More signs the deflationary spiral is upon us

11 11 2015

I’m feeling poorly this morning, the victim of some bug apparently doing the rounds in my neck of the woods. Ute I is having minor repairs done to pass the safety certificate it needs to have its new shiny Tassie plates screwed to its bumper bars, so I’m taking the time to do a bit more blogging.

This scary item from Zerohedge turned up in my inbox the other day, and it really rattled my cage…….  All the ducks are lining up on the wall… I better start spending the proceeds from selling Mon Abri quick smart.

It’s no secret that Beijing has an excess capacity problem.

Indeed, the idea that a yearslong industrial buildup intended to support

i) the expansion of the smokestack economy,

ii) a real estate boom, and

iii) robust worldwide demand ultimately served to create a supply glut in China is one of the key narratives when it comes to analyzing the global macro picture.

That, combined with ZIRP’s uncanny ability to keep uneconomic producers in business, has served to drive down commodity prices the world over, imperiling many an emerging market and driving a bevy of drillers, diggers, and pumpers to the brink of insolvency.

As we noted late last month, if you want to get a read on just how acute the situation truly is, look no further than China’s “ghost cities”…

Here’s the simple, straightforward assessment from the deputy head of the China Iron & Steel Association:

“Production cuts are slower than the contraction in demand, therefore oversupply is worsening. Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”

To which we said, “meet the deflationary commodity cycle in all its glory”:

China’s mills — which produce about half of worldwide output — are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation amid a property-led slowdown. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas.Shanghai Baosteel Group Corp. forecast last week that China’s steel production may eventually shrink 20 percent, matching the experience seen in the U.S. and elsewhere.

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”

Right. Well actually there’s that, and the fact that they can’t get loans despite multiple RRR cuts and attempts on Beijing’s part to boost China’s credit impulse. In fact, over half the debtors in China’s commodity space are generating so little cash, they can’t even cover their interest payments.

So, considering all of the above, the obvious implication is that China will simply export its deflation…

Given that, it shouldn’t come as any surprise that on Friday, the world’s biggest steelmaker suspended its dividend and cut its outlook.

Here’s more from Bloomberg:

The world’s biggest steelmaker on Friday cut its full-year profit target and suspended its dividend, putting the blame on the flood of cheap steel from China’s loss-making mills. The market is being overwhelmed with material coming from the nation’s state-owned and state-supported producers, a collection of industry associations said Thursday.

“It is obvious that we are operating in a very challenging market,” Chief Financial Officer Aditya Mittal said on a call with reporters. “This is essentially the result of very low export prices out of China that are impacting prices worldwide.”

The steel industry has been roiled by the slowest economic growth in two decades in China, the biggest consumer.

The flood of cheap exports from the nation has drawn complaints from Europe and the U.S. that the shipments are unfair. Bloomberg Intelligence estimates Chinese steel shipments overseas will exceed 100 million metric tons this year, more than the combined output of Europe’s top four producing countries.

While demand for steel in the company’s largest markets of the U.S. and Europe is recovering, producers’ profits are being hit by slumping prices because China has been pushing excess supply onto the world market as its economy slows.

So again, we’re seeing disinflation (the exact opposite of what DM central bankers intended when they decided to expand their balance sheets into the trillions) as global growth and trade enters a new era, characterized by a systemic slump in demand. Here’s the damage in terms of the Arcelor’s equity:

And here’s more from The New York Times on the impact of Chinese “dumping:

“The Chinese are dumping in our core markets,” Mr. Mittal said. “The question is how long the Chinese will continue to export below their cost.”

The company’s loss for the period compared with a $22 million profit for last year’s third quarter.

ArcelorMittal, which is based in Luxembourg, also sharply cut its projection for 2015 earnings before interest, taxes, depreciation and amortization — the main measure of a steel company’s finances. The new estimate is $5.2 billion to $5.4 billion, down from the previous projection of $6 billion to $7 billion.

On a call with reporters, Aditya Mittal, Mr. Mittal’s son and the company’s chief financial officer, said that a flood of low-price Chinese exports was the biggest challenge for ArcelorMittal in the European and North American markets.

The company estimates that Chinese steel exports this year will reach 110 million metric tons, compared with 94 million tons last year and 63 million tons in 2013. ArcelorMittal produced 93 million metric tons of steel in 2014.

Of course when the standing government policy is to roll over bad debt and avoid SOE defaults at all costs, uneconomic producers can and will continue to produce. This means the deflationary impulse ArcelorMittal cites isn’t likely to dissipate anytime soon, and on that note we close with what we said just a week ago:

The cherry on top is that China itself is now trapped: it simply can’t afford to let anyone default, as one bankruptcy would cascade across the entire bond market and wipe out countless corporations leaving millions of angry Chinese workers unemployed, and is therefore forced to keep bailing out insolvent companies over and over. By doing so, it is adding even more deflationary capacity and even more production into the market, which leads to even lower prices, and even greater bailouts! In short: this is a deflationary toxic spiral.

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Want to see what Financial Collapse looks like…..?

28 10 2013

Sourced from zerohedge and

Citi’s Matt King’ report recently showed when it comes to stepwise, quantum leap repricings of widely held credits, the revelation is usually a very painful, sudden and very dramatic one.  This can be seen nowhere better than in the default of Lehman brothers, where, while the firm’s equity was slow to admit defeat, it was nothing in comparison to the abject case study in denial that the Lehman bonds put in.

However, as can be seen in the chart below, when it finally came, and when bondholders realized they were screwed the morning of Monday, Septembr 15 when the Lehman bankruptcy filing was fact, the move from 80 cents on the dollar to under 10 cents took place in a heartbeat.

Lehman Repricing

It is the same kind of violent and anguished repricing that all unsecured creditors in the coming wave of heretofore “denialled” municipal bankruptcy filings will have to undergo.  Starting with Detroit, where, as Reuters reports, the recovery to pensioners, retirees and all other unsecured creditors will be…. 16 cents on the dollar!…  or less than what Greek bondholders got in the country’s latest (and certainly not final) bankruptcy.

From Reuters:

On Friday, city financial consultant Kenneth Buckfire said he did not have to recommend to Orr that pensions for the city’s retirees be cut as a way to help Detroit navigate through debts and liabilities that total $18.5 billion.

Buckfire said it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them.

“It was a function of the mathematics,” said Buckfire, who said he did not think it was necessary for him or anyone else to recommend pension cuts to Orr.

“Are you saying it was so self-evident that no one had to say it?” asked Claude Montgomery, attorney for a committee of retirees that was created by Rhodes.

“Yes,” Buckfire answered. 

Buckfire (what an appropriate name for this…!), a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city’s pensioners, 16 cents on the dollar. There are about 23,500 city retirees.

Creditors across all products, aided and abetted by the greatest credit bubble of all time blown by Benny and the Inkjets, will find the kind of violent repricings that Lehman showed take place whenever hope (or more rightly, confidence…) dies, increasingly more prevalent.   And since retirees and pensioners are ultimately creditors, this is perhaps the fastest, if certainly most brutal way, to make sure that the United Welfare States of America is finally on a path of sustainability.The only question is how will those same retirees who have just undergone an 84 cent haircut take it. One hopes: peacefully.  Because among those whose incentive to work effectively has just been cut to zero, is also the local police force.  In which case if hope once again fails, it is perhaps better not to contemplate the consequences.