Commodity prices fall as China hits Great Wall of economic contagion
Weak China PMI drives copper lower
• The fall in Chinese equity markets has damaged already weak confidence
• Government officials are sitting on projects in fear of corruption probes
• Industrial / manufacturing numbers have fallen but are likely to be lower than actual reported numbers as officials massage the figures to appease their masters
• China has a great ability to recover but may need further stimulus
• It feels like the ‘Asian Crisis mk II’ is upon us but that this time China is a much bigger economy with more and bigger levers to pull to generate a next major phase of growth
• China’s construction market may have stalled but China has plans for many new urban, suburban and trans-continental rail systems and if policy makers hit the button on these projects then we could see the development of a third phase of this supercycle.
Economic News
China – Manufacturing PMI (Markit) hit the lowest level in 15 months with both new business and export orders recording a decline during the period.
• The gauge fell to 48.2 from 49.4 in Jun and 49.7 forecast.
Japan – As opposed to PMI readings in China and the Eurozone, Japan posts the strongest rate of expansion in manufacturing sector since Feb beating market estimates.
• The Nikkei/Marit manufacturing PMI climbed to 51.4 in Jul from 50.1 in Jun and 50.5 forecast.
Germany – The EURUSD rate is down following weaker than expected manufacturing PMI numbers.
• Markit manufacturing PMI fell to 51.5 in Jul from 51.9 in Jun and 51.9 forecast.
• New business orders reported a weaker increase, while new export business placed with German manufacturers fell for the first time since Jan.
• This compares to French data showing manufacturing sector slipped into contraction this month (49.6 from 50.7 in Jun and 50.8 forecast).
South Africa – The Reserve Bank raised the benchmark rate for the first time in a year in an effort to fight accelerating inflation.
• The repurchase rate was increased by 25bp to 6%.
• “Economic growth remains subdued, constrained by electricity supply disruptions and low business and consumer confidence and the risks to the outlook remain on the downside,” governor of the Bank said.
• Governor indicated the Bank is now moving into a hiking cycle in response to strong inflation.
World Bank Quarterly Commodity Report expects commodity price weakness to persist for the rest of the year with a modest recovery in 2016
• The World Bank expect commodity prices to remain under pressure for most commodities as a result of abundant supplies.
• In the case of industrial commodities, they expect demand to be weak.
• Risks to metal prices forecasts include slower demand in China and tightening environmental regulation to contain pollution.
• Lower production costs and currency depreciation are helping to sustain output and delay market rebalancing.
US$1.0941/eur vs 1.0989/eur yesterday. Yen 123.79/$ vs 123.79/$. SAr 12.479/$ vs 12.423/$. $1.549/gbp vs 1.561/gbp
US$0.730/aud unch vs0.741/aud
Commodity News
Precious metals:
Gold US$1,084/oz vs US$1,104/oz yesterday –
Platinum US$979/oz vs US$994/oz –
Palladium US$624/oz vs US$636/oz –
Silver US$14.61/oz vs US$14.94/oz –
Base metals:
Copper US$ 5,271/t vs US$5,375/t – Codelco temporarily suspends its Salvador division, the smallest in the Group, on the back of protests by contractors.
• Mobilisation of unions that represent contractors “have endangered the security of Codelco’s staff and damaged the installations of the company and the public infrastructure”.
• Protestors are demanding the right to negotiate benefits and the renewal of labour contracts directly with Codelco versus the management of services contractors.
• Freeport is considering selling some copper and molybdenum assets or cut production amid faling copper prices.
• “If markets deteriorate further, we are prepared to take steps,” the Company said after reporting US$1.9bn net loss in Q2/15. After adjusting for US$2bn in write downs attributed ot oil and gas business net income came to US$143m.
• “We don’t see China having a hard-landing-type situation as some are predicting, but we have to be prepared to deal with conditions as they evolve.”
• For now, the Company reiterated its annual copper, gold and oil sales guidance for the year at 1.9mt, 1.3moz and 52.3mmboe (H1/CY15 realised: 0.9mt, 0.6moz and 25.6mmboe).
Aluminium US$ 1,647/t vs US$1,657/t -
Nickel US$ 11,300/t unch vs US$11,385/t –
Zinc US$ 1,969/t vs US$2,012/t –
Lead US$ 1,728/t vs US$1,775/t –
Tin US$ 14,850/t vs US$14,750/t –
Energy:
Oil US$55.10/bbl vs US$56.20/bbl
Natural Gas US$2.807/mmbtu vs US$2.882/mmbtu
Uranium US$36.25/lb unch vs US$36.40/lb –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$51.20/t unch vs US$51.10t –
Thermal Coal $56.9 vs $57.1 cif ARA Europe –
Tungsten - APT European prices price $220.0/mtu unch vs $225/mtu – price change as spreads widen
Company News
Anglo American (LON:AAL) 812 pence, Mkt Cap £11.4bn – First half results weak as expected
• The company reported underlying EBIT of US$1.88 bn for the first half down 36%.
• Revenues were down 17% to US$13.3bn with underlying EBITDA down 24% to US$3.28bn.
• Falling prices accounted for US$1.9bn of impact to EBIT with realised prices for iron ore down 41%, platinum down 19% and copper down 18%.
• Weakening operating currencies added US$0.4bn offsetting cost inflation.
• Capex was down US$0.6bn to US$2.1bn.
