Goldman says only China can rescue metals as mine cuts won't

Only a substantial rise in Chinese metals demand is likely to be sufficient to balance copper and aluminum markets, according to Goldman Sachs Group Inc, which said recent output cut by miners aren't large enough to rescue prices. 

PHOTO: REUTERS

NOV 13, 20154:50 PM

[SINGAPORE] Only a substantial rise in Chinese metals demand is likely to be sufficient to balance copper and aluminum markets, according to Goldman Sachs Group Inc, which said recent output cut by miners aren't large enough to rescue prices. Copper fell to the lowest since 2009.

"While recent supply cuts in copper and aluminum may appear to bring the markets closer to balance, the cuts in our view are not sufficient to do so," analysts including Max Layton said in a report received on Friday. "It is our view that the supply cuts confirm the bear case for these metals."

The rout in metals prices spurred by China's slowdown and a rising dollar has prompted miners including Glencore Plc and Alcoa Inc to cut capacity this year. Copper futures in London are headed for a fifth straight weekly loss, dropping on to the lowest price in six years. Metals demand in China, the top user, slipped again in October, Goldman said, citing an in-house gauge of consumption in Asia's top economy.

"Only a major pickup in Chinese demand is likely to be sufficient to balance metals markets such as copper and aluminum," Goldman said. "This is because metals supply generally continues to grow, while Chinese demand is not, so demand has to work hard to catch up."

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Copper for delivery in three months lost as much as 0.8 per cent to $4,787.50 a metric ton on the London Metal Exchange and traded at $4,799.50 at 3:04 pm in Singapore, 24 per cent lower this year. Aluminum has lost 19 per cent in 2015 to $1,498.50 a ton.

Alcoa, the largest US aluminum producer, said this month that it will reduce smelting capacity by 503,000 tons and alumina refining by 1.2 million tons. Glencore has said that it will curb copper production in Africa and also reined in zinc output.

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Maersk gets debt market warning to shun container line takeovers

Debt markets are warning A.P. Moeller-Maersk A/S not to pursue an acquisition in the struggling container line industry. 

PHOTO: AFP

NOV 13, 20158:37 PM

[COPENHAGEN] Debt markets are warning A.P. Moeller-Maersk A/S not to pursue an acquisition in the struggling container line industry.

Neptune Orient Lines Ltd last week said it's in talks with Maersk and CMA CGM SA as Southeast Asia's biggest container company seeks a buyer. Borrowing costs for both potential suitors have risen since the announcement.

"Maersk Line could possibly derive some synergies from an acquisition but Maersk Line is one of the few profitable companies in the sector and it could dilute margins initially," Marie Fischer-Sabatié, a senior vice president at Moody's Investors Service, said by phone. In June, Moody's added a positive outlook on its Baa1 rating for Maersk.

The container line industry is suffering from a toxic cocktail of vessel overcapacity and sluggish global growth, which has sent freight rates plunging and turned some of the world's maritime trade lanes unprofitable. The industry has responded with job cuts and - to a limited extent - capacity reductions. But so far there has been little consolidation as container lines instead have formed vessel-sharing agreements with rivals.

"Real consolidation could be positive for the cost structure of companies involved, but it would likely take more than just one or two mergers to materially improve the overall market conditions in the container market," Fischer-Sabatié said.

The yield on Maersk US$750 million 2.55 per cent bond due 2019 rose to a high of 2.84 per cent this week. The yields on bonds issued by Marseille-based CMA CGM have also gone up. Moody's has a B1 junk rating on CMA CGM, six steps lower than what it assigns to the Copenhagen-based conglomerate.

Maersk said on Oct 23 that the container market was doing worse than it expected as it cut its 2015 forecast for the group's underlying profit by 15 per cent to US$3.4 billion. A week later, it said it will slash as many as 4,000 jobs at the container line, scale back capacity and delay investments to cope with a weaker market.

Maersk Chief Executive Officer Nils Smedegaard Andersen said last week his container unit "will look at everything that comes up for sale in the market but our base strategy is to grow organically." He also said he would "welcome any consolidation - - that would only be healthy for the container line industry." Meanwhile, Maersk, which is Denmark's largest company with more than 1,000 subsidiaries, may be better off investing in its other units.

"Overall, the Maersk Group is more likely to pursue acquisitions for its oil unit - because it needs to increase its reserve levels - than for its container line unit," Fischer-Sabatié said. Maersk Oil "has previously invested mostly organically, but reserves have declined." The unit said on Nov 9 it has agreed to buy oil assets in Kenya and Ethiopia for as much as US$845 million. The company, whose North Sea fields are maturing, has signalled it's ready to buy more.

"If they find the right acquisition target, it could have a positive impact on Maersk Oil's business profile," the Moody's analyst said. "But the eventual impact on A.P. Moeller-Maersk's credit profile would obviously depend on the size and the details of the deal."

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JPMorgan backs away from US stock bull market's top performer

NOV 13, 201510:13 PM

[NEW YORK] The top-performing industry group of stocks' current bull market faces "significant risk" as investors look for inflation to accelerate, according to Dubravko Lakos-Bujas, JPMorgan Chase & Co's head of US equity strategy.

Lakos-Bujas was referring to consumer-discretionary shares: media companies, retailers, homebuilders, automakers and others reliant on household spending that's relatively easy to put off. He recommended in a report that investors cut their holdings to bring them into line with market benchmarks.

The chart below tracks the ratio of the Standard & Poor's 500 Consumer Discretionary Index to the S&P 500 since 1990. Since stocks began climbing in March 2009, the industry gauge has more than quintupled. That's the biggest gain among the 10 main groups in the S&P 500, which tripled in the period.

"We are becoming increasingly uneasy with the consensus rationale for the sector," Lakos-Bujas wrote in reducing his rating to neutral from overweight. While lower energy prices have benefited the category, their effect on earnings and revenue growth is poised to fade as oil markets stabilize, the New York-based strategist wrote. He cited wage inflation as another concern.

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Analysts who follow consumer-discretionary companies are more optimistic. They see profit rising 12.5 per cent next year, up from 10.3 per cent this year, according to data compiled by Bloomberg for S&P's index. As for sales, they expect the pace of growth to accelerate to 5.9 per cent from 2.9 per cent.

Consumer-discretionary stocks also have "rich valuation," the report said. Their index was valued Thursday at 21.9 times earnings, the highest among the S&P 500 groups. The P/E rose from a low of 13.3 at the start of 2012.

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Britain's Serious Fraud Office charges 10 individuals over Euribor

      

NOV 13, 20159:36 PM

[LONDON] Britain's Serious Fraud Office said on Friday it has charged 10 Barclays and Deutsche Bank employees in the first criminal proceedings for alleged manipulation of the Euribor interest rate benchmark.

"Criminal proceedings will be issued against other individuals in due course," it said in a statement.

The SFO said it was charging Barclays employees Colin Bermingham, Carlo Palombo, Philippe Moryoussef and Sisse Bohart and Deutsche Bank employees Christian Bittar, Achim Kraemer, Andreas Hauschild, Joerg Vogt, Ardalan Gharagozlou and Kai-Uwe Kappauf with conspiracy to defaud in connection with an investigation into the manipulation of Euribor.

The defendants will appear at Westminster magistrates' court on Jan 11, 2016 and the SFO said the investigation continues.

REUTERS