Markets live chat transcript for the chat ending at 12:14 on 7 Apr 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Markets Live.
PM: This is FT Alphaville’s daily markets discussion.
PM: Neil Hume is with me.
PM: He is still with us.
NH: Hi there
NH: ???
PM: Well, did you see this in the NYT?
PM: report that blogging kills, basically.
NH: Marvellous. So that’s why you’ve hardly written anything recently. You are looking after your health.
PM: Shall we ring the changes this morning??
PM: Start with a tiddler??
NH: yep, good idea
NH: good question
PM: Ok — What the heck is going on with D1 Oils?
NH: stock has flown this morning
NH: currently 17p at 55p
NH: has been as high as 58p
PM: So whats going on???
NH: I don’t know. More buyers than sellers.
PM: This is the little bio fuels hope — that has disappointed on a regular basis
NH: and needs a serious of amount of cash to survive
PM: We had that clown announcement from the former chairman last month
PM: Karl Watkin
PM: Having regard to the movement in D1 Oils’ share price, Karl Watkin announces that he is at a very preliminary stage in evaluating all options with regard to his shareholding in the Company, including an increase or decrease in his interest, and whether or not to make an offer for the Company.
NH: what does that mean??
NH: he might sell, he might, he might bid, he might not
PM: Either way he is at a very preliminary stage of his indecision
NH: 
NH: obviously something going
NH: I have calls in
NH: hopefully we should have some feed back before the end of the show
PM: There was an interesting piece in the Guardian last week related to this.
PM: Well biofuels.
PM: Big scam — splash and dash. Seemed extraordinary to me.
PM: Bit like missing trader fraud – cost the gov billions and yet they struggled to stop it and couldn’t collar anyone.
PM: Demands for crackdown on biofuels scam: US ’splash and dash’ loophole undermines climate change fight
Terry Macalister
682 words
1 April 2008
The Guardian
1
English
© Copyright 2008. The Guardian. All rights reserved.
The EU is being urged to take action to stop a biofuel trading scam that exploits US agricultural subsidies and undermines the fight against global warming.
Up to 10% of biofuel exports from the US to Europe are believed to be part of the rogue scheme reaping big profits for agricultural trading firms.
The “splash and dash” scam involves shipping biodiesel from Europe to the US where a dash of fuel is added, allowing traders to claim 11p a litre of US subsidy for the entire cargo. It is then shipped back and sold below domestic prices, undercutting Europe’s biofuel industry.
The trade is not illegal, but flouts the spirit of producing green fuel by transporting it needlessly across the Atlantic at a time when campaigners are voicing concern about emissions from global shipping.
The producers’ body, the European Biodiesel Board, has uncovered the trade as part of its investigation into why British, German and Spanish producers are in financial trouble at a time when biodiesel prices remain high. The board will call for retaliatory action against the US over subsidies for its leading biofuel.
Biofuels are plant-based oils from crops such as soy and corn. They are expensive to produce but have become relatively cheaper as the price of crude oil has risen to more than $100 a barrel. It is estimated that 10% of the 1m tonnes of biodiesel exported from the US to Europe is part of the splash and dash trade.
PM: 
PM: Wider market
PM: By the looks of things
PM: the bull market is back!
NH: yes, that’s right
PM:
NH: take off your tin hats
NH: 
NH: because
NH: the fabulous Footsie
NH: wait for it…
NH: broke through the psychologically important 6,000 level earlier this morning
PM: Er, why is 6k important??
NH: dunno
NH: sounds good though
PM: Right…
NH: miners driving the index higher this morning
NH: index currently 36.6 points higher at 5,983.7
NH: very impressive performance from the miners this morning
NH: have a look at this
BHP Billiton (BLT:LSE): Last: 1,663, up 46 (+2.84%), High: 1,683, Low: 1,648, Volume: 7.34m
Antofagasta (ANTO:LSE): Last: 784.00, up 35.5 (+4.74%), High: 786.00, Low: 754.00, Volume: 1.44m
Xstrata (XTA:LSE): Last: 3,803, up 96 (+2.59%), High: 3,819, Low: 3,740, Volume: 2.51m
Vedanta Resources (VED:LSE): Last: 2,237, up 56 (+2.57%), High: 2,255, Low: 2,207, Volume: 697.71k
Anglo American (AAL:LSE): Last: 3,282, up 120 (+3.80%), High: 3,301, Low: 3,240, Volume: 3.21m
PM: So what has caused this???
