China is going through its Lehman Bros moment with it’s stock market collapse stalling the economy and driving demand toward recessionary levels
• Markets are digesting the impact of a new and sharp slowdown in China.
• The PMI stats were worse than expected, though not necessarily showing contraction as yet.
• Chinese companies are now trading below book value in Hong Kong as companies are expected to write down the value of their assets.
• New news from the construction industry is that many projects have stalled and that contractors are waiting till the very last minute before committing to new machinery for contracts.
• CAT, which is more affected by mining than some others reckons it could cut 10,000 jobs at its factories and distributors and this is from a manufacturer which is normally slow to react to a downturn.
• Other machinery manufacturers are suffering a less severe impact but also report a significant slowdown in the construction and this probably also related to the infrastructure sectors.
• Falling demand for almost everything from electrical power to cement, steel and cars is causing surplus stocks to build, raising export levels and impacting competitors in the west as stock is dumped into western markets
Stimulus – China and Europe look likely to implement new stimulus programs to offset the impact of a slowdown in Chin’s economic activity
• China commented a week ago on the potential for new fiscal stimulus but nothing has been heard since.
• China’s plan to raise domestic demand appears to have been derailed by the stock market collapse and new action is now required to restore consumer confidence
The US Fed may have decided to hold rates as the impact of China’s slowdown reverberates around the world
• Janet Yellen expects rates to rise by the year end according to yesterday’s statement.
• The impact of China’s current slowdown indicates to us that a Fed rate rise by the year-end poses a significant threat to growth unless China and possibly Europe implements new ‘Stimulus’ programs.
• If rising Chinese exports and lower demand cause US industry to slow then we suspect the Fed may be forced to delay its next rate rise till well into next year.
Lithium - Tesla – innovations made by Tesla are forecast to cut battery costs to just 38/kWh from $250/kWh
• The report is confusing as it talks of the actual price of a Tesla Model S battery falling to $200/kWh
• The figure of around $38/kWh is for a battery pack price and assumes peak production at the Gigfactory and cost reduction of 70% in battery pack costs
• Tesla plan to use a nickel cobalt aluminium cathode, a silicon synthetic graphene anode to achieve 2-6 times better lithium-ion storage capacity
• Tesla may also use a more efficient lithium-rich nickel cobalt manganese cathode with double the proportion of silicon in the graphene anode
Economic News
US – Janet Yellen expects rates to go “sometime later this year” should incoming economic data support the case.
• The Fed chair said inflation is likely to return towards a 2% annual rate over the next few years as temporary influences including soft oil prices ease.
• She argued a prudent approach would not be to waiting for the US to reach full employment and inflation hit 2% but act pre-emptively.
• “Most FOMC participants, including myself, currently anticipate that achieving these conditions will probably entail an initial increase in the federal funds rate lates this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us. Our judgements about appropriate monetary policy will change,” Ms Yellen said in a speech in Massachusets.
• On other economic news, durable goods orders contracted in Aug, albeit less than forecast.
• The gauge is driven by weaker export demand as well as cutbacks in investment by energy companies on low oil prices.
Japan – Consumer prices growth crossed the 0 level in Aug with the economy slipping into deflation for the first time since Apr/13.
• Core inflation (CPI ex fresh foods) fell 0.1%yoy despite the BoJ sticking to the accommodative policy.
• Stripping out a change in energy prices, the index reports a 0.8%yoy which is the highest reading since summer 2014.
• Contrary to market estimates, the BoJ expects inflation to pick up towards 2% target next year.
Currencies
US$1.1138/eur vs 1.1187/eur yesterday. Yen 120.94/$ vs 120.08/$. SAr 13.764/$ vs 13.905/$. $1.523/gbp vs 1.527/gbp
0.701/aud unch vs 0.696/aud – UD strengthened on Yellend comments for a Fed interest rate rise by the end of this year
Commodity News
Precious metals:
Gold US$1,142/oz vs US$1,136/oz yesterday
Platinum US$947/oz vs US$945/oz yesterday – More diesel emissions scandals likely to continue to hold back platinum in favour of palladium
Palladium US$661/oz vs US$648/oz yesterday – Palladium prices continue to gain on potential for consumers to move away from higher emission diesel engines
Silver US$15.07/oz vs US$14.85/oz yesterday
Base metals:
Copper US$ 5,062/t vs US$5,078/t yesterday –
Aluminium US$ 1,576/t vs US$1,581/t yesterday –
Nickel US$ 9,875/t vs US$9,345/t yesterday – Norilsk Nickel expects refined metal market to record a “sizeable deficit in 2016, which will widen in 2017”.
