lunes, 14 de diciembre de 2015

lunes, diciembre 14, 2015

Up and Down Wall Street

Commodity Rout: Only The End of the Beginning

Slashing dividends and expenses are just the first step to bring oil and metal supplies in line with demand.

By Randall W. Forsyth         
 
“This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Winston Churchill’s assessment of the Battle of El Alamein brings to mind the dramatic actions of a whole host of major commodity producers confronting the collapse of prices from petroleum to metals to agricultural goods. But rather than victory, their sharp cutbacks represent tactical retreats that are necessary in order to fight again another day.
 
This week alone has seen an onslaught of dividend cuts, most prominently by Kinder Morgan its payout.
 
And even with a 7% pop Wednesday after Wall Street analysts defended the stock, Bary writes the worst isn’t over for the Kinder Morgan shares.
 
That was followed by mega-miner Freeport-McMoRan’s suspension to its dividend to husband $240 million in cash while slashing capital spending. Meanwhile, BHP Billiton ( BHP ) yields nearly 10%--that is, if its current dividend is maintained, about which the market evinces some skepticism at these prices.
      .           
cat   Ore at Freeport McMoRan Inc.'s Grasberg copper and gold mining complex in Papua province, Indonesia. Photo: Bloomberg News            


Payout reductions or eliminations are relatively benign compared to the dramatic and traumatic actions seen at Anglo American, the U.K.-based mining giant that announced a major restructuring that will see about two-thirds of its workforce—some 85,000 jobs—eliminated, along with the suspension of its dividend. Following that news, Anglo American overtook Glencore, the Swiss-based mining giant, to be the year’s worst performer in London’s FTSE 100, the U.K. Telegraph observed, both having shed more than 70% in the mining rout this year.
 
Finally, American chemical giants Dow Chemical and DuPont were reported in serious talks to merge and then split up into three operating units, ostensibly to reap “synergies”—read headcount reductions—while satisfying antitrust concerns. Shares of both jumped about 10% Wednesday as the moves were seen as a response to the ongoing slump in commodities prices.

The old saying in the commodities pits is that the cure for high prices is high prices, and vice versa. Expensive goods result in demand destruction and then expanded supplies; think of hybrid and electric autos and fracking in reaction to oil prices rising past $100 a barrel starting back in 2008.

Now that prices for everything from oil to coal to iron ore to copper have collapsed, producers are being forced to cut back, slashing or eliminating dividends, payrolls and capital expenditures. And they’re pursuing mergers to writing out costs, with giants such as Dow and DuPont reportedly getting together to further those efforts, just as Exxon and Mobil did during the oil slump late in the 20th century to form ExxonMobil  to reassemble major parts of John D. Rockefeller’s Standard Oil.

Is this the end of the beginning? Based on some stock moves, some investors think so. The Materials Select Sector SPDR exchange-traded fund traded up 3% Wednesday while the Energy Select Sector SPDR gained 1.3%. That was on a day when the broad market represented by the SPDR S&P 500 ETF was off 0.8% and big tech tracked by the PowerShares QQQ Trust fell 1.5%.
 
The Battle of El Alemain took place in 1942. That year also saw the Battle of Midway, arguably the end of the beginning of the Pacific War, less than a year after the attack on Pearl Harbor.
But much fighting and many casualties still lay ahead before victory by the Allies.
 
In economic cycles, the central bankers are the generals, commanding forces as never before.

The so-called Commodities Super Cycle that lifted off in the past decade was fueled by the expansionary policies of the developed world that helped to fund the unprecedented boom in China. Unlike the classic inflation of “too much money chasing too few goods,” this cycle saw the expansion of supply in mining, metals and energy production, aided by new technologies such as fracking.
 
As China slows, there’s a surfeit of supply—of both commodities and the debt taken on to finance the expansion. On balance sheets, assets are being written down while the liabilities remain unchanged. On income statements, as revenues decline, companies are trying to slash expenses. The result is cash outflows, which puts real pressure on the firm to put their finances in order.
 
That’s the stage where these firms stand now. The problem is that there likely has to be more pain before a payoff.
 
Danielle DiMartino Booth, who offers her keen insights with our friends at the Liscio Report, observes in a recent trip to Dallas that some of the excesses pumped up in the oil boom are beginning to give way. But there’s more to come, she writes:
 
“Being familiar with the business of pulling black gold out of the ground, many Dallas private equity firms saw fit to lead the charge into the financing of the shale revolution. The damage will thus not be readily apparent until a good number of companies in the space run out of breathing room. One-in-five U.S. oil producers are hedged between $80 and $85 a barrel. The New Year will bring a crude reality to these companies whose lenders have been so badly burned they’re disinclined to extend a lifeline.”
 
The crash in West Texas crude to the mid-$30-a-barrel level thus just marks the end of the beginning of the campaign. As the hedges come off and credit lines get pulled, the real casualties will begin to rise. Only then will supply come into balance with demand, which still lies ahead.


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