NH: pricing news
NH: at the moment there are yearly pricing negotiations going on in number of metals and basic resources
NH: and some of the figures that have come out this morning are quite eye-catching
PM: so the super cycle lives on
NH: looks that way
NH: check these stats
NH: coking coal appears to have settled with an increase of over 200%
NH: this is based on some news that came out of Japan this morning
NH: Posco, Asia’s third biggest steelmaker, said over night it would pay the 205-215% more with immediate effect for their coking coal
PM: Whao!
NH: now, this is very good news for Rio, BHP and Xstrata
NH: and should have a positive impact on earnings
NH: this just in from MF Global
NH: Earnings estimates to increase significantly. Although most miners would be forward sold some 40-50% in terms of their ‘coal books’, the impact on earnings of this price increase should be quite substantial once the full impact makes itself felt over the next one to two years. Investors should note that the price increase will not only impact hard coking coal but semi-soft as well, as this will now be used as a low quality substitute. We expect hard coking coal prices to increase to around US$300/t and semi-soft to around US$195/t (see Table 1). Profits on the back of this could increase massively the companies’ respective for coking coal ‘divisions’ (see Table 2) and increase by as much as 10-30% at the Group level over the next two years
NH: What will this do the BHP Billiton Rio Tinto exchange offer? We will have to look into this more closely, especially as manganese could provide a bit of a positive surprise in favour of BHP Billiton as well. Clearly, Rio Tinto still benefits from the uplift in iron ore and aluminium, but the uplift might become that bit less marked given the impact from other carbon steel materials (such as manganese and coking coal), where the Group has less exposure. We will report back to you in due course on our estimates, the impact on the offer ratio and our recommendations in the sector? Please bear with us for a bit longer!
PM: Thanks for that
NH: and this is not the end of the goods news for the mining sector
PM: No?
NH: nope
NH: also had some pricing news on thermal coal and ferrochrome
NH: and here is the news
NH: Xstrata has settled thermal coal contracts with Japan’s Chubu Electic for the year starting 1 April at US$125/t fob, up 125% yoy.
NH: and on Ferrochrome
NH: according to Metal Bulletin, charge chrome benchmark has settled at 192c/lb
NH: and it also expects ferrochrome prices to rise to over 300c/lb to give an average of 280c/lb for the year for European prices.
PM: so who benefits from the rising ferrochrome price then???
NH: er, knew you would ask that
NH: International Ferro Metals
PM: of course
NH: and Ferrexpo
PM: 
NH: i think
NH: you mock, but they are both FTSE 250 companies
NH: hang on
NH: got a note from Fairfax, a newish broker based in Mayfair
NH: on IFM
NH: We are raising our valuation on IFM to 206p per share as the market settles on markedly higher benchmark ferrochrome prices for Q2. Indications are that the Q3 settlement should be higher as spot ferrochrome prices are forecast to rise to over 300c/lb in Europe.
We assume that South African energy and coke prices rise markedly with a 53% increase in power prices likely in SA and a 200-300% rise in coking coal prices also on the cards. A stronger SA rand further offsets the benefits of rise in ferrochrome prices but all this also means that ferrochrome prices simply can not return to last year’s levels without significant production being shut.
We have adjusted our model to use a 7.8:US$ SA rand rate vs the 8.15:US$ used at the time of our last valuation. However, we are using a 8.15 SA rand rate for 2009 and beyond to match our 121c/lb ferrochrome forecast.
Our valuation 206p/s target price forecast is based on an average ferrochrome price of 190c/lb for this year and 121c/lb thereafter.
NH: Now, as Fitch mentioned below
PM: Fitz even
NH: sorry, rating agencies on the brain
NH: Goldman Sachs have turned positive on the miners this morning.
NH: Citi also warming to them
NH: right, here are the thoughts of the mighty Goldman Sachs
NH: they have added Anglo American to one of their conviction buy lists
NH: Commodity prices and fx updated to reflect ytd performance
We are revising our commodity price assumptions and exchange rates to
reflect prevailing prices in 1Q08. On the back of these changes we have
also updated our company earnings estimates and price targets. We
believe the recent strength in commodity prices has been driven by
resilient global industrial production despite negative GDP pressures,
continued supply-side disappointments and US dollar weakness. In the
absence of a significant deterioration in global industrial production, we
expect commodity prices to remain around current levels in 2008 and to
increase significantly in 2009 in-line with our expectations for a recovery in
economic activity.
NH: Anglo American now Conviction Buy due to relative de-rating
We see particularly high value in stocks in our coverage that have lagged
in terms of performance and have undergone a sector relative de-rating
versus stocks that have been involved in ongoing M&A transactions or
speculation. We believe Anglo American has been overlooked by investors
on this basis and that it currently offers the most upside to fundamental
fair value within the sector. We have removed the Not Rated designation
from Anglo American; we now rate it Buy and add the shares to our
Conviction Buy List.
