Commodities and China

“We are, however, waiting to see the response of the governments in Asia regarding any type of stimulus to spur growth.”  Nick Carter, NRP President on the metallurgical coal markets right in their earnings release.

“Coal used to make steel is set to drop to the lowest price in two years”  Bloomberg

First signs of coking coal, iron ore rebound emerge at Mining.  If so, Teck Resources (TCK) would be a favorite (chart).  China’s Scary Slowdown May Have Limits at Business Week, yet July data has been coming in weak.

Decreased demand hits China’s rare earth producers at China Times.  Even the Chinese “hopes that the government can stimulate domestic demand to offset the weak demand for rare earth minerals from overseas markets.”

China Seen Delaying New Stimulus:  “Hope Fades for More Spurs to Growth as Beijing Waits for Effects of Its Moves”  WSJ

China’s literally ground-breaking copper inventories at FT Alphaville.  Yet, “China’s copper consumption is expected to grow to 10 million mt by 2020, up 36% from 2011” at Platts.  Supply will not meet this projected demand with $3 handle copper.  The dynamics of the next decade will be fascinating.

Copper: The Essential Metal at Visual CapitalistCopper: Supply and Demand at Visual Capitalist.

Dr. Copper’s Head & Shoulders at Ritholtz.

Giddy on Coal

This weekend everyone was excited over the coal stocks.  The charts finally turned and started to improve:  ACI, CLD and a chart-fest at FINVIZGot Coal? When “Less Bad” Starts To Work at Upsidetrader garnered a lot of attention.  I was told Dan Fitzpatrick is high on coal.  Am I too cautious in my patience?

First, note the S&P 500 closed last week above 1400, with the cyclicals actually leading (Alhambra).  Conversely, denial in the commodity sector?  Market Anthropology

The ISA thesis continues to be to wait on natural gas.  Looks like “U.S. natural gas prices must average in the $2.50 to $3.00 range”  through shoulder season at Raymond James.  Well productivity, associated gas production and the well-count backlog continue to keep natural gas supply high.  Look for a turn later this year in the best natty supply read you will find: RBN Energy.

Until natural gas normalizes:  “We are moving into an environment where coal-fired power plants are only partially base loaded and many are only loaded in an intermediate and peaking basis.”  SNL

Long term, ISA is in the super-cycle camp too.  Japan is energy short (Washington Post).  But not right now.  Sinking coal prices force major job cuts in Australia at Mining.

US thermal coal is the play, not coking coal.  The China slowdown needs to end to turn around steel production (WSJ).  This Motley Fool essay unintentionally shows Alpha Natural (ANR) to be in big trouble if met coal holds steady or heads lower.

In the second quarter James River (JRCC) slashed capex to $5 million more than operating cash flow, and it was spun as positive (Barron’s).  Ignored was interest expense being at over half cashflow alone.  Who are they kidding?  When the thermal market does turn, the capital starved players will lose out to the strong.

Big Picture

Amid the European mess and weak emerging markets, the US has seen The Housing Recovery Strengthen at esoltas.  Both Home Prices and Rents Rise at CNBC.  Auto manufacturing and sales are a strong tailwind at the Detroit News.

The good news continues as The US private economy is growing as the government economy slows at Value Plays.  Further, US Intermodal Volume Hit Record in July at JOC.  This is not the data of recession.

“…we now estimate an upward revision to about 2.5% for Q2 from an original government report of 1.5%.” (First Trust)  Diametrically opposed is David Rosenberg: The Coming Negative Export Shock giving pause at Pragmatic Capitalism.

Further concern:  “China’s export growth collapsed and imports and new yuan loans trailed estimates in July, adding to signs the global economy is weakening…” from Bloomberg.  “China’s crude steel output may fall for the first time in 31 years this year…” in the WSJ.  The world’s largest miners continue to trim capex a billion dollars at a time:  Globe and Mail.

“Real Wages Much Lower Than They Were Four Decades Ago” at Ritholtz.  The unemployment rate for 18 to 19 year olds is 22.2%.  FED

“Stockpiles of the biggest crops will decline for a third year…” at BloombergU.S. Corn-Crop Estimate Cut as Midwest Drought Hurts Yields by BloombergGrain markets may be on verge of final blow-off top by Peter Brandt.

