Tag Archives: commodities

China’s steady commodity imports are remarkable in context

By Clyde Russell, Feb 16, 2016

China’s imports of major commodities presented a “steady-as-she-goes” picture in January, which doesn’t sound that exciting but should go some way to hosing down some of the more alarmist fears over the state of the world’s second-biggest economy.

In a month where commodity prices were rattled by ongoing global growth fears, and equity markets also stumbled, it has to be reassuring to some extent that the physical flow of commodities to China looked more or less normal.

Worries flared over China’s currency valuation, credit risks and capital outflows, contributing to the MSCI World Index dropping as much as 10 percent in January, while Brent crude oil plunged as much as 25 percent at one point during the month.

China’s crude oil imports did drop to 6.29 million barrels per day in January, a decline of 20 percent from December and 4.6 percent on the same month in 2015.

But seen in the context of December being the record high for crude imports and the Chinese New Year holidays being 11 days earlier this year than in 2015, it becomes clear that the crude imports are within the realms of reasonable variation.

It’s also worth noting that exports of refined fuels fell in January to 679,000 bpd from December’s record 975,500 bpd, meaning less crude was needed for oil product exports.

Crude imports in February are expected to be around 6.63 million bpd, according to assessments by Thomson Reuters Oil Research and Forecasts.

If the February forecast is accurate, it would mean a fairly solid start to the year for Chinese crude demand, continuing the pattern seen last year of rising oil demand for strategic storage and increasing gasoline consumption on the back of higher vehicle sales.


Iron ore imports were weaker in January from the prior month, dropping 14.6 percent to 82.19 million tonnes.

However, as for crude oil, December 2015 had been a record month for iron ore imports, and January’s figure was still 4.6 percent above that for the same month a year earlier.

There was most likely an element of stockbuilding ahead of the early February Chinese New Year holidays, as witnessed by a gain of some 2 million tonnes in port inventories over the month.

But it also seems clear that despite the much-publicised woes of China’s steel sector, which is battling both excess capacity and weak demand, iron ore imports are very far from collapsing.

It would be surprising if they managed to improve on last year’s record 952.8 million tonnes, given expectations of lower steel output in China in 2016.

But overall, the main problem with iron ore isn’t demand, it’s the massive amount of oversupply caused by the overly optimistic forecasts made several years ago by the major miners, which led them to ramp up production to levels sufficient to swamp the market.

Copper continued the January pattern of a drop in imports from elevated levels in December, but still solid when compared with the same month in 2015.

January’s imports were 437,000 tonnes, up 5.3 percent on the same month a year ago, but down 17 percent from December.

In recent months, copper imports have been boosted by buying for inventories, given the industrial metal’s low global price.

While China’s commodity imports for January always come with the caveat of the potential impact of the timing of the Lunar new year holiday, there seems little in the data to cause consternation.

Imports held up well, with the exception of coal, which saw a 9.2 percent drop from the same month a year earlier, although even this may be viewed somewhat positively, as it is a slower pace of decline given the 30 percent plunge for 2015 as a whole.

January’s commodity imports were generally unremarkable, which is remarkable given the turmoil that was taking place in financial markets at the time.


John Rubino: Big Companies, Huge Problems

By John Rubino, Jan 27, 2016

Apple is far from the only iconic US company that’s signaling a global slowdown. Three more are in the news today:

Caterpillar warns equipment sales still falling

(CNBC) – Caterpillar saw retail sales of machinery fall 16 percent worldwide for the three-month period ended in December, the construction and mining equipment company said on Wednesday.

Caterpillar, which is due to report earnings on Thursday, has been pressured by the global slowdown in the energy and mining industries.

The company said retail sales to resource industries worldwide fell 38 percent over the three-month period, while retail sales to the energy industries fell 32 percent.

The pace of declines is also increasing, the company noted in an SEC filing. The worldwide decline in retail sales of machines had been 11 percent for the three months ended in November.

