According to Platts Mineral Value Service, a Munich-based iron ore and steel research company, domestic iron ore’s contribution to the Chinese steel market has declined from 36% of market share in 2010 to around 22% in 2015.
Domestic iron ore output from an industry plagued by fragmentation, high costs and low grades (only around 20% Fe) has halved since 2013 and may dip below 200 million tonnes Fe 62% equivalent this year…..
Even if more Chinese mines shut down and the shift to seaborne ore continues, the seaborne market is not exactly short of tonnage. All-in-all new seaborne supply set to increase by approximately 245 million tonnes by end of 2018 according to Platts MVS.
The big three – Vale, Rio Tinto and BHP Billiton – last week lowered future production guidance, but the aggregate 35 million tonnes in possible lost production hardly changes the oversupply picture and the giants would still hit actual annual output records even at these lowered levels. Citigroup’s analysts expect around an additional 75 million tonnes of iron ore this year to be shipped out of Australia, more than a third of which would come from Roy Hill. The Gina Rinehart mine has brought forward ramp-up plans and now expects to be producing at full annualized capacity of 55 million tonnes by the end of this year. Later this year, Rio’s board is likely to give the go-ahead to build Silvergrass which would add another 20 million tonnes of high-grade, low cost ore to the company’s Pilbara output.
Trading in futures on everything from steel reinforcement bars and hot-rolled coils to cotton and polyvinyl chloride has soared this week, prompting exchanges in Shanghai, Dalian and Zhengzhou to boost fees or issue warnings to investors. Eventually, the excesses will need to be curbed and maybe that starts a new phase of risk-off within China.
As Bloomberg reports, While the underlying products may be anything but glamorous, the numbers are eye-popping: contracts on more than 223 million metric tons of rebar changed hands on Thursday, more than China’s full-year production of the material used to strengthen concrete.
The frenzy echoes the activity that fueled China’s stock market last year before a rout erased $5 trillion, and follows earlier bubbles in property to garlic and even certain types of tea. China’s army of investors is honing in on raw materials amid signs of a pickup in demand and as the nation’s equities fall the most among global markets and corporate bond yields head for the steepest monthly rise in more than a year. Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong, says the improvement in fundamentals and the availability of leverage to bet on commodities is making them irresistible to traders. “These guys are going nuts,” Hong said. “Leverage exaggerates the move of the way up, but also on the way down – much like what margin financing did to stocks in 2015.”
China’s fresh boom nears peak just as amateurs pile in
Tyler highlights the “irrational exuberance” in commodities futures markets but Ambrose Evans-Pritchard at The Telegraph nails the cause:
China’s reflation drive has been explosive. New home sales jumped 64pc in March from a year earlier. House prices have risen 28pc in Beijing, 30pc in Shanghai, and 63pc in the commercial hub of Shenzhen. The rush to buy has spread to the Tier 2 cities such as Hefei – up 9pc in a single month.
“The housing market is on fire,” said Wei Yao, from Societe Generale. “In the first quarter, increases in total credit exploded to 7.5 trilion yuan, up 58pc year-on-year. There is no bigger policy lever than this kind of credit injection.”
“This looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the “four trillion stimulus” package in 2009. The consequence of that stimulus was inflation, asset bubbles and excess capacity. We still think that this recovery will not last very long,” she said.
Yang Zhao from Nomura …. said the law of diminishing returns is setting in as the economy nears credit exhaustion. The ‘incremental credit-output ratio” has deteriorated to 5.0 from 2.3 in 2008. Loans are losing traction and the quality of investment is falling.
“Be careful. We are nearing the point where things are as good as they get for the first half of 2016. We recommend taking some money off the table,” said Wendy Liu and Vicky Fung, the bank’s equity strategists.
….Michelle Lam from Lombard Street Research said Beijing has retreated from reform and resorted to pump-priming again. “This may last for one or two quarters. But how much longer can Beijing go on creating debt at a breakneck pace?” she said.