The CRB Index Has Another Date With Resistance at All Star Charts.  Miners to reflate?  Marketwatch

Ten stocks which have payed an uninterrupted dividend more than 110 years and increased their dividend for at least the last 10 years:  Dividend Growth Stocks.

Our current place in the secular bear which began in 2000:  Zeal.  Perhaps the market price low occurred in March of 2009, with the valuation low still years ahead.

No wonder the stock market is such a tough place!  Go Comics

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Coal Industrialization

Coal plant retirements in 2012 look to be 9,000 megawatts against 318,000 megawatts of capacity, a bit less than 3% of the total. More than 1,000 megawatts of the new plant total is coal-fired.  John Hanger

Meanwhile, “Dale Earnhardt Jr. will be touting coal in a newly released commercial by American Coalition for Clean Coal Electricity.”  Fuel Fix  Heat Sends U.S. Nuclear Power Production to 9-Year Low at Business Week.  “Several nuclear plants…were shut down”  Mcall

Coal investors continue to zone in on the rightsizing of the US coal market.  Yesterday Cloud Peak Energy (CLD) reported solid results, especially considering the industry trough (results and conference call transcript).  Cloud has large free cash flow which they are keen on reinvesting into long term export projects.  Look for ISA to have more to say on Cloud in the future.

Perhaps the super-cycle theme still lives.  “China has quietly increased its budget for railway investment this year by 16%”  WSJ

China’s lower manufacturing reading masks ‘notable rebound’ at Mining.

India Blackout Shows Urgent Need For Infrastructure Spending Boost at IB Times.

Copper and Freeport McMoRan: Bear Flag or Base?  ChessNwine

As I continue to consider the industry participants, many ideas are becoming clear.  Importantly, the low cost producers are eating the high cost, over indebted players’ lunch.  Stay tuned and be patient as we wait on natural gas.

Commodities & Bonds

India’s power grid failed for the second day in a row, this time for more than half the country (BBC News).  Is there much doubt about emerging market infrastructure development, as $80-trillion urban boost for mining projected at Mining Weekly.  I lived in a third world mega city for six months; these pictures do not scratch the surface (BBC).

The dynamics become more interesting with mining projects are being delayed, as China slowdown hurts BHP at Bangkok Post.  Iron ore prices continue to be hit (FT Alphaville).  “A peak may be in sight for commodity prices” from the Economist.

Crop damage sending agricultural commodity prices to new highs by Sober Look.  Poor policy has 40% of the corn crop turned into ethanol.  NY Times

Are Interest Rates at a Key Inflection Point?  All Star Charts

“Unilever…sold $550 million worth of 5-year notes with a coupon of just 0.85 percent…Texas Instrument has broken a record for the lowest coupon on 3-year debt at just 0.45 percent…”  Business Insider.  Teck Resources sold 30 year paper at 5.4%.

Doug Kass presentation:  “my favorite short of the next decade is the U.S. bond market” at Business Insider.  The distortions continue with Defensive stocks becoming overvalued at Sober Look.

Interesting macro idea of the day:  “In order to avoid a debt spiral, a country must reach nominal GDP growth at least in line with average financing rates.”  Ritholtz

Black Coal

The coal stocks continue to trade like grim death.  Most of the names are making fresh lows and I do not own any at the moment.  Twice in the past I have been deeply involved with stocks trading below one year of cash flow and some of these act like that is where they are going.  The hairy part is trying to get a position.  Perhaps the coal sector will bottom around this fall’s natural gas shoulder season.  Today’s natty decline is not helping the coal names.

Coal output to shrink as mining margins in retreat at Mining Weekly.

One take on Peabody’s results at Business Week.  BTU’s conference call transcript.  Ironically, there are signs of a bottoming U.S. coal market, but Peabody looks to be weighed down by their Australian operations going forward.

In looking at Arch Coal in advance of the their second quarter earnings release on Friday, I can report the results will be a mess.  ACI will report a loss from continuing operations and a huge write-down.  With a new CEO this could be a kitchen sink quarter.  The headline GAAP number could be near a $2.50 loss per share.  Closing mines they borrowed money to purchase a year earlier is not working out.  In May Arch obtained a large term loan and pushed out debt maturities to give them some cushion through this down cycle.  Expect them to have have near $450 million in cash on hand to go with their $4 billion in debt.  The stock market cap is $1.15 billion.  Nevertheless, parsing management’s happy talk for nuggets about U.S. coal supply and demand will be vital.

