Political Trade Destruction

Dear Australian #auspol politicians involved in incompetent trade and diplomatic rhetoric……it is in the “Chinese” tea leaves, that Iron Ore is next on the list of ‘sanctions’. I just wish the media would call them sanctions. It would sell so much more advertising…..

Politicians who are inexperienced in business and unable reading the geopolitical mood are causing more damage than their pea brains can possibly imagine.

Don’t they understand that a backbencher from an obscure political seat calling for an “inquiry into the origins of a Chinese flu” is a badly weighted bet and ramifications of the rebuttal can hardy be comprehended by someone inadequately positioned to speak in a manner within a nation’s parliament.

In these circumstances, political table-pounding seldom prevails over commercial reality and necessity.

Don’t look know, but to the complacent producers of current and future ‘sanctioned’ products, our politicians are doing some effective price mean reversion on behalf of your wallet.

October 13, 2020
by Rob Zdravevski
rob@karriasset.com.au

Iron Ore – As Good As It Gets

June 23, 2020

by Rob Zdravevski
Iron Ore – As Good As It Gets ?

Over the past 6 weeks, the price of 62% grade Iron Ore has risen 25%. It’s now trading around $102.

Prices have risen due to a combination of China’s factories and manufacturing returning to a “normalised” utilisation and Brazil shipping less ore.

The previous spike, in January 2019, saw Iron Ore price climb from $75 to $95 within 2 weeks and a subsequent surge to $125 occurred over the next 3 months.

This was mainly due to the collapse of a tailings dam in Brumadinho (owned by VALE), which also tragically resulted in lives being lost.

I can’t quite reason about the cause of the 2nd lurch higher as economies were at the tail-end of a 7-8 year economic cycle.

However, the price normalised back to over the next 4 months as Australian suppliers filled the gap.

<see chart below>

Today, the price of Iron Ore has risen again due to a Brazilian supply disruption aided by “newer news” that Brazil’s COVID-19 environment is worsening.

Once again, Australian iron ore miners seized the supply opportunity yet prices have continued to roar ahead.

It is at this point in time, that I now think, that this is as “good as it gets” for the Iron Ore price.

But I also have the following questions;

  • Can Brazil contractually sell Iron Ore to China below prices as seen in the spot and futures markets?
  • Is it true that Brazil produces a higher grade of Iron Ore than Australia?
  • Will Brazil’s cheaper labour and production give them an advantage?

If the answer to these 3 questions is “Yes”, they then qualify for two of the three “cheaper, better and faster” categories.

Brazil could also be “faster” getting ore to the port, although overall we need to keep in mind that it does take 45 days to ship Brazilian Iron Ore to China when compared to the 12 day journey for Australian suppliers.

Anecdotally, I can’t help speculate that Brazil is feeling the strain of lower export receipts and may start to push product through its ports with less hesitation.

Inversely, it’s naive to think that China’s importers are submissive “price-takers” of sensitively priced commodities.

And so, my analysis of the price action in the Singapore traded 62% TSI contract suggests the strength of the advance is waning, as it makes a “rounding top” of lower highs and lower lows, a change in trend is near and the price traded to extremes on various measures.

The “fat part of the trade” has been seen and I expect it to retrace and trade down to $92.

For those who disagree, I am curious what you think will “drive” the price higher from here and how much risk are you taken when compared to the reward on offer when looking at the whole picture?
Until next time,

Rob
Subscribe to my blog: www.robzdravevski.com

Drop me an email: rob@karriasset.com.au

Disclaimer

 

Some extra reading.

https://www.abc.net.au/news/2019-02-12/iron-ore-price-explainer-after-mining-dam-collapse/10800698?nw=0

https://en.wikipedia.org/wiki/Brumadinho_dam_disaster

If you’d like to have a chat to me about some of our best stock ideas for your portfolio, feel free to call me on 0438 921 403.

Rob Zdravevski is the proprietor of Karri Asset Advisors, a specialist in the provision of investment advice and equity recommendations for clients’ portfolios.

Iron Ore Gravy Trains

Once upon a time mining companies were making a lot of money by extracting ore from Australia’s crust.