Goldman Sachs recently downgraded the company to “sell,” an unusual and notable call from a major Wall Street firm, saying it expected lower machinery demand from commodity producers.

Caterpillar shares dropped 2.1 percent in early trading. The stock is down about 22 percent since early November and more than 34 percent from its highs last May.


Boeing forecasts 2016 earnings below estimates; shares tumble

(Reuters) – Boeing Co said on Wednesday it would deliver fewer planes in 2016 and forecast earnings below expectations, sending shares tumbling as much as 10 percent to a 52-week low.

The world’s biggest planemaker also reported weaker fourth-quarter profit, mainly due to a charge announced last week for slowing production of the 747-8 jumbo.

Boeing expects to deliver 740 to 745 planes in 2016, its centenary year, down from a record 762 in 2015. It will build fewer 737s as it shifts that factory to the upgraded 737 MAX. It also is cutting 747-8 output in response to weak demand.

Boeing forecast 2016 core earnings, excluding some pension and other costs, between $8.15 and $8.35 per share, below the average analyst estimate of $9.43, according to Thomson Reuters I/B/E/S.

Its forecast for about $10 billion in operating cash flow in 2016 raised concern among analysts.

Boeing’s net income fell to $1.03 billion, or $1.51 per share, in the fourth quarter, from $1.47 billion, or $2.02 per share, a year earlier.

Core earnings declined to $1.60 per share from $2.31, reflecting a charge for slowing production of the 747-8 jumbo jet. Wall Street looked for core earnings of $1.26 per share, according to Thomson Reuters I/B/E/S.

Fourth-quarter revenue fell about 4 percent to $23.57 billion. Analysts expected $23.53 billion, according to Thomson Reuters I/B/E/S.


Is Bank of America on Life Support?

(The Street) – If the current economic trajectory for global recession holds, and I think it will, one of the victims is going to be Bank of America (BAC). And it probably won’t survive.

This is not because of any changes with respect to the company’s business strategy. It’s because no changes have been made.

Since the Lehman-era crisis, Bank of America has been dealing with legacy issues, buying loan business by offering much lower interest rates to institutional borrowers on commercial and industrial (C&I) loans than the other money centers, and reducing costs by firing people.

That’s not a business strategy, though. That’s just hunkering down and trying to outwait the economy and business environment with the expectation of “this too will pass.”

In the first several years following the Lehman era, the “this too will pass” belief was predicated on the Fed stimulus causing an increase in borrowers that would allow for an increase in economic activity and an ability to both absorb the legacy losses and eventually grow the bank again.

The oncoming recession is going to challenge all four money centers, but it represents an existential crisis for Bank of America because it’s going to move from dealing with mortgage legacy issues to dealing with oil-sector loan defaults without any way of cutting costs or buying revenue by offering lower-cost C&I loans than the other three money centers.

The bank has already steadily reduced its labor force for the past seven years, resulting in a 30% cut in total and the smallest number of full-time employees of all the money centers.

Bank of America is on the verge of having investors realize that the bank is in runoff mode.

Three companies in very different fields, all of which are forced to admit that their business model doesn’t match the environment. All hope the environment will improve, but in fact it’s deteriorating at an accelerating rate. The commodities complex is still contracting due to vast overcapacity (Cat). Air travel is becoming ever-less attractive as former tourist destinations like Greece and Egypt (and Paris) descend into chaos while new diseases make even boarding a plane a life threatening activity. See Women asked to avoid pregnancy as zika virus spreads (Boeing). And banks have leveraged every corner of the world and are running out of people to con into borrowing more. (BofA)

The result: Weak numbers stretching as far as the eye can see, punctuated by the occasional existential crisis. Not the ideal “hot stock” profile.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:


John Rubino: Short Sellers Back In The Saddle

By John Rubino, Jan 20, 2015

The improbable success of The Big Short, a scathing and hilarious tutorial on making money during a financial crisis, probably has a lot of people thinking that now might be a good time to start betting against the current bubble(s).