Their actions reveal desperation at the PBOC. Faced with the unpalatable choice between running down foreign reserves at the rate of more than $50 billion a month, to support the dollar peg, or devaluing the Yuan which would fuel even greater capital flight, the central bank opted to inject a further round of credit stimulus to ease the immediate pressure. There are no free lunches: further credit expansion pushes China’s economy ever closer to a financial crisis.
We are in for a volatile year. Make that a decade…..
….the Reserve Bank of Australia pushes Australian banks to create the New Payments Platform, a new piece of open-source infrastructure being built that will move the payments system to real time. The RBA’s plans are echoed by the US and the eurozone, which are also planning to roll out real time payment infrastructure by next year. These payments would boost Australia’s economic activity, as money flow improves and Australians access their funds as they are deposited, [Don Sharp at InPayTech] argued.
Australian banks could lose $2.5 billion in interest earnings if instantaneous payments were adopted – and the figure could jump significantly as interest rates rise.
Payments held in the banking system are part of the “float” which banks use for interest-free funding of part of their balance sheet — a boost to interest margins. Switch to a realtime payments system would see this disappear.
Goldman Sachs (GS), last of bank heavyweights to release their first-quarter (Q1) 2016 earnings, reported a 55 percent fall in diluted earnings per share ($2.71) compared to the first quarter of last year ($6.05).
Net revenues dropped 40%, primarily due to a sharp 53% fall in Market Making and a 23% fall in Investment Banking. A 29% cut in non-interest expenses was insufficient to compensate.
Basel III Tier 1 Capital (CET1) decreased slightly to 12.2% (Q1 2015: 12.4%) of risk-weighted assets, while Leverage (SLR) improved to 6.0% (Q1 2015: 5.9%).
The dividend was held at 65 cents (Q1 2015: 65 cents), increasing the payout ratio to a still modest 18%.
We have had six heavyweights, JPM, BAC, WFC, C, MS and GS all report declining earnings per share. Most had cut non-interest expenses but insufficient to compensate for falling revenues and rising provisions for credit losses. The results reflect a tough environment.
GS is in a primary down-trend, having broken primary support at $170. Long-term Momentum below zero confirms. Expect a rally to test resistance and the descending trendline at $170 to $175 but respect is likely and would warn of another test of primary support at $140. Breach would offer a target of $110*.
Morgan Stanley (MS) is the latest bank heavyweight to release their first-quarter (Q1) 2016 earnings, reporting a 53 percent fall in diluted earnings per share ($0.55) compared to the first quarter of last year ($1.18).
Net revenues dropped 21%, primarily to a sharp 43% fall in the Institutional Securities (Trading) business and an 18% fall in Investment Banking. Non-interest expense cuts of 14% were insufficient to compensate. Declines were widespread, with Europe, Middle East & Africa (EMEA) (-36%) the worst affected.
Tier 1 Capital (CET1) improved to 14.5% (Q1 2015: 11.6%) of risk-weighted assets, while Leverage (SLR) improved to 6.0% (Q1 2015: 5.1%).
The dividend was held at 15 cents (Q1 2015: 15 cents), increasing the payout ratio to a still modest 27%, from 13% in Q1 2015.
The uneven market uptrend in place since mid-February resumed last week, with the S&P 500 Index climbing 1.7%. The primary catalyst appeared to be better-than-expected corporate earnings results in the still-early reporting season, particularly from the banking sector. As a result, bank stocks performed particularly well, rising 7% last week, marking the best weekly gain in over four years. Investors also focused on better economic data coming from China and ongoing evidence that the U.S. economy is growing slowly.
We have had five heavyweights, JPM, BAC, WFC, C and MS all report declining earnings per share. Most had cut non-interest expenses but insufficient to compensate for falling revenues and rising provisions for credit losses. I’m afraid there isn’t much evidence of growth in the US economy and banking results reflect a tough environment. Beating earnings estimates doesn’t mean much if your earnings are falling.