Soon after, the government needed some money to pay for the debts they incurred as a result of the spending promises they made to the Australian public, in their attempt to remain elected to power.

They thought that they could invent a tax which charged mining companies for how much resources that they dig up and sell.

The tax was created. Some were happy and others weren’t. They was lobbying, protests, crying and demanding. The tax had a short life. The new government had mates in the mining sector. The tax was no longer alive.

It was OK ’cause the government still earned some sort of money from whatever businesses the large mining companies conducted, providing that they didn’t cleverly use their offshore subsidiaries to move around and book profits into.

The price of coal had already fallen, but nobody likes them anyway ’cause their industry is a visibly polluting one.

But oh oh – recently the price of Iron Ore has fallen.

This is how I see it,

Government let off the iron ore miners off the hook with the mining tax, less money for the government, then global demand slowed, the giants continued to increase supply, the price of iron ore fell, the companies made less profit but them increasing supply (coupled with falling commodity prices) also pressured the smaller miners, thus the giants are growing their market share, but government still needs more cash, there is no capital gains tax being paid of share profits because the stock prices of the major iron ore companies are the same as 5 years ago, thus shareholder return is poor, but hundreds of employees are making more than $400,000 per year.

It’s important to keep the gravy train going by any means you can, whether you manage to dupe government, the economy or shareholders.

Yet they still are on the look out for federal government help to assist them with their plight of iron ore prices being below their cost of production.

WTF?

Can You Smell The Deception & Misdirection

This is a periodical post about things that I see in the financial press, which I tend to interpret differently. When managing investors money, you need analyse the news and not just simply read it because you can’t assume you are getting to the truth.

Firstly, Jakarta warns Australia they are prepared to “clash” over border violations incurred by the Australian Navy. Australia best heed their warnings and wipe that smirk off your face because 300 million Indonesians should send your xenophobic fears into overdrive. I hope our government isn’t pinning all of our defensive hopes on U.S. Marines stationed in Darwin?

But equally Telstra is looking to form a 50/50 venture with Telekom Indonesia. Can David Thodey please be our next foreign minister?

I can’t believe why any company in the world wants to pay that much for a small insignificant business such as Warrnambool Cheese & Butter. Good luck to them.

Panic, Panic – protestors block Bangkok streets and the Thai Prime Minister is suspected of corruption. The Thai stock market has risen 9% in 10 days since this story picked up steam.

Alex Waislitz’s Thorney Group raises $68 million. Now I’m not sure what their raising target was but from a distance, their reputation could have easily raised 4 times that amount. My point is, would-be stockbroking firm geniuses should keep in mind that it’s difficult to raise money from the public.

With 65% domestic market share, Qantas still thinks it plays on an uneven playing field.

Franchisee of Australia’s 370 Burger King stores, Competitive Foods Australia, posts revenue of $1.03 billion for fiscal year 2013 and makes $21.4 million profit. That’s a lot of invoices and money to handle in order to make a 2% net profit margin. Last year, revenue was $935 million and profit was $8 million. Hey Jack, I see that cost cutting program is working?

Australian rail operators (in the Pilbra, Western Australia) are complaining that truckers have got an unfair price advantage when they transport iron ore. If trucking iron ore is cheaper than by rail, then the iron ore giants should then give their competitors access to their railroads. Umm, I didn’t think they would.

Various interviewees in newspapers are wishing for a weaker Australian Dollar. Be careful what you wish for. When you see commodity prices rise, it is usually accompanied by a higher Australian Dollar. In Australia we mainly export commodities, ’cause we don’t manufacture things such as cars, televisions or clothes anymore. So if the AUD remains weaker, we can sell US Dollar denominated commodities and receive a lot of AUD once its converted but it’s also good for overseas money to buy up Australian assets (see Australia is “on sale”).

Australia’s stock market falls due to weak Chinese data. Yup, heard this one before. Just like other brokers who actually ask me if I’m staying up late to watch the U.S. unemployment numbers. It doesn’t really affect the earnings of the shares in the companies that I and my clients own but if you need to justify a movement in the stock market with some sort of news, good luck and be my guest. Please continue to manage your investments on the basis of “jumping at shadows”.