That’s a well-timed thought because it comes after three long years in which shorting was really, really hard. Why was it hard? Because easy money — at first — floats all boats. When interest rates are low and financing is readily available, even the crappiest companies can pay their bond interest and support their share price with debt-fueled share repurchases. The uniformity of the past few years’ bull market was so extreme that buying the most heavily-shorted stocks — on the assumption that those companies would have access to sufficient capital to support their market value, thus forcing the shorts to cover at ever-higher prices — was a successful and widely-practiced strategy.

But as Warren Buffett likes to say, when the tide goes out you see who’s swimming naked. And in the past year, as the US stopped quantitatively easing, China stopped buying commodities and oil tanked, the tide has gone out with a vengeance. Already, the Russell 2000 index of small-cap stocks is down 22 percent from its cycle high and fully half of the S&P 500 is down more than 20%.

Long-suffering short sellers, as a result, now find themselves in a target-rich environment reminiscent of The Big Short’s final act. Dallas-based Bearing Fund is a case in point. After a “humbling” couple of years, partners Bill Laggner and Kevin Duffy have ridden some high-profile short positions (including SunEdision, Wynn Resorts and Valeant) to big gains, with — if this bubble deflates according to the standard script — much more still to come. Here’s a short Q&A compiled from an exchange of emails:

DollarCollapse: The past few years have been tough for short sellers. But during 2015 that changed in a big way. What happened?

Laggner and Duffy: The commodity bubble actually began to crack in 2011, led by deterioration in China and the first convincing signs of governments losing control. But speculators continued to stay at the casino, especially in the US where short-term interest rates remained at zero. So unlike the last bubble where real estate was the main collateral, this series of echo bubbles included any kind of financial asset.

After the commodity sector was hit, other related countries’ stocks and currencies began to falter, led by Brazil and Russia. The last shoes to drop were various sectors of the US economy as endless intervention finally exhausted itself and nonfinancial operating profits peaked. By the end of 2015, 52% of the stock market was down 15% or more.

DC: You maintain a list that’s a mirror image of those that most money managers compile, because yours — the Bearing Short Index — is made up of things that you expect to go down. How has it performed historically and recently?

L & D: When we created the Bearing Credit Bubble Index in 2004 our goal was to demonstrate where the real distortions were playing out from central bank largess. Those sectors eventually declined by 70%-80%.

About 18 months ago we constructed an equal-weighted index of our short selling universe at the time, 53 stocks. From its all-time high on June 23, the Bearing Short Index was down 20.3% by mid-December. Over the same period, the S&P 500 was -4.8%. Of the 53 stocks in the index, 11 were down over 40% from their 52-week highs while 5 were down over 60%.

Bearing short index Jan 16

In other words, the past six months have been ideal for short sellers and miserable for a number of high profile hedge funds which have been long many of these formerly highflying stocks.

The coordinated central banking interventions this cycle led to numerous distortions in a variety of sectors and over the last 12 months the Bearing Short Index has declined at roughly 4X the rate of S&P 500. So clearly we’ve identified some of the more egregious actors.

DC: What are your main themes? In other words, what parts of the global economy do you expect to do most badly from here?

L & D: Prolonged ZIRP has fueled the biggest bubble since ’00. China led the charge by expanding debt by over $18 trillion since ’09, so unwinding that means lower commodity prices and Chinese bank solvency problems.

Meanwhile, the infatuation with anything offering yield like REITs, MLPs, junk bonds, alternative energy “yieldcos” will end in tears once the commodity carnage is recognized by the market.

Finally, much of the debt from the prior two bubbles was never allowed to deflate. So excess everything (derived from cheap credit) will ultimately lead to contraction in economic activity/profits, driving most asset prices back below fair market value.

DC: Right now the world is in chaos and most categories of financial assets are falling hard. How long do you see this continuing and how will you know when a bottom is in?