NH: Valuation looks compelling in 2009E; coverage view to Attractive
Prevailing high base and platinum group metal prices combined with
higher-than-expected bulk metal contract settlements means that we
expect our coverage universe to again generate record cash flows in 2008.
Our Economists’ view of stronger economic activity in 2009 translates into
tight metals markets and rising base metal and iron ore prices. These
combine with higher production to lift cash returns and cash flows making
2009 valuation metrics appear very compelling. We therefore upgrade our
coverage view to Attractive from Neutral.
NH: Risks: Slower metal demand and inability to undertake M&A
A larger than expected negative impact on metal demand from slowing
global economic activity is the main risk to our commodity price forecasts
and therefore our company-specific estimates and price targets. The
failure of companies to undertake M&A due to a lack of available financing
could also depress sector valuations.
PM: Ok thanks for that
NH: and there’s the Citi stuff very briefly
NH: first, here are their revised commod forecasts
NH: Categories Unit 2008e 2009e
New Old change New Old change
Aluminium US¢/lb 132.3 120.0 +10.2% 130.0 120.0 +8.3%
Copper US¢/lb 355.6 310.0 +14.7% 350.0 350.0 +0.0%
Nickel US$/lb 12.5 10.5 +19.3% 10.0 8.0 +25.0%
Zinc US¢/lb 105.0 104.3 +0.7% 100.0 100.0 +0.0%
Lead US¢/lb 117.8 112.5 +4.7% 110.0 110.0 +0.0%
JFY2008 JFY2009
Thermal benchmark US$/t 110.0 100.0 80.0 80.0
Hard coking benchmark US$/t 285.0 200.0 200.0 180.0
Asia Lump (Brockman)
benchmark
US¢/DLTu 85% 65% 30% 30%
Asia Fines (Brockman)
benchmark
US¢/DLTu 80% 65% 30% 30%
NH: sorry the table is a bit messy
NH: but you can just about decipher the figures
NH: I hope
NH: if you can’t here is some comment from Citi
NH: Changed commodity forecasts: Our commodity team has pushed through another
round of changes to our forecasts reflecting the strong start to the year for
commodities. Preference in commodities remains for the bulks (iron ore up 30%
next year, coal suite to stay strong) and copper among the base metals. Precious
metal outlook remains strong, yet we stick to our numbers for now.
NH: Global economic slowdown: Global industrial production growth is expected to slow to 2.7% in 2008E (from 4.1% in 2007), with partial recovery in 2009E to 2.9%.
The slowdown is being led by the US, but other regions, especially Japan, are
likely to be affected. The slowing economic situation makes it difficult to see what
will drive prices substantially above our forecasts.
NH: A tidal wave of fund flow: Despite the economic gloom, many commodity prices
have hit new highs in recent weeks, driven largely by investment inflows. We
estimate total investments at the end of March were around US$400bn, up from
US$330 at the end of 2007. Investments in commodity indexes increased by
US$40bn, equivalent to the total increase in 2007. While fund inflow has certainly
helped to push prices up so far this year, we see fundamental support in the base
metal complex at c10 below current levels. We do not expect a bubble to burst.
Still sector cautious; be stock specific: Against a backdrop of slowing economies
and relatively full sector valuations, we remain cautious on the sector. To
generate performance we would look to stocks with value and volume growth:
Xstrata (IM, £45 target), Ferrexpo (1M, current price £3.28, £4.30 target), Anglo
(IM, £35 target).
PM: Right — lots to digest there
PM: ta
PM:
PM: Lets go to some comments
PM: Miners and Pompey supporting the index
PM: Goldman — please dont knock Harry R
PM: Monkey is a fan
PM: Peeeeooooortssmmmutth
NH: i wonder if the FA will give a Harry a warm welcome at the final
NH: and of course, will you be going?
PM: I stopped supporting about 20 years ago — when I was kicked out of the 6.57 Squad
PM: Fitz — tahnsk for enquiry re the Torch.
PM: Damp Squib
PM: Funny tely
PM: great ad
NH: so, was your daughter running with the torch then
PM: Er, no — some dance thing
PM: At the Dome
NH: and was the marred by protesters??