Finally, this week, not a single economist who provided an estimate on the Australia Consumer Price Index reading got it correct and Deutsche Bank posted a “surprise” $1.15 billion quarterly loss.

Whether these professionals continually get their ‘calls” incorrect, can’t make money themselves or continue to pay fines for manipulation & price rigging, yet people still give these investment firms their money to manage.

How To Go From Sinophile to Sinophobia – Ask Australia

A country’s Foreign Affairs  isn’t only about setting policy but you need to understand economics in order to achieve your diplomatic objective.

Having a few politicians who are certified Sinophiles isn’t an automatic pass either.

Unfortunately, politicians and their advisors often aren’t financially literate let alone considered to be business people and because of this, they fail to understand how to deal with other countries over the length of many economic cycles.

In Australia’s case, it was the only large developed economy to survive the 2008 Global Financial Crisis. The fact that it has hasn’t posted a year with negative economic growth for 22 years in another anomaly.

Over the past 10 years, Australia’s economy benefitted from China’s appetite for its commodity resources (see China’s stimulus) and we loved them for it but after a while Aussies weren’t happy with what panned out, as the social and financial divide was then blamed on a “Two-Speed” economy.

When a large trading partner saves your economy, you say “Thank You”.

You don’t;

  1. antagonise them by placing U.S. Marines in Darwin and lie about the real reason they are there.
  2. call them dirty polluters (even though you have been one for a 100 years before them)
  3. revile the fact that their students come to Australia to study and “take away places from Aussie students”.
  4. ban their large telecomm networking company from participating in the construction of your own National Broadband Network
  5. obstruct and oppose their companies from buying assets (farms) from a willing seller in a free market enterprise system &
  6. charge their citizens more tax if they choose to buy property in Australia.

Oh Australia, you just don’t get it.

Iron Ore prices rise 33%

Did you know that over the past 6 weeks, the spot price of Iron Ore has risen 33% back to $120 per tonne?

Some investors may not believe this as they are still anchored to the bad news they saw last month with headlines such as ‘Iron Ore Prices Plummet”.

Credit to London’s Financial Times who did report the positive news this week.

source: Bloomberg

 

 

 

 

Is Fortescue in trouble?

Lately, Australian iron ore miner, Fortescue Metals (FMG), has seen increasing speculating whether it will breach loan covenants or require more capital due to the fall its stock pice has suffered as a result of the decline in the spot iron ore price.

Depending what index you happen to watch, iron ore has fallen 40%-50% in the past 6 weeks.

Keeping with this blog’s mantra, “Trying to Hear What Is Not Being Said – It doesn’t matter what the iron ore price does week-to-week. The multi-year and decade demand for iron ore is stronger than the supply pipeline, especially with the scarcity of capital and expanding project costs to extract and ship it.

Furthermore,  I don’t think that analysts fully take into account the iron ore reserves that FMG has. It seems they take the market capitalisation of $10 billion and look at its $8.5 billion of gross debt and start scaremongering. In fact, FMG has $2.3bn in cash, so it’s “net” debt is $6.2 billion.

Did you know that in the 2012 financial year, FMG had revenues of $6.7 billion and its EBITDA was$2.8bn? It’s net debt is less than 3 years worth of EBITDA, which is not a stretch considering its debt is priced at 600 basis points over the benchmark and is rated BB-.

FMG’s bonds aren’t trading at levels that indicate default or bankruptcy. I actually wish that they were trading at woefully large discounts as it would b a great investment opportunity. In fact, the upside for FMG’s debt is that their credit rating improves and their cost of borrowing drops and they subsequently re-finance.

I can’t say that FMG equity is dirt cheap but if you align yourself with its founder, owning the equity would be a more attractive than its “not quite cheap enough” debt.

Fortescue won’t fold or “go under”, irrespective of what ratings agencies have to say. In fact, Australia’s Labor government (who will most likely be re-elected in 2013) would be wise to stop bashing the iron ore miners and be prepared to shift their stance to being more supportive.

Imagine if Fortescue fails as a company? Directly and indirectly, FMG is responsible for (and has created) thousand of jobs. If government is bailing antiquated automobile manufacturers, it better get ready to support the iron ore industry.

Don’t they know that they would have a bunch of unhappy Chinese on their hands!

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