L & D: Well, we know that getting here [since the 2008-2009 crisis] took almost $63 trillion in new debt globally and a tremendous level of financial engineering/leverage, so with pieces of the commodity cycle crashing to earth we would say this is the top of the second inning. Bottoms take time and unfortunately moral hazard created by bailouts/stimulus has encouraged many to await the next rescue mission experiment. Of course, margin clerks are getting busy and many of the speculators are playing with rented merchandise, so selling begets selling.

At the bottom you will see despair, frustration, and obviously no discussions at cocktail parties about stocks or real estate investing.

DC: What role do precious metals play in the world you see coming? How do you choose among the various ways of owning/betting on gold and silver?

L & D: Gold is unencumbered money so owning gold is really just insurance in the event fiat currency systems end badly. Of course owning gold miners is much more challenging as the industry became distorted from suppressed interest rates and related malinvestment. We’ve tried to find good operators in relatively safe jurisdictions with lows costs. The recession in mining coupled with low energy costs has allowed many of these companies to lower all-in sustaining costs so gold miners look attractive again.

DC: You’re both followers of the Austrian School of economics. How does this inform your decision making?

L & D: The economy is a complex adaptive system similar to the brain, the Internet, and ant colonies. The connections are important and information gets transmitted via the price system. Austrians recognize that interfering with freely determined market prices (by central command) sends the wrong signals to economic actors. When a central bank suppresses the price of credit – interest rates – bad things happen. To quote Jim Grant, “This is like turning all the traffic lights green.” One possible result of this is inflated asset prices and an unsustainable boom.

Austrian Business Cycle Theory tells us that the depth of the bust will be proportional to the boom. Since we just witnessed a tripling of stock prices over a 6 year period, we expect the ensuing bust to be historic. As Austrians, we also know to look for areas of malinvestment on the short side, typically long-term grandiose projects (like record high skyscrapers in China) or consumer goods where long-term financing is offered (such as 7 year auto loans). On the long side, it suggests we keep it simple and invest in basic necessities like food and affordable luxuries like beer. “When the going gets tough, people eat, drink and smoke.”

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:


Harmless commodity crash accelerates as dollar soars

By Ambrose Evans-Pritchard, Nov 23, 2015

copper mineThe bottomless pit of copper.

‘Dr Copper should be struck off the list. He is telling us a lot about over-supply in China, but little about the world economy,’ says Capital Economics.

Copper prices have crashed to their lowest level since the Lehman Brothers crisis and industrial metals have slumped across the board as a flood of supply overwhelms the market.

The violent sell-off came as the US dollar surged to a 12-year high on expectations of an interest rate rise by the US Federal Reserve next month. The closely-watched dollar index rose to within a whisker of 100, and has itself become a key force pushing down commodities on the derivatives markets.

Copper prices fell below $4,500 a tonne on the London Metal Exchange for the first time since May 2009, hit by rising inventories in China and warnings from brokers in Shanghai. Prices have fallen 32pc this year, and 55pc from their peak in 2011 when China’s housing boom was on fire.

Known to traders as Dr Copper, the metal is tracked as a barometer of health for the world economy but has increasingly become a rogue indicator. China consumes 45pc of the world’s supply, distorting the picture. Beijing is deliberately winding down its “old economy” of heavy industry and break-neck construction, switching to a new growth model that is less commodity-intensive.

“Dr Copper should be struck off the list,” said Julian Jessop, from Capital Economics. “He is telling us a lot about China and the massive over-supply of copper on the market, but he is not telling us anything much about the economy in the US, Europe or the rest of the world.”

The CPB index in the Netherlands shows that global trade began to recover four months ago after contracting earlier in the year, and the JP Morgan global PMI index for manufacturing has risen since then to 51.3 – well above the boom-bust line.

The trigger for the latest plunge in copper prices was a decision last week by the Chilean group Codelco to slash its premium for Chinese customers by 26pc, effectively launchng a price war for global market share. “We’re trying to lower costs. We’re not cutting production,” said the group’s chief executive, Nelson Pizarro.