• Net debt was up by US$0.6bn to US$13.5bn.
• The company expect to generate US$3bn from asset sales including the US$1.6bn received from their sale of 50% of Lafarge.
• Asset sales are expected to lower debt with a net debt target of between US$10-12bn.
• Iron Ore EBIT was down 59% from U$1,229m to US$510m mainly due to the price fall in iron ore.
• Kumba is reducing cash cost to US$45/t.
• Copper EBIT was down 77% from US$760m to US$174m as a result of price and volume with Los Bronces seeing a 13% fall in production due to water constraints as previously announced with production results.
• Production levels are expected to increase in the second half for copper with guidance unchanged at 720,000 to 750,000 tonnes.
• De Beers EBIT was down 25% from US$765m to US$576m due to softer rough diamond demand.
• Sales at De Beers was down 21% to US$3bn with a 27% reduction in sales volumes to 13.3m carats.
• Global jewellery sales were weak in the first half leading to a build up in polished stock.
• The second half will depend on retail jewellery re-stocking and downside risks remain from weaker Chinese demand.
• Production guidance has been revised down to 29m carats from 31m carats.
• Coal EBIT was up marginally by 3% to US$267m and phosphates up from US$9m to US$41m.
• Platinum EBIT was up to US$272m after the strike action last year.
• Year on year operating costs per equivalent platinum oz fell by 30% due to strike action.
• Adjusting for the strike action unit costs went up due to increases in labour and electricity costs.
• The company took a pre-tax write down of US$2.5bn from Minas Rios and post tax of US$2.9bn.
• Further write downs were taken in coal assets of US$0.8bn and US$0.6bn post tax.
Conclusion: Weak numbers from Anglo as expected with all industrial commodities suffering from lower prices and in the case of copper lower volumes. Coal was relatively flat. De Beers and diamonds were also weak with rough demand suffering from a weaker end market in jewellery and a build up in polished stock. Write downs from Minas Rios had also been flagged to the market. Anglo continue to make operational improvements and are cutting back on capex but against a weak commodity price environment this is having minimal impact.
Caterpillar (CAT US) $76.9, mkt cap $46.4bn – misses Q2 sales but affirms intention to buyback $1.5bn of stock
• Caterpillar missed Q2 sales last night with earnings down to $710m vs $999m yoy
• Sales fell 13% to $12.3bn just below consensus of $12.7bn
• Construction equipment sales fell 18%
• Energy and transportation fell 12%
• Mining fell 11%
• CAT has cut its sales outlook to $49bn from $50bn but affirms its adjusted EPS outlook at $5.
• Management plan to buy back some $1.5bn worth of stock through Q3.
Conclusion: With Chinese construction falling off a cliff and the resources industry likely to cut yet more capex we reckon CAT might be better off spending its funds on product development and paying down its debt ahead of an US interest rate rise. Its nice to put funds back into shareholders pockets but is this really the time for such action?
Lonmin (LON:LMI) 70 pence, Mkt Cap £408.8m – Production results and update on measures to address weak commodity prices
• Lonmin has released production information for the 3 months to 30th June and provided an update on its response to the current period of weak commodity prices. The production information is not readily comparable with 2014 as this period was covered by a lengthy 5 month strike resulting in “no significant production in Q3 2014.”
• Mine production of 2.7m tonnes during the quarter has been impacted by safety stoppages under section 54 of the Mine Health and Safety Act, particularly at the K3 shaft. The company reports that section 54 closures have resulted in the loss of 489,000 tonnes of production (approximately 6% of the 8.3m tonnes production) during the 9 months up to 30th June.
• Smelting and refining operations have been running at full capacity as they process stockpiles accumulated earlier in the year when Numbers 1 and 2 furnaces were undergoing repairs. As a result, refined platinum production of 241,170 ounces is the highest volume refined in any quarter since Q4 2013. Total PGM production for the quarter amounted to 450,885 ounces.
• As a result of an assessment of the condition of the furnace, a planned closure of the number 2 furnace for the replacement of refractory bricks has been deferred from Q4 2015 to Q1 2016.
• Referring to “the platinum pricing crisis” Lonmin highlights the continuing weakness of PGM prices with the platinum price declining “by 14.4% from $1,126 per ounce at 31 March to $964 at 22 July” which leaves the company EBITDA negative.
• As a response to this challenging environment, Lonmin is moving to the orderly closure of the Hossy and Newman shafts and is placing the contractor-operated W1, E1 and 1B shafts on care and maintenance. The “Generation 2” Shafts (K3, Rowland, Saffy, 4b/1B and Hossy) provided 78% of total production. The reduced shaft capacity is expected to reduce “normalised annual production over the next two fiscal years by some 100,000 platinum ounces.”
• As well as the shaft closures, the company is seeking to reduce its workforce by around 6000, including contractors and those employees who have already applied for voluntary redundancy terms. Formal consultations on the additional labour force reductions have started today in an effort to identify alternatives to compulsory redundancy.
• Despite the difficult operating and commodity price environment, Lonmin is maintaining its production, sales and cost guidance of 750,000oz of platinum saleable metal in concentrates, 730,000 ounces of platinum sales and R10,800/ PGM ounce for the full year to September 2015.
Conclusion: Lonmin is addressing a potentially extended period of low PGM prices, which it has previously indicated may last for 2 years, by implementing shaft closures, reductions in platinum production and lower staffing levels.