterly cost. Below you will see the monthly Receipts and Expenditure over the last two years. They hardly paint a picture of austerity. Receipts amble along with the extra VAT  giving some help whilst expenditure has for the most part been up on last year. The debt will not stop growing at this rate. The new tax year will bring a surge in additional receipts but as you well know that will have negative impact on disposable incomes. Within three months the FX markets may have realised that the UK is just as much a basket case as Spain or Italy. The only difference so far has been an independent currency which has allowed us some manufacturing growth impetus due to its weakness. With our main trading partner going into an economic tailspin, China not yet loosening and the USA and Japan facing ticking debt time bombs, why would a highly indebted, poor trade prospect currency with no safe haven status be worth anything. I could well imagine Sterling testing its all time low against the Dollar which from memory was around $1.08. Maybe if Gordon Brafoon had not sold a chunk of our Gold reservers for some shiny beads and a copy of Andy Stewart singing  Donald Where’s Your  Troosers?  we might have better credibility. Estimates for Public Sector net debt range from unchanged £12.9bn to £14bn. As expenditure was way above trend last month it could revert this month. I still expect a deficit at the high end or worse.

UK Government Expenditure

UK Government receipts

I have been totally wrong on Sterling to date. My expectations earlier in the year were far too negative. The market saw events otherwise. I am not going to change now. As you can see if you click on the chart below. We are due some fireworks soon. Either we break out of this pennant formation to the upside or to the downside. Either way it is likely to be a sharp move with a $1.85 target if I am wrong and $1.40 if I am right. At $1.40 inflation would become unbearable with Petrol/Diesel up 10p a litre to start.

Tags: Currencies

APMoellerMaersk..Yen..SuezCanal (Update)

AP Moeller Maersk

I have written many articles on the shipping Industry. In January I published a 16 year chart which I believed showed a seriously long trend head and shoulders formation. Well, since then several analysts upgraded the stock and forced it to the high of its long term downtrend. From that peak it has fallen 20% and is back to the January level. The sector news continues to be bleak but again some analyst are talking positively due to the significant freight rate increases forced through recently. The only way these increases have any chance of sticking is to raise the already high level of vessels laid up at anchor. I for one do not expect them to stick and why should they. A worrying trend for the biggest fleet operator in the world is that despite a 5% uptick in volume through the Suez Canal in Q1 (see chart below), there was only a 0.40% increase in the number of ships. With the worlds fleet continuing to grow each month, eventually the Net Asset Value will have to be cut dramatically. Shipbuilding yards will, by the second half of 2012, offer a buy one get one free deal. They (shipbuilders) will not all survive.

AP Moeller Maersk (APMM) 1996 to date (click on chart)

Suez Canal tonnage 2007 to date (click on chart)

Most of the Q1 growth in tonnage came in January. Since then the spring uptick has been very sluggish.

Japanese Yen  (click on chart)

I have written many times on the impending peril that Japan faces. I have forecast that much further Yen weakness will eventually help the Nikkei above the Dow. In the same January blog, as mentioned above, I showed a 40 year Dollar/Yen chart which highlighted the peak of the Yen. It will go much lower. The updated chart below includes the uptrend (vs $)  from 2007. The long term moving averages are still firmly in place for that weakness to continue.

Tomorrows posting will be about the downfall of the UK. Within 3 months we will be talking about austerity for real not the austerity light which we have been lead to believe will solve our debt crisis.

US Economic health check

Lie on your side…breath in…this wont hurt…Not the words you want to hear from a burly, rugby playing Australian doctor wearing extra large sterile gloves.

Sorry, I was thinking of the time I had my Appendix out. All in all not a great experience.