Glencore has already said it will suspend output in Zambia and the Congo for two years until new equipment is installed, and others are doing likewise. But Codelco is the key player.

Kevin Norrish, at Barclays Capital, said Codelco is in effect copying Saudi Arabia’s tactics in the oil market: using its position as the copper industry’s low-cost giant with a 10pc global share to flush out the weakest rivals.

The price war comes as the expected revival of Chinese metal demand disappoints yet again. Warehouse stocks in Shanghai have risen to their highest in five years, though LME inventories have been falling since September.

Views are starkly divided over the outlook for copper, as it is for the whole nexus of commodities. Goldman Sachs says the demise of China’s “old economy” will lead to a near permanent glut through to the end of the decade.

Natasha Kaneva, from JP Morgan, said it would take another one to two years to touch the bottom of the mining cycle, predicting further price falls of 12pc-28pc. “We remain bearish on all the base metals,” she said.

But the International Copper Study Group is sticking to its guns, insisting that there will be a global copper shortage of 130,000 tonnes next year.

What is clear is that the commodity rout has taken on a life of its own, with financial flows and speculators reinforcing the crash. Nickel, lead, zinc and aluminium have all plunged over recent weeks, tracking the parallel drama in oil and gas. Even soybeans and wheat have fallen by roughly 40pc since May.

Commodity crashes are a dangerous warning signal if global demand is falling. But they are benign if caused by excess supply, acting as a shot of stimulus for most of the world, or a “positive supply shock”, as it is known.

Peter Praet, the European Central Bank’s chief economist, said the jury is out on this point, warning that a “significant part” of the latest slump appears to come from weak demand and therefore needs watching carefully.

Yet the current circumstances are nothing like mid-2008 before the Lehman crisis, when most commodities were reaching fresh highs even though the money supply was already buckling in the US, Britain and the eurozone. Some economists argue that it was the oil shock of June and July 2008 that ultimately caused the financial crisis three months later.

This time the picture is inverted, with global real M1 money growing at the fastest pace in 30 years, potentially setting off a strong economic recovery.

Harvard economist Carmen Reinhart said commodity busts typically run for seven years as it takes time to clear the tidal wave of supply from over-investment during the boom. If the historical pattern holds, we are only half-way through. “This commodity-price roller-coaster ride is probably not over yet,” she said.


Some of This Year’s Most Hated Assets Are Finally Staging a Rally

Bloomberg, Sep 16, 2015

Emerging market currencies like the Malaysian ringgit are catching a bid. Emerging market currencies like the Malaysian ringgit are catching a bid.

A “sell the news” moment for a Fed rate hike?

It’s been a brutal year for just about everything in the world of emerging markets and commodities. Copper, oil, nickel, the Turkish lira, the Malaysian ringgit, and so on have all been getting slammed ahead of a potential rate hike in the U.S. and the slowdown in China.

Lately, some of these markets have been catching a bid.

Emerging market currencies are currently enjoying their longest rally since early 2014. Here’s a chart of the MSCI EM Currency Index. While the bounce at the bottom is not huge, given the scale of the losses over the last year, it’s notable.

A similar story is playing out in the world of commodities.

Oil is surging over 5 percent on Tuesday, and as you can see below, it hasn’t been following its longer-term downward trend of late.

Copper’s story is similar.

One of the stories we’ve heard a lot as to why these currencies and commodities have been such bad performers is that a tightening cycle by the Federal Reserve is seen as bad for emerging markets.

Yet recent gains for these asset classes do not appear to have been driven by expectations that the Fed will delay a hike for much longer. Indeed, short-term U.S. interest rates are near their highest levels in years, signaling market acceptance that the Fed rate hike is inching closer, even if it doesn’t happen this week.

Again, it’s worth reemphasizing that these moves are pretty small. We should watch to see if they gather momentum—and if a Fed rate hike becomes a “sell the news” phenomenon, by which the thing everybody expected would happen (rate hike = bad for commodities and emerging markets) unfolds in a way that people didn’t anticipate.