MS is in a primary down-trend, having broken primary support at $30. Long-term Momentum below zero confirms. Expect a rally to test resistance and the descending trendline at $30 but respect is likely and would warn of another test of the band of primary support at $20 to $22. Breach would offer a target of the 2011 low at $12*.
In our view, the most obvious underlying factor behind this recovery is credit. In Q1, increases in total credit exploded to CNY7.5tn, up 58% yoy and equivalent to 46.5% of nominal GDP – one of the highest ratios ever. Credit growth accelerated to 15.8% yoy to end-March, the quickest pace in 20 months.
Credit growing faster than nominal GDP is unsustainable in the long-term.
“Australia continues to swim strongly against the global tide, shrugging off China’s slowdown, rotten commodity prices and a fast fading resource construction boom to chalk up good growth,” said Deloitte Access Economics partner Chris Richardson…..
“A stronger Australian dollar … could, if it is sustained, start to take the cream off the cake of the non-mining growth story,’ said Mr Richardson, “with some of the recent gains in tourism and international education potentially at risk, and the possibility of the blowtorch to the belly going back onto the nation’s long-suffering manufacturers and farmers.”
The Australian Dollar is too strong given the current headwinds facing the economy. Having closely tracked commodity prices since 2009, recent divergence has the Aussie rallying to test resistance at 80 US cents. Failure of negotiations among major oil producers, in Doha, to institute a production freeze, may be just the catalyst needed to spark another decline. This time with a target of 60 US cents.
From Pam Martens and Russ Martens via WallStreetOnParade.com:
Yesterday the Federal Reserve released a 19-page letter that it and the FDIC had issued to Jamie Dimon, the Chairman and CEO of JPMorgan Chase, on April 12 as a result of its failure to present a credible plan for winding itself down if the bank failed……
At the top of page 11, the Federal regulators reveal that they have “identified a deficiency” in JPMorgan’s wind-down plan which if not properly addressed could “pose serious adverse effects to the financial stability of the United States.”
How could one bank, even one as big and global as JPMorgan Chase, bring down the whole financial stability of the United States? Because, as the U.S. Treasury’s Office of Financial Research (OFR) has explained in detail and plotted in pictures (see below), five big banks in the U.S. have high contagion risk to each other….
….Equally disturbing, the most dangerous area of derivatives, the credit derivatives that blew up AIG and necessitated a $185 billion taxpayer bailout, remain predominately over the counter. According to the latest OCC report, only 16.8 percent of credit derivatives are being centrally cleared. At JPMorgan Chase, more than 80 percent of its credit derivatives are still over-the-counter.
Contagion and derivatives exposure….. two facets of the same problem. To me the question is: why are too-big-to-fail banks allowed to carry such high derivative exposure? Wells fargo (WFC) seems to be the only big bank who is not swimming naked.
The Australian’s Adam Creighton has written a ripper post explaining why, in the wake of tax avoidance scandals (e.g. multinational and the Panama Papers), a broad-based land tax is needed more than ever, but will never see the light of day due to vested interests and weak politicians:
Windfall gains to private land owners stemming from developments outside their control are a far better object for taxation than income and consumption, which prop up vast avoidance industries…
Taxes on land are unique economically because they can’t be avoided and they don’t distort supply…
In fact, over time land tax (which should apply only to the unimproved part) could even reduce rents by encouraging development, including more apartments, on undeveloped land…
Land taxes may well be fairer, too. Just as the owners of land adjacent to new railway stations have done nothing to generate their windfall, land owners don’t lift a finger to generate increases in unimproved land values…
A comprehensive national, flat rate tax on unimproved land taxes was part of Labor’s platform from 1891 to 1905. The party should consider resurrecting this policy and using the proceeds entirely to slash personal income and/or company tax to unleash a productivity, investment and spending boom. This would help affordability; property prices would automatically fall…
A 1 per cent annual land tax without any exemptions could raise around $44bn based on the ABS’s estimates…
The economic ignorance and self-interest of land owners will, however, prevent any shift towards land tax, however beneficial it might be in the long run for almost everyone.