It is that time again. An update of the BNSF rail freight data. Only this time it is much more exciting! I have added two addition components of the Freight Wagon (Carload) segment. They are Sand/Gravel and Lumber/Wood. Given the importance of the construction industry and its widely forecast recovery (from what is presumed to be the bottom of the cycle) these two new sub-components should pick up any trends. If you click on the first box, you will see the updated and improved data. The second box will reveal a chart showing the 2012 growth or contraction rate (%) versus 2011.  I am unsure how much of an effect the earlier Easter has had on the figures but it is interesting how weak the two construction components have been over the last two weeks. Still too early to call. Given the tail wind of the warm winter it is only now that the true picture of the economy is emerging. The next update will be very interesting (to me at least). It is clear that without the light vehicle demand, Uncle Sam would be in a pretty dire shape. It could be very interesting if the explosion at the main resin supplier (to the auto industry) leads to production halts. Inventory for Cars has fallen to 44 days in April versus 48 in March. This is below normal levels. Production is up 17% this year with an additional 570,000 vehicles in Q1. Truck inventory, another regular theme, is stable at 66 days

Tags: Rail freight

BRICs and Steel (update)

BRICs and Steel

As I have said for a while, production capabilities in heavy industries is way above even the most optimistic of consumption demand forecast. So why the update? Well, with Chinese steel mills recording their all time high monthly production in March, it would appear all is rosy and demand must be just dandy. As you can imagine, I see things differently. In the first quarter, steel companies in China lost (estimated) 1 Billion Yuan versus a profit of 25 Billion Yuan Q1 2011. That makes them desperate to meet any demand from the important spring construction season. It is possible that this high level of production will  just end up as expensive inventory. In the last two weeks, volume traded on the Shanghai exchange has been very low. Prices are showing a downward bias. So what is demand upto? In the earlier BRICs and Steel report I highlighted the reduction in railway infrastructure investment for 2012. In February, investment spending (on the railways) hit a multi year low of Yuan 32.6, surpassing the previous low of Yuan 36 Billion immediately following the Zhejiang province disaster. On top of this, other heavy users of steel do not look to be on an upward trajectory. Shipbuilding, a subject I have highlighted so many times even I have become bored with it, will likely see a 50% drop in orders by the time 2012 is out. China took the mantle of worlds biggest builder from South Korea in 2011. As orders from previous years get completed and hopefully delivered (no guarantee as finance for completed delivery is getting scarce) many plants will be idled. The two other main consumers, construction and transportation, are also showing signs of slowing activity. In Q1 total vehicle sales (commercial and private) were down 3.4% on 2011 Q1. Forecast by the industry still point to growth of around 7.5% for the full year but given the shaky start and the two significant increases of state controlled fuel prices, these seem a little ambitious. As for construction, who knows. It is all down to the state as and when they start to loosen monetary policy. For now, the picture is one of much slower building project starts, this of course could change very quickly.

Tags: China, Iron Ore, steel

UK Unemployment

A quick update.

The Bloomberg headline reads  `UK Unemployment unexpectedly falls as economy gains momentum` great news and very welcome relief to the government.

As you have come to expect, I will put a slightly different slant on things.

Looking through all the positive data there are a few facts which need expansion. Part time employment grew by 80,000 whilst full time fell by 27,000. Redundancies in the 3 month period were 174,000, up 11,000 on the previous period and up 47,000 on the 2011 period. This would not be a problem if vacancies were growing strongly. Sadly they were flat on the previous period and down 19,000 on 2011. Pay growth or rather the lack of it was the main feature. The negative divergence between pay and inflation is one I have highlighted on several occasions. One of the real worries is the continued downward pressure on the Velocity of money.This was highlighted in `Where is all this money coming from`.  Jobs in Starbucks or Waitrose do not make economic growth sustainable. Low paid jobs in services are masking the real problem.

Without doubt, the primary reason for growth in part time jobs was the very mild winter. In fact the biggest change in the incomes components was the 30% increase (month on month) of bonus pay for the Wholesale, Retail, Hotels and Restaurant sector.

As a side issue and one that needs urgent government attention if anarchy is not to prevail. Employment of UK born citizens was down 208,000 whilst employment for those born outside the UK was 212,000 higher.

All in all, these numbers do nothing to help the fiscal deficit. More on that next week. They do suggest that the Retail Sales number for March will hold up but only due to the sunshine and increased availability of WageDayLoans which is another time bomb of the debt culture.