Alert, alert! Matt Taibbi of Vampire Squid fame has discovered contango in a five-page mega opus for Rolling Stone magazine, in which he blames all the usual names for crimes against markets, people and everything good in the world. It’s also a running continuation of his “everything is rigged” theme.
But it’s a terribly nauseating read for anyone following the story since 2008.
First off, Taibbi turns out to be a dependable repackager of other people’s stories. Facts and ideas unearthed by others are borrowed and twisted until they fit his own version of reality (often without citation or attribution). Case in point, the “vampire squid” description is surprisingly similar to popular writer ‘Coin’ Harvey’s 1894 description of the Rothschild bank as a black octopus stretching its tentacles around the world.
True, Taibbi never claimed to have come up with the term himself and perhaps it is just a coincidence, but one can’t deny he’s benefited immensely from borrowing it and applying it to Goldman Sachs. Read more
From Rio Tinto’s Alcan performance statement on Thursday (our emphasis):
Rio Tinto Alcan’s underlying earnings of $557 million were $503 million higher than in 2012, and EBITDA margins improved, despite a nine per cent decline in LME prices over the period. Growing momentum from the cost reduction initiatives, increased volumes and a rise in market premia were the main drivers.
Market premia on aluminium shipments have continued to perform strongly during 2013. This has been supported by a balanced physical supply/demand picture, despite significant LME inventories, much of which remains tied up in financing deals due to higher forward prices and low interest rates. Cash cost improvements lifted earnings by $392 million ($574 million pre-tax). The savings included greater production efficiencies and lower prices of raw materials, lower functional costs and increased production from Yarwun and Alma. These were partly offset by heavy rainfall in Queensland earlier in the year, which reduced earnings by around $40 million.
Forcing LME warehouse operators to comply with faster aluminium load-out rates was supposed to bring down excessive spot premiums for fabricators and end-users.
The idea very loosely was that if end-users could get their hands on metal, which was otherwise trapped in the inventory system, they would not be beholden to the higher prices charged by producers for the privilege of direct delivery. Everyone would be a winner – yay!
And yet, as FT Alphaville pointed out on a number of occasions, we thought the LME’s solution — by misdiagnosing the problem — would not be successful. If anything we worried the premiums could get worse before they got better, since a lot of the inventory rather than making its way to market would only be shifted into private dark inventory stores instead. Read more
Bored with zero interest in the bank? Why don’t you check out the latest in aluminium-backed deposit accounts? You take the excess aluminium off our hands, we sell it forward, and hey presto you get interest rates conventional banks just can’t beat!
(It’s the way the gold market has been compensating for its oversupply for generations.) (Terms and conditions apply.)
All of which is another way of saying the world’s aluminium oversupply burden has created some excellent carry opportunities in the off-market storage space over the last few years. Read more
The Wall Street Journal has been digging deeper into the metals warehouse logjam issue, and discovered that both Alcoa and Rusal may be beneficiaries of the situation due to the physical premiums they collect when end-users are forced to go direct to producers for metal so as to avoid queues.
According to the WSJ the aluminium makers have reaped as much as $1.4bn in revenues from higher fees due to the logjam.
The story then suggests this strips the credibility from their objections to proposed LME rules to ease the bottleneck. Read more
Alcoa, one of the world’s largest aluminium producers, has come out against the LME’s proposed new rules for dealing with warehouse queues.
In a letter to the LME, Alcoa’s president for materials management Tim Reyes states the plans are “counter productive” and designed to address what the company feels is a “red herring”. Read more
Rio Tinto’s problems with its aluminium business are well documented.
But things could have been worse without all that warehousing shenanigans from Goldman et al. Read more
Now that the possibility of a sharp slowdown in Chinese growth, or even an outright contraction, is getting some serious airplay, we can expect a ramp up in forecasts about what this will mean.
Here’s one from Barclays commodities analysts, Sudakshina Unnikrishnan and Jian Chang. They note that their China economics colleagues, having gifted us with the awkward ‘Likonomics‘ neologism, are also canvassing the possibility of a big drop in the country’s GDP growth rates. Read more
In the M&A hall of shame, Rio Tinto’s top-of-the-market $37bn acquisition of Alcan (in CASH) is right up there. In this century, at least.
It was a truly disastrous deal that nearly killed the Anglo-Australian mining company and its after-effects are being felt to this day. Just ask Tom Albanese. Read more
Implied copper volatility has risen sharply over the past month, according to Goldman Sachs:
…not that the levels are in any way unprecedented. Read more
There’s an enlightening interview with Oleg Deripaska, chief executive of Rusal, in the Telegraph this Monday (h/t Neil Hume).
Turns out the metal tycoon believes aluminium may do better than expected this year, largely because much of the excess capacity that has plagued the industry has finally been cut back. Read more
John Kemp at Thomson Reuters has pointed us in the direction of colleague Clara Ferreira-Marques’ piece on the likely repercussions of Rio Tinto’s $14bn revaluation of aluminium and coal assets last week. As she notes, it’s almost certain that Rio Tinto’s hit will now set the stage for a wave of writedowns across the industry. Read more
Nothing short of an RNS fit for framing from Rio Tinto this Thursday morning:
Rio Tinto expects to recognise a non-cash impairment charge of approximately US$14 billion (post tax) in its 2012 full year results. These impairments include an amount of approximately US$3 billion relating to Rio Tinto Coal Mozambique (RTCM), as well as reductions in the carrying values of Rio Tinto’s aluminium assets (mostly Rio Tinto Alcan (RTA) but also Pacific Aluminium) in the range of US$10-11 billion. The Group also expects to report a number of smaller asset write-downs in the order of US$500 million. The final figures will be included in Rio Tinto’s full year results on 14 February 2013.