Arch Coal Inc forms bearish “Descending Continuation Triangle” chart pattern at Recognia.

Teck Resources (TCK) reported strong operating results while weak commodity pricing hurt profits.  Also, “Concern is building that the so-called commodities supercycle is drawing to a close as a period of aggressive economic growth becomes more subdued in China, which powered prices for many materials to record highs over recent years.”  Globe and Mail

Coal investors ought to be sure to check out my morning oil and gas posts for more color on natural gas.  Natural gas, after all, is a key to the thermal coal story.

Iron Ore & Real Assets

Teck Resources (TCK) reports tomorrow.  I hope they stop thinking about getting into iron ore.  Vale is a $17 stock.  Iron ore inventories at China’s ports hit a record by Sober LookIron ore price spirals to 8-month low; traders draw 2008 comparisons at MiningFront-end iron ore swaps selloff flattens curve at PlattsIron Ore-Spot prices extend losses; outlook weak from Reuters.  Long term “Global iron ore demand is set to double” at Intierra.

Indonesia ‘requests’ 51% of Grasberg, Freeport agrees to 9.3% ‘at the moment’.  What happens next? at Mining.  Who ever thought FCX would have a dividend yield more than double the 10 year Treasury and look so bad?

“Bill Gross…real assets are a “better bet” amid negative real interest rates.  Investors may be able to maintain purchasing power with real assets…”  Bloomberg

Water is the new gold, a big commodity bet at Marketwatch.

Macro Peek

“The number of Chinese online was already huge, and it’s soared over the past year by more than 50 million thanks to an upsurge in mobile Internet access.”  CNET  “…800 million to 1 billion new consumers around the world will enter the middle class this decade…”  Peter Pham.

“Cash Flow per shares over the past 5 and 10 years has grown at the rate of 5.5% per year and 24.2% per year, respectively. Book Value per share is up nicely over the past 5 and 10 years with growth at 15% and 16% per year, respectively.”  SP Brunner

Increasing the inflation target could lead to a super-boom in hard assets while bonds would get crushed.  WSJ

The credit bubble may have begun a blow-off top.  Leadership has narrowed to US Treasury’s and German Bunds, and investment grade corporates (Bespoke).  The Swiss 5-year has gone negative (Sober Look).  Meanwhile, spreads are rising (Bespoke).  Note “bond prices in free fall” at Reuters.

The financial crisis was entered with government and corporate balance sheets in good shape, while the consumer was a wreck.  The next crisis will occur with business and the improved consumer (Housing Views) much better off than governments.

Highlights of Ray Dalio’s Q2 Bridgewater letter:  Business Insider.  Essential facts about the Federal budget:  WSJ.  Richard Russell bullish on housing at Financial Sense.  Chart-fest by Peter Brandt.

Tons of Coal, part III: World Fundamentals

The chart is from the Economist.  Future electricity generation demand just for air conditioning, and thus for coal, is wildly bullish (Guardian).  Wind and solar are not going to get the job done.  China is always the elephant in the room (Reuters).

The massive scale with which industrial activity in China occurs is mind boggling (Platts).  India is big too and expects to see large increases in coal imports:  Mining Weekly.  India solar at Business Week.

Meanwhile, China coal market likely to see oversupply amid weak demand in H2 at Platts.

Currently industry profits are on the met coal side, but there is concern over the steel-making coal going forward.  Mining

Off a small base, US coal exports still on upswing: government data at Platts.

Small players are having a tough time in China too:  WCT.  Colombian coal miners’ strike risks Glencore operation at Mining.  Rio Tinto is cutting costs amid low Chinese thermal coal pricing:  Reuters.

I hope you enjoyed the coal series this afternoon.  Expect a whole lot more coal commentary in the future.  I smell opportunity.

Home CRB Bull Market

“The U.S. economy is downshifting, even as the housing sector is finally showing signs of life.”  WSJ  Optimism from the Economist.  Housing supply is tight with with inventory is down 24.4% year over year (Calculated Risk).  More color:  Marketwatch.

