Archive for May, 2012

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!


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Sunday, May 13th, 2012 China, Oil, QE, Shipping No Comments

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!


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Monday, May 7th, 2012 China, GDP, Shipping, Steel 3 Comments

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.

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Friday, May 4th, 2012 BNSF, US Economy No Comments

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!


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Thursday, May 3rd, 2012 BRICs, China, GDP, Shipping, Steel, UK No Comments
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