It could be that a major commodity story is about to go mainstream.
We are, of course, talking about the issue of financialised commodity inventory and the impact it has had on the supply and demand picture, by taking inventory off-market and off-balance sheet. Read more
When the chief executive of UC Rusal, Oleg Deripaska, takes to the pages of the FT to air his frustrations about his industry, you’ve got to sit up and listen. Especially when he concludes that output caps are needed to overcome the problems.
Rusal, of course, is one of the world’s top aluminium producers and Deripaska, it turns out, wants output caps because he is worried about the strange anomalies which are gripping his market. Read more
Here’s a bearish take on what the post-stimulus, rebalancing Chinese economy will mean for demand of steel, copper and aluminium:
Adjusting to a new paradigm: We see a no/low growth scenario off what is now a very high base level of demand as a realistic rather than a disaster scenario Read more
Sean Corrigan at Diapason Commodities has sent us another fascinating chart. It shows the hot money inflows into China which are unaccounted for by the sum of the trade balance, FDI, interest earned and FX revaluations.
That’s to say there’s still a large chunk of inflows left over after all of the above is considered, the volumes of which happen to correlate very nicely with changes in the combined aluminum, copper and zinc (and lead from 2011 onwards) stocks of Shanghai and the LME. Read more
Alcoa, one of the world’s largest aluminium companies, has highlighted the impact of the European debt crisis on corporate profits, reporting its first quarterly loss on an underlying basis since 2009 and announcing plant closures and cutbacks in Italy and Spain, reports the FT. It also warned that the outlook for Europe “remains soft”. Opening the earnings season for US companies, Alcoa reported a $239m pre-tax loss for the fourth quarter, compared with a $348m profit for the equivalent period of 2010, as revenues were squeezed by falling aluminium prices. The loss included a $159m restructuring charge for the cost of shutting down 12 per cent of worldwide smelting capacity either permanently or temporarily, a move announced last week as part of the company’s drive to cut costs.
The highly anticipated third-quarter earnings season got under way with a whimper when Alcoa ’s shares sank in the wake of its disappointing results, the FT reports. The aluminium company fell 2.4 per cent to $10.05 after reporting earnings per share of 15 cents after the market closed on Tuesday, well below the average forecast of 22 cents from analysts surveyed by Bloomberg. But the stock still remains slightly up for the week, with analysts blaming the results on foreign currency transactions rather than operating losses. “Translation adjustments accounted for a good portion of the miss,” Fraser Phillips, an analyst at RBC Capital Markets wrote to clients. “A weak result but not as bad as it looks,” he added. Analysts were also cheered that the company maintained its aluminium demand forecast for the year, with higher demand from China expected to offset weaker demand from Europe.
Aluminium company Alcoa opened the US corporate earnings season with disappointing results for the third quarter, reporting profits below consensus expectations, the FT reports. Earnings per share were 15 cents for the third quarter, up from 6 cents in the equivalent period of 2010, but down 28 cents from the second quarter, and well below the average forecast of 22 cents from analysts surveyed by Bloomberg. Chief executive Klaus Kleinfield said confidence appeared to be more of a problem than actual demand, and insisted that “the world is not the same” as when it plunged into the downturn of 2008-09, with strong physical aluminium markets and total global demand still growing. However, he said that growth was slowing sharply in the second half of the year, and regional demand was falling outright compared with the first half in North America, Europe and Brazil. The results helped push Asian shares lower, says Reuters.
Alcoa, the integrated aluminium producer, reported that its second-quarter earnings more than doubled and expressed confidence in its outlook despite recent weakness in metal prices, the FT reports. Kicking off the North American second-quarter reporting season, Klaus Kleinfeld, Alcoa’s chief executive, described the economic recovery as “uneven”, but said the outlook for the company and for the aluminium industry as a whole remained positive. Net income for the second quarter totalled $322m, or 28 cents a share, up from $136m, or 13 cents, a year earlier. Income from continuing operations, excluding special charges, totalled $364m, or 32 cents a share. Revenues grew by 27 per cent from a year earlier to $6.6bn.
FT Alphaville noted a couple of weeks ago how backlogs at London Metal Exchange (LME) warehouses in Detroit were seeing some market participants have to wait up to 10 months to receive their aluminium.
We also noted that an independent study into the LME’s warehousing network had recommended upping load-out rates, to try and deal with some of these issues. Read more
The commodities world knew Glencore was the biggest market participant, but few were aware until now of the true scale of the Switzerland-based company’s operations, according to the FT. As Glencore announced on Thursday its intention to become a public company, it revealed some of its most closely guarded secrets: the dominant market share of its vast trading activities. In some cases, including zinc and copper, Glencore told investors it controls more than half of the so-called third party market. Glencore disclosed that it controls 45 per cent of the third-party lead market, 38 per cent in alumina, and between 30 and 20 per cent for aluminium, cobalt and thermal coal. It has a smaller market share for nickel, ferrochrome, oil and grains. The sheer dominance of raw materials trading is set to play into Glencore’s favour as it pushes for a 15-20 per cent stake sale worth $9bn-$11bn in London and Hong Kong.