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Societe Generale SA says as many as half of China’s steelmakers may have to shut down. Farther away, Australian iron producers such as Fortescue Metals Group Ltd. (FMG), which derives almost 100 percent of its revenue from China, could see lower profits. Photographer: Forbes Conrad/Bloomberg A worker prepares shirts at a factory in Shenzhen. Factory pay in southern China’s... Read More
“It is going to cause very substantial stress, particularly among state-owned enterprises,” said Nicholas Lardy, author of “Sustaining China’s Economic Growth After the Global Financial Crisis.” “These guys will have to up their game or sell assets if they can’t improve their performance, or eventually go out of business.”
Support to industry totaled about 10 percent of gross domestic product, according to a 2010 study led by Huang Yiping, vice president of the National School of Development at Peking University and former chief Asia economist at Citigroup Inc. That equals about $593 billion.
China is still coping with a cost shock from average inflation-adjusted wages that have tripled in a decade. That is showing signs of undermining competitiveness and threatening growth potential, the Asian Development Bank said last year.
Factory pay in southern China’s Guangdong province has surged 82 percent since 2008, hurting makers of goods including toys, furniture and textiles. That has forced companies including Hong Kong bra maker Top Form International Ltd. to shift some output to cheaper locations such as Cambodia.
A second shock triggered by the new measures probably would afflict state enterprises coddled by subsidies in industries including steel and coal that are less mobile and less competitive.
While big state-owned steel mills still have access to bank loans, private factories must find alternative financing, Ma Kai, an analyst at China International Capital Corp., said in a Feb. 20 phone interview from Tangshan, a city near Beijing where private steel mills cluNo Names
Annualized interest rates for the mills he talked to range from 12 percent to 18 percent. That is “a prohibitively high level as they are contending with slowing demand and falling prices,” Ma said.
He declined to mention individual company names, saying that if those appear in the press, “it will immediately bring creditors straight to their door. Suffice it to say steel mills in general are under enormous pressure just to keep their heads above water.”
The change also will help bankrupt “a whole bunch” of coal companies, said Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC, adding that Yanzhou Coal Mining Co. (1171) may be “scrounging for capital” at exactly the wrong time. The company’s debt has ballooned 78 times to 43.6 billion yuan ($7.1 billion) at the end of 2012 from 2008, according to S&P.
1. Massive capital mis-allocation (which at the time is touted as well organized, centrally administered, "China is different because it can make decisions quickly" competitive advantage);
2. The overcapacity in China results in misallocation of capital all the way back up the supply chain...too much new iron ore capacity, too much coking coal capacity, too much bulk shipping capacity to move all that stuff to China;
3. This culminates with the idea it is better to buy added capacity "now" rather than spend years permitting and approving another commodity project (Rio Tinto's purchase of Alcan is but one example of this stupidity);
4. In the ensuing first phase of the ensuing downturn the low cost producer (China) wins as others shutter high cost capacity (unless they enjoy government tariff or non-tariff barriers erected to deal with the "Chinese threat");
5. The Chinese miracle continues, and lo it becomes the "2nd largest economy in the world" and nanoseconds from overtaking the USA, reputed to be in terminal decline;
6. But China isn't the low cost producer any more. In the case of steel making the vertically integrated US producers became lower cost suppliers of steel than China some four years ago.
...too much new iron ore capacity, too much coking coal capacity...
It seems coal is suffering a perfect storm of negative price outlook.
Collapsing steel demand drives down prices for metallurgical coking coal.
Abundant, cheap natural gas from shale has driven out thermal coal in the power generation markets.
We seem to be looking at a once in a lifetime low price of coal, and so coal mining stocks.
Won't this revert to the mean when the shale gas fizzles, and we claw out of the global recession?
Perhaps large US coal miners are getting to be good long-term investment opportunities.
Its easier to buy low and sell high when you buy really, really low.
1. Massive capital mis-allocation (which at the time is touted as well organized, centrally administered, "China is different because it can make decisions quickly" competitive advantage);
While we all have an understanding of the ultimate effects and outcomes generally of mis-allocated capital (e.g., waste, liquidation, loss), it sees to me that the evolution of debt based monetary system and floating fiat currencies has not only allowed these misallocations to ramp up, but also to sustain themselves much longer than would be the case if "fiat capital" was limited, which is not the case today.
This concept of misallocation of capital while certainly true and occurring on a widespread basis, and ultimately regrettable under any sane economic system, may not be such an anathema to the authorities under the current system where growth is the goal and the "long-term" be damned. Under a fiat capital system, the misallocation can result in sustained booms which continue for a longer and longer time (and I think the CBs have figured out that with QE etc, they can just keep it going - there may be the mother of all busts and debt liquidation at some point in the distant future, but continually printing money can keep everyone liquid and in the game). It's really disgusting IMO, but totally predictable. Give someone (e.g., anti-deflationist) a fire hose and everywhere there is fire. This is one reason why we are not seeing a crash in equity markets.