Vested interests would launch a hysterical defence of existing arrangements, wrongly claiming poor renters would be harmed.
Others would argue even stupid policies can’t be changed because some people have arranged their affairs around them.
Creighton has nailed it.
Land taxes are one of the most efficient sources of tax available, actually creating positive welfare gains to the domestic population of $0.10 for each dollar raised, since non-resident home owners are also taxed (see below Treasury chart).
Even just switching inefficient stamp duties (which cost the economy $0.70 per dollar raised) to a broad-based land tax would produce an estimated 1.5% increase in GDP, or $24 billion, without changing the amount of tax raised.
Unfortunately, while the arguments for shifting the tax base towards land taxes are impeccable, there are several key factors holding politicians back.
Consider the proposal to merely junk stamp duties in favour of a broad-based land tax levied on all land holders.
As shown by the RBA, only around 6% of the housing stock is transacted on average in a given year:
This means that in a given year, only a small minority of households pay stamp duty (albeit tens-of-thousands of dollars of dollars). And once they pay it, they automatically become a roadblock to reform (“why should I pay tax twice”, is the common retort).
While having such a small group of taxpayers supporting services for the whole community is ridiculous, rather than governments sharing the tax burden by levying each household a much smaller amount on a regular basis, it is far easier politically to tax a small group than everyone.
The other major roadblock with land taxes is that they would be levied on retirees that are asset (house) rich but cash poor. They would, therefore, squeal like stuffed pigs if they were required to pay tax.
The obvious solutions to these roadblocks are:
To overcome concerns around “double taxation”, provide a credit to anyone that has purchased a home in the past 10 years, equal to the amount of stamp duty paid, and then subtract the hypothetical land tax that would have been paid since the home was purchased.
Allow retirees to accumulate their land tax liability, with the bill payable upon death (via the estate) or once the house is eventually sold (whichever comes first), with interest charged on any outstandings.
However, even with such arrangements in place, politicians would still face the option of maintaining the status quo and taxing only a small number of people each year (easy) versus reforming and taxing almost everyone (hard).
Add in a fierce scare campaign from the property lobby – especially if land taxes were extended beyond just stamp duties to replace income taxes – and the likelihood of achieving meaningful reform is slim, especially with the current useless crop of politicians.
Citigroup (C) was the last of the bank heavyweights to release their first-quarter (Q1) 2016 earnings this week, reporting a sharp 27 percent fall in diluted earnings per share ($1.10) compared to the first quarter of last year ($1.51).
Revenues (net of interest) dropped 11% while non-interest expenses reduced by 3%. There was a modest 7% increase in the provision for credit losses (including benefits and claims). The fall in net revenues was largely attributable to a 27% decline in institutional business from Europe, Middle East & Africa (EMEA) and an 8% decline in North America. Consumer business also dropped in Latin America (13%) and Asia (9%).
Tier 1 Capital (CET1) improved to 12.3% (Q1 2015: 11.1%) of risk-weighted assets, while Leverage (SLR) improved to 7.4% (Q1 2015: 6.4%).
The dividend was held at 5 cents (Q1 2015: 5 cents), increasing the payout ratio to a parsimonious 5%, from 3% in Q1 2015.
C is in a primary down-trend, having broken primary support at $48. Long-term Momentum below zero confirms. Expect a rally to test resistance at $48 but respect is likely and would warn of another test of the band of primary support at $34 to $36. Breach would offer a target of the 2011 low at $24*.
* Target calculation: 36 – ( 48 – 36 ) = 24
We have had four heavyweights, JPM, BAC, WFC and C, all report declining earnings per share. Most had cut non-interest expenses but insufficient to compensate for falling revenues and rising provisions for credit losses.
It looks like we are on track for a tough earnings season.
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