Builder confidence has rebounded (Carp Diem) and the stocks have had a party (Bespoke).  Thoughts from some fellows at the New York Fed.  Shadow inventory improvement from Economic Musings.  The anecdotal stories never end:  Sacramento, Michigan and Chicago are strong.  San Antonio prices are at new all-time highs.

Housing picking up would help Dr. Copper, which has been hanging around $3.50 a pound (Mining).  These prices are not enough to spur supply (FT).  Yet they’ve made balance sheets strong (SA).  Copper chartology.

Jeff Saut at KWN:  “I expect notional world GDP growth going forward to be somewhere around the 4% level.”  If he’s even close, think commodities as represented by the CRB at RitholtzCommodity Prices Will Continue to Ratchet Up by Greg Harmon.  Corn at $12.50 is possible by Peter Brandt.

A Euro rebound is bullish as are these black candlesticks.  The S&P 500 is right at resistance.

Commodities & Agriculture

The commodity supercycle by Frank Holmes.

Economic and commodity outlook:  Rio Tinto.

Most of the commodity complex is depressed, though soybeans, wheat and corn have crushed it.  Sober Look

“Until the weather changes significantly, we’re going to continue to see the uptick in corn,”  Bloomberg.  Corn chartology:  See It Market

Sensationalistic photos of the drought effect on crops:  Business InsiderJim Rogers: Much Bigger Problems Than Drought Threaten GrainsMoney News.

“soaring demand for Australian food, particularly beef, among China’s 100 million wealthy people…”  Mining.

Small Smorgasbord

China Economic Growth Slows to 7.6% at Iacono Research.

On and on they rant about China’s over investment.  “China’s capital stock per capita is still only about a tenth of the United States” at the New York Times.

The commodity complex is lagging today, something which has been going on for some time now.  Sector charts from Bespoke.

Grains, Soybeans Extend Rallies on Expanding U.S. Dry Weather at Bloomberg.

One ginormous chartfest:  Business Insider

‘Financial Expressionism’ by Jeff Gundlach

All Energy

Yesterday WTI crude oil was higher by $1.25 on the potential Statoil strike, yet Canadian pipeline crude differentials rose more than $2 at Platts.  This morning Crude Drops as Norway Ends Oil Strike, China Cuts Imports (Bloomberg).

When Will the WTI Discount to Brent End?  RBN Energy

As U.S. producers report second quarter results, just picture U.S. production accelerating on this chart:  EIA.

Today’s lower oil prices indicative of a lack of economic health:  Burning Platform.

Worldwide oil, gas rig count up 4.5% in June from May: Baker Hughes at Platts.

“Total US energy demand in 2012 will decline for the second consecutive year…Natural gas demand will remain robust, though, in light of low prices and coal plant retirements.”  CGES

Schlumberger goes to China, taking a 20.1% stake in a $3.4 billion company.  WSJ

“About half the more than 5,000 wells drilled in the Marcellus are awaiting completion…”  from Philly with a hat tip to Investor Village.

The Forest Oil disaster took a really bad turn.  Whether it’s geology or an inability to crack the code, their Eagle Ford results stink next to peers.  The JV looks unlikely and significant acreage leases may be lost.  Company wide drilling returns are poor with natty under $3.  Yahoo

The British do not understand U.S. bankruptcy laws.  Often in capital intensive industries the weak industry participants file chapter 11 in a downturn, sheds their debts, and then gets to screw their competitors who beat them in the marketplace.  The rot of the high cost operators lingers as the same companies file from recession to recession.  Patriot Coal may be bankrupt, but they are still open for business (Forbes).  James River looks to be next (Adam Gefvert).  The good news for the rest of the industry is that once a company is a weak sister, typically they are always a weak sister.  “The low cost producer ends up with all the assets.”  Somebody should tell the Brits US bankruptcy laws are a response to their debtors’ prisons of old.

Bulls Lift Wagers by Most in Two Years After Rally: Commodities from Bloomberg.

Big Coal and China

Outstanding coal analysis re-post by Gregor.

First half 2012 coal production was down 6.2% vs 2011:  EIA  The greenies will try to slow coal exports:  Business Week.