PM: There were more protesters at the Dome than fans
PM: hardly anyone there actually
PM: All hurried thru
PM: Worzel — we dont have anything specific on Rightmore — other than it beign the right move to avoid anything housing related in the current environment
PM:
PM: Trip to the Alps
NH: nice at this time of year
NH: but not for skiing
NH: but to take another look at UBS
NH: the price just keeps on rising
NH: since last week’s emergency cash call was announced it has gone from Sfr28.86 to 35.90 this morning
PM: that’s quite a move on the back of some seriously bad news
NH: certainly is
NH: driving the stock higher this morning is some bid speculation (sort of)
NH: and an upgrade from Merrill Lynch
NH: in fact Merrill has turned positive on the entire European banking sector
NH: which is a brave call if you ask me
PM: OK, let’s have a look at this bid rumours first
NH: this appeared in one of the German paper this morning
NH: UBS AG will prepare its investment banking business for a possible sale in two to three years’ time, Sonntag reported, without saying where it got the information
NH: UBS may be forced to sell the unit if future U.S. laws
require a separation of its business and investment banks, the
Aarau, Switzerland-based newspaper said. A sale may also be
necessary if the Swiss Federal Banking Commission raises capital
requirements for investment banks, or if the unit can’t be made
profitable, it said.
NH: Luqman Arnold, a former UBS president, said last week that
Switzerland’s largest bank should separate investment banking
from the wealth management unit and consider selling other parts
of the company to raise capital.
NH: On top of that there is Lina Saigol’s comment this morning
NH: About a Barclays bid for UBS
NH: anyway, I think the main reason for the UBS gains is this upgrade from Merrill
NH: and their upgrade reflects a more positive stance on two factors
NH: (1) credit markets have passed their worse
NH: (2) banks are moving from the denial stage to contrition and, as UBS shows, equity markets are rewarding such moves
NH: now, Merrill reckons these two factors should help reduce uncertainty and volatility in the sector
PM: excellent, so now we can just concentrate on the dismal outlook for earnings
NH: precisely
NH: anyway, here is the full note
NH: Upgrading from cautious to Neutral
NH: We are upgrading from our long-time cautious stance on the sector to Neutral.
Our more positive stance reflects two key factors. First, we are increasingly
confident that credit markets are past their worst. Second, we see banks moving
from “denial” to contrition and the equity market rewarding such moves – last
week’s write-down/re-capitalisation from UBS was a defining moment, we believe.
These two factors should lead to reduced uncertainty and volatility in the sector.
As such we think the sector’s valuation is more defendable at still low levels in
terms of both P/NAV (1.7x) and P/BV (1.2x). The swing factor in our ratings is the
accompanying upgrade of UBS from Neutral to Buy.
NH: More confidence that credit markets are past their worst
We have more confidence that credit markets experienced their moment of
maximum distress on March 17 with the bail-out of Bear Stearns. Last week was
easily the busiest week of the year for bond issuance by European banks with
$31bn of deals being launched. The heavy volume of successful primary issuance
should by itself go some way to improving confidence in European credit markets.
UBS has shown how bad news can turn into good news
UBS is now leading the way in terms of delivering on investors’ desire to see
“denial” switch to contrition. We detect that other banks are also becoming more
realistic about the challenges ahead. We see an increased likelihood that equity
markets will reward such more realistic thinking.
NH: Many risks and challenges remain for the banks
We do not believe investors should be overweight banks. We still see many risks
and challenges for the European banks. These include the poor macro outlook
and negative earnings momentum. Moreover, we see significant challenges to
certain banks’ business models from the need for de-leveraging and improved
funding diversification. Finally, we still see some areas of worry in credit markets.
How to be positioned in the sector
This is not March 2003 all over again – we do not expect a V-shaped recovery in
bank shares. Rather we are now content to selectively add more risk. We are
adding UBS and Fortis to Merrill Lynch’s Europe 1 list today, and we add both to
our banking team’s “feature stocks” list. This now comprises UBS (contrition and
self-help), Fortis (self-help), Soc Gen (contrition), Postbank (M&A and self-help)
a nd Intesa (balance sheet strength).
PM: So no v-shaped recovery
NH: nope
PM: this isn’t a really enthusiastic upgrade is it?
NH: more of a “sector has bottomed call”
NH: here’s some more from the note
NH: In our report of March 31, Still cautious, but incrementally less negative, we
highlighted the early signs of improvement in credit markets. We noted that these
were very important since (a) they represent one of our key three swing factors
for the sector and (b) if the improvements in credit markets continued they had
the potential to help the other two of our key indicators – earnings momentum and
the macro outlook.
NH: One week on, we are moving from our long-time cautious stance on the
European banks to a Neutral stance. We have become more constructive on
the European banks for two key reasons: