Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. The bad news finally came and the sellers were not afraid to act. Whilst Spanish bond yields continued to fall from the high at the beginning of the week, the Spanish bond auction during the day went well. Sort of I guess, better than expectations, but at the same time the Spanish are paying a Euro era record for their five year debt, just above six percent. The demand was quite high though, the suggestion is that if Europe is "going to get the job done", then of course these yields are attractive in the medium term. The other Spanish news on the agenda was of course an independent bank audit which suggested that Spanish banks need as much as 62 billion Euros to shore up reserves to the level that they ought to be. That news release was a pretty late one in our time zone, but it was coming nevertheless.
But the news that was impacting on us the most was quite simply another pretty dull looking HSBC Flash PMI read which showed that Chinese manufacturing was again under pressure. That was the news that moved the needle on commodity prices, with oil falling to an 18 month low, this is to a level when Kaddafi (Qaddafi?) and Mubarak were still in control in their respective Northern African countries. The one is dead and the other one is technically dead. All commodity prices also took heat not only on the Chinese news, but filtering through from the prior session and a lack of extra stimulus had a negative impact on precious metal prices. Gold bugs were, you guessed it, upset with Ben Bernanke once again. WHAT? No more stimulus? What is that about? As such the broader commodities complex sank, Sasol was hurt the most, the stock ended down 4.4 percent on the day. The broader resources ten index closed down 2.36 percent, sending the Jozi all share index 0.73 percent off, or 254 points to 34534.
Byron's beats tries to explain that you should rather be grateful for the Chinese growth story, because it has made us all better off.
- I want to talk about a more positive story and one we are seeing less and less of in the South African environment. Today Kumba Iron ore announced the official opening of the Kolomela mine which is situated in the Northern Cape. The mineral rights for this mine were issued in July 2008 and the project was scheduled for first production in the first half of this year. Full production of 9Mtpa is expected in 2013.
But these production dates have not happened. In fact they have been surpassed. The mine started production 5 months ahead of schedule and contributed 1.5 million tons to Kumba's full year production of 41 million tons at the end of their year December 2011. They expect to produce 5 million tons at the mine this year.
As shareholders of Kumba we are very pleased with this but there is a bigger story here. In 2007 Kumba had revenues of R8.7bn and profits of R2.1bn. This was from 31 thousand tons of production. Last year Kumba Made R17bn in profits from R48.5bn in revenues and paid R9.7bn in taxes. Where am I going with this? Through efficiency and a bucket load of demand from China, Kumba have more than nationalised 2007 revenues. Our government now extracts nearly 5 times Kumba's 2007 profits. If Kumba had been nationalised in 2007 I highly doubt government would be getting close to what they make from the private company right now.
Other than our receiver of revenue, Kumba shareholders and employees have also benefitted handsomely. Massive dividends and generous bonuses have been paid and reinvested into our economy. There are two points I am trying to make here. One, allowing a miner to operate efficiently will create more benefit in the long run for everyone. This kind of thing is not happening in South Africa enough at all and it is situation that needs to be dealt with immediately. Miners are struggling and are faced with many government related headwinds.
My second point is that those of you who believe the Chinese are selfish and are purely focused on extorting Africa should reassess your opinion of them. Yes they may have their own best interests at heart but without their growth our economy would be nowhere near where it is today and we have all benefitted indirectly. In fact the entire globe has benefitted. Without the Asian growth story we would be living in a very different world right now, that is for certain.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. When the market participants caught wind of a pending across the board ratings downgrade for all the major banking stocks across the globe, the selling activity accelerated. Moody's stepped in after hours, the longest day of the year in the Northern Hemisphere saw them make the following release afterhours: Moody's downgrades firms with global capital markets operations. I have already seen several of the banks themselves object to this, some saying that this is almost reactionary. There are some implications with short term trading between the banks, specific to derivatives, as far as I could understand it from the FT, but a lot of banks say that they have done a lot since 2008 to deleverage and shore up capital. So, is this a case of the ratings agencies telling everyone the obvious? Perhaps. But we will still maintain around here that these big banks are not where we want our clients funds invested, the capital requirements required by new regulation and the handcuffs placed on past lucrative business segments are going to impact future profitability. Thanks Moody's, we knew this already.
Markets got crushed, it was one way traffic, the markets graphic was, well ..... graphic for the bulls. The Dow Jones closed down nearly two percent to 12573 points, the broader market S&P 500 lost two and a quarter percent on the day to 1325 points, whilst the tech stocks sold off one fifth of a percent worse than the broader market. Materials and energy stocks, like they were here, were sold off heavily, over 4 percent lower for the oil and gas producers. Yech. Exxon Mobil, Chevron, ConocoPhillips, and even services company Schlumberger (one of my favourites) all sank between three and four and a half percent. And if that was not enough for you to feel a little beaten up, well then, Proctor & Gamble lowered their guidance for the fourth quarter, citing Dollar strength and slower growth in developed markets. They are not the only company to do this is recent days, McDonald's are taking strain in some of their geographies, ditto Pepsico. Soft cabbage patch here Sandton dolls, that is where we are right now.
It is easy to feel beat up after a day of selling like that, particularly when the overall mood was starting to improve. Policy response is going to be key from here on out for the rest of the year. Germany needs to be committed to being more proactive, in a way the cracks starting to appear in their economic armour might ironically see the action more forthcoming. As far as I understand it Angela Merkel is going to be attending the quarter final in Poland tonight, in the mother of all sovereign debt clashes, with the Germans taking on the Greeks. Last night, in case you missed it (like Ronaldo did on a few occasions) the Portuguese beat the Czechs one zip, with the one of the worlds best scoring a stunner. I have Mario Gomez in tonight, with the Germans edging the Greeks, any other results would be a huge shock. The G20 heads have already met, there was not too much fanfare this time around, the G20 Leaders Declaration looks like a generic document with tweaks. Commitment to this, commitment to that, working harder on this. Yeah, thanks for the politics everybody.
Currencies and commodities corner. Dr. Copper is lower, at the lowest level I have seen in a while, 327 US cents per pound, the gold price is also lower at 1565 Dollars per fine ounce, the platinum price is also lower at 1430 Dollars per fine ounce. The oil price is about the only good news for consumers here, down at 77.84 Dollars per barrel for Nymex WTI, whilst Brent Crude oil trades at 88.78 Dollars per barrel. The Rand is getting a little tap on this risk off day today, 8.37 to the US Dollar, 13.07 to the Pound Sterling and 10.54 to the Euro. We are selling off here again today, but it has been a few good weeks.
Parting shot. Awesome, I found these graphs again, they were Economist graphs published which takes the last two thousand years worth of economic activity globally and what the majors contributed at a specific time. As the Economist blog points out, this data was complied by economist Angus Maddison who died a couple of years ago. This first graph is found via the Wiki entry for Maddison:
And then on to the starting point, the Economist blog entry titled: More 2,000 years in a single graphic. I quite like that one line there, lower, with the Maddison graphs: "Among the points it presents is that in the first decade of the 21st century, the population of the world produced more economic output than in the first 19 centuries of the common era combined."
So, think about it, the last ten years have produced more economic output than the years 0 to 1900. Yeah, you are right, things were so much better in the old days. No matter what you might, or might not think about the future of our species, I suspect continued progress will continue to see output globally rise in the coming years. And with that prosperity will grow, and there will be fewer pariah states. How many of those can you count? I guess also it depends who you are. Current Pariah states are fewer than they were in the past. I look forward to the days when North Korea finally emerges from that category. Do yourself a favour, look at the last graph in that Economist blog and ask the question, do you think that a more spread global economic pie is better or worse for all of us? The simple answer is yes, it is better.
Sasha Naryshkine and Byron Lotter
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