Fundamental to reviving the depressed coal sector is a natural gas price recovery.  The natty rig count has collapsed and production started to look weak, but then I see Value’s commentary at Investor Village.  Natural gas, the gasbags and especially some of the coal guys spiked on this morning’s inventory data (Reuters).  Our hot weather is addressing the storage overhang; but the natty supply over-production is really what needs to be watched.

Coal to Gas Switching – Part I at RBN Energy.  Coal to Gas Switching Part II at RBN Energy.

Coal and natty power generation dynamics from AOL Energy.

ACI chart:  Greg Harmon

Rail traffic is strong, even with weak coal loadings.  I’d like to find out how much is Bakken oil.  Value Plays.

Many U.S. coal producers have cut capex to delay the timing of projects.  Low investment meeting higher demand would mean high returns:

“…global coal demand was expected to increase, driven by longer-term, increasing electricity generation within the Asia Pacific region.  “China’s coal imports are accelerating in recent months, and we project they will reach a record 285-million tons in 2012 as the country increasingly looks to the seaborne coal markets,” he said.  Global metallurgical coal use was forecast to jump 25% by 2016, mostly driven by China and India, adding another 250-million tons of demand growth.”  Mining Weekly

“We are optimistic that the June 6th dismissal of Barrick Gold’s CEO and the $70 billion aggregate net debts of Glencore, BHP Billiton and Vale discourage cap ex.”  John Tumazos

“…little credit is given to the fact that China’s growth over the past 30 years has lifted more people out of poverty than in any period in history.”  China Daily.  Average Chinese salaries:  China Daily.

China auto exports to other emerging nations booms:  NY Times

“In the past, Western companies invested in Asia to take advantage of low labor costs to export goods back to home. Increasingly, they are investing in the region to sell products locally.”  WSJ

China’s second quarter economic growth seen slipping to three-year low at ReutersChina Beige Book Shows Pickup Unseen in Official Data at Bloomerg.

I know zilch about aluminum, but I do listen to pricePlatts

Teck rumor:  AMP 2012

Thermal Coal Play

First, a commodity snapshot from Bespoke.  Clearly, commodities were the big losers in the first half of this year:  Iacono Research.  As fallout from the natural gas bust, coal stocks were the worst, being down more than an average of 70% from 52 week highs and 79% from all-time peaks (chart in article).

The coal stocks have been leading the risk-on rip which began last Friday:  24/7 Wall Street.  Yes Virginia, Europe Burns Coal Fastest Since 2006 in Boost for U.S. at Bloomberg.

Yet, striking is how dinky the Western nation coal imports are next to the developing world.  The Sun  I know everyone is freaking out because China has a month of coal inventories laying around.  Financial Times  But India can hardly keep the lights on:  WSJ and WSJ blog.  The emerging nations, chief of whom is China, are what matter:  Weakonomics.

Here at ISA we’ve have been increasingly noting the coal sector with posts like Down & Dirty with Coal and China and Coal.  All posts with even a mention of coal can be found here.

Stocks tend to be leading indicators.  Fitch: Coal price recovery on horizon, but weakness could persist into 2013 at SNL.  Jeff Saut from his missive Monday:  “In my opinion, last week the Commodity Index bottomed and the Dollar Index topped.”  Raymond James

Notes from Peabody’s analyst day at Doyle Trading Consultants.

As for specific stocks, the lowest cost and least beat up industry participants are royalty play NRP and low cost producer ARLP, both of whom sport big yields.  BTU is the industry big boy.  On the other end of the spectrum are high beta PCX and JRCC, who while they may continue rocketing higher, are bankruptcy candidates longer term.  Arch Coal (ACI) stock may be in the best risk and reward option.  Arch does not have the dire debt and legacy issues of the spec plays, but being severely beat up itself offers the possibility of much greater reward than the safer guys.

Arch Coal’s recent presentation can be had by opening the file on their website.  The first half discusses the coal market, the second half Arch specifically:  Arch Coal.

Arch Coal chartology at See It Market.  As always, good stocks are hard to buy.

When I started this blog eleven weeks ago I had no idea I’d been taking such an interest in the coal sector.  To end, I’ll quote one wise man:  “We all bet our own money and take our own chances.”