• The market is currently being affected by high levels of ore inventories available in Chinese ports as well as an increase in ore supply from Philippines and ore blending.
• However, moving forwards the Company expects fundamentals to improve on a decline in the growth of Chinese NPI production and underinvestment.
• “Just of a month’s consumption of high and medium grade ore is left in China” while shipments from Philippines to China are also slowing.
• On demand side, the Company forecasts China to expand stainless steel capacity at a CAGR +6.0%pa in 2015-17, although the risk of slowdown remains high.
Zinc US$ 1,654/t vs US$1,670/t yesterday –
Lead US$ 1,678/t vs US$1,702/t yesterday
Tin US$ 15,270/t vs US$15,050/t yesterday
Energy:
Oil US$48.30/bbl vs US$48.00/bbl yesterday -
Natural Gas US$2.598/mmbtu vs US$2.557/mmbtu yesterday
Uranium US$37.25/lb unch vs US$37.25/lb yesterday –
Bulk commodities:
Iron ore 62% Fe spot (cfr Tianjin) US$56.9/t vs US$56.6/t
Thermal coal (1st year forward cif ARA) US$49.70/t vs US$49.80/t yesterday
Other:
Tungsten - APT European prices unchanged at the spectacularly low price of $180/190 per mtu.
• This is entirely unhelpful for Wolf Minerals which shipped first concentrate recently from the Hemerdon Mine in the UK
Company News
Bellzone Mining (LON:BZM) 0.05 pence, Mkt Cap £4.9m – Interim Results
• Against the current iron ore price the company has been looking at alternative development options for Kalia.
• Specifically the company have been looking at the potential to produce nickel pig iron.
• Cash at the end of the period stood at US$2.37m.
• The US$4m loan facility put into place in August last year will now be extended to 31 March 2018.
• The total funding available on the loan has been increased to US$10m of which US$8.5m has been drawn.
• Stripping out D&A, expenses are running at US$2.96m.
• Costs have been lowered further but without a cash injection, running costs still need to come down further.
Conclusion: With iron ore prices where they are, the potential for iron ore is not there. Therefore it is sensible for the company to look at other options although we wonder whether the pig iron option is any better. US$2.96m over a half year period is still quite a lot to sustain. The long term viability will depend on China Sonangol.
Berkeley Energy (LON:BKY) 20.50 pence, Mkt Cap £37.0m – Annual Report and project status
• Berkeley Energy has reported an after tax loss of A$7.87m for the year ended 30th June 2015 (2014 – Loss of A$7.53m).
• The company is debt free with year-end cash of A$13.4m.
• The company is working on a DFS for the Salamanca uranium project in western Spain and it expects to complete an updated mineral resource estimate for the promising Zona 7 deposit of shallow, high grade uranium.
• The company has another deposit at Retortillo where an Exploitation Permit was granted in in April 2014, however given the higher grades and favourable metallurgical characteristics at Zona 7 priority at presents seems to be shifting.
• Metallurgical testing has shown the Zona 7 material is amenable to heap leaching and the company is proceeding with the permitting process to construct the proposed process plant. The Nuclear Safety Council has already issued a favourable report on the proposed development and this represents the successful conclusion of the first of step in a three-stage permitting process.
Conclusion: Berkeley Energy has strengthened its management team during the year and is moving towards a DFS for the Salamanca Uranium Project. We look forward to the updated mineral resource estinate for the Zona 7 deposit which seems to be emerging as the most promising of a number of uranium deposits within the company’s Spanish portfolio and to further news on the advancing of the permitting process.
African Potash (LON:AFPO) 3.175p, Mkt Cap £24.3m – Arranging US$50m Trade finance facility and pricing of fertiliser in Zambia
• The company reports that it has reached agreement on the pricing of 50,000 t of fertiliser product to a distributor in Zambia.
• At the agreed sales price of $500/tonne “the Company’s pre-tax profit margin on this transaction is expected to be 6%”.
• In addition, the Company has announced that it is currently in the process of arranging a US$50m trade finance facility “through African Potash’s exclusive banking advisor Loita Capital Partners International. The facility will remain in place until the Company’s fertiliser trading operations become self-funding…”