While we all have an understanding of the ultimate effects and outcomes generally of mis-allocated capital (e.g., waste, liquidation, loss), it sees to me that the evolution of debt based monetary system and floating fiat currencies has not only allowed these misallocations to ramp up, but also to sustain themselves much longer than would be the case if "fiat capital" was limited, which is not the case today.
This concept of misallocation of capital while certainly true and occurring on a widespread basis, and ultimately regrettable under any sane economic system, may not be such an anathema to the authorities under the current system where growth is the goal and the "long-term" be damned. Under a fiat capital system, the misallocation can result in sustained booms which continue for a longer and longer time (and I think the CBs have figured out that with QE etc, they can just keep it going - there may be the mother of all busts and debt liquidation at some point in the distant future, but continually printing money can keep everyone liquid and in the game). It's really disgusting IMO, but totally predictable. Give someone (e.g., anti-deflationist) a fire hose and everywhere there is fire. This is one reason why we are not seeing a crash in equity markets.
Originally posted by thriftyandboringinohioView Post
It seems coal is suffering a perfect storm of negative price outlook.
Collapsing steel demand drives down prices for metallurgical coking coal.
Abundant, cheap natural gas from shale has driven out thermal coal in the power generation markets.
We seem to be looking at a once in a lifetime low price of coal, and so coal mining stocks.
Won't this revert to the mean when the shale gas fizzles, and we claw out of the global recession?
Perhaps large US coal miners are getting to be good long-term investment opportunities.
Its easier to buy low and sell high when you buy really, really low.
...
Yep, but the two keys for commodity companies in this situation are: (1) Is the balance sheet strong enough to survive years of low coal prices? (because equity is difficult to impossible to raise when the sector is out of favour and stock prices in the toilet), and (2) Is the company likely to be one of the lowest cost producers through the remainder of the bottom of the cycle? (US based mines are now at a disadvantage as the US$ strengthens compared to CAN, AUS, etc.).
Yep, but the two keys for commodity companies in this situation are: (1) Is the balance sheet strong enough to survive years of low coal prices? (because equity is difficult to impossible to raise when the sector is out of favour and stock prices in the toilet), and (2) Is the company likely to be one of the lowest cost producers through the remainder of the bottom of the cycle? (US based mines are now at a disadvantage as the US$ strengthens compared to CAN, AUS, etc.).
But then again, surely the coal remains in the ground regardless of the intervening economic problems. Indeed, it might be better to wait and take up a company, newly formed to return a closed mine back to full production; in which case, you can have the best of both worlds; a rising coal price and getting in on the ground floor of a new enterprise.
But then again, surely the coal remains in the ground regardless of the intervening economic problems. Indeed, it might be better to wait and take up a company, newly formed to return a closed mine back to full production; in which case, you can have the best of both worlds; a rising coal price and getting in on the ground floor of a new enterprise.
Most coal mine restarts are expensive...very expensive. When the pits are shut down, especially underground, the water pumps are shut off and the mine floods. The time and cost of lifting water to be able to access the coalface and seams to restart can be prohibitive. A great many of the pits in the UK that were shut-in during the Thatcher era are almost certainly uneconomic to ever restart...those resources are gone for good.
Most coal mine restarts are expensive...very expensive. When the pits are shut down, especially underground, the water pumps are shut off and the mine floods. The time and cost of lifting water to be able to access the coalface and seams to restart can be prohibitive. A great many of the pits in the UK that were shut-in during the Thatcher era are almost certainly uneconomic to ever restart...those resources are gone for good.
It surely, considering the vast areas with coal still to be extracted, is not beyond possibility to simply move the new shaft away from the water and start again?
It surely, considering the vast areas with coal still to be extracted, is not beyond possibility to simply move the new shaft away from the water and start again?
"Moving the shaft" is essentially building a new mine.
The objective of a "restart" is to avoid the considerable costs and time difference between capital expenditure and first production by using the original shafts and drifts. If one has to create a new shaft that means starting from surface and building everything from scratch to go underground.
And one still has to evacuate the water from the flooded shafts and tunnels if one wants to safely mine up to it from the "other side". The pressure of the water column at the bottom of the old mine will be tremendous and risks breaking through into any new, adjacent shaft. The energy cost of lifting out the water and drying out the mine to restart is tremendous.
Those UK pits are gone for good Chris (which will make the global warming cohort very happy, no doubt). If I recall, during the Thatcher era the future for the UK was North Sea oil and gas, and nuclear? Now it's offshore windmills and imported LNG, isn't it?
True enough. It was simply that I always look at things from the point of view that, if someone wants to enough; they will find a way that makes sense to their way of thinking. Yes, indeed, not to your way of looking at the problem; but theirs entirely.
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