To market, to market to buy a fat pig. We enjoyed a great day of gains here locally, a blue Monday nowhere to be seen. Resource stocks rallied as the underlying commodity prices gathered a little steam. Excellent, this sector has underperformed the market for five of the last six years. Yes sir, it has been pretty difficult out there! And the wildcat strikes at Amplats yesterday did little to ease the frayed nerves, but it was very speedy and workers at Thembelani and Khuseleka have returned to work. It seems like there was a resolution pretty quickly, which I guess is very pleasing.
Why does everyone get their knickers in a knot about the delay around the Medupi Power Station? Because the minister said that it would be ready? I think that he probably regrets those comments, and regardless of the heads will roll comments yesterday and today, he can't go back and change them. How many mega projects do you know that were delivered before the initial deadline (or even on time) and below budget? Very few, that is for sure! With projects of this nature there are all sorts of different moving parts. A project the size of this (105 billion Rand) is enough to build four Gautrains, according to Timeslive.
The full media release is here: Eskom update on its new build programme. Now Unit 6 at Medupi was supposed to come online before the end of 2013 (last update) but the welding on the boilers, as well as technical challenges with the control and instrumentation systems for the units are also an issue. As well as labour "challenges".
I'm no engineer, but I am pretty sure that this is pretty self explanatory: "The critical issues on the boiler related firstly, to inadequate post-weld heat treatment, which meant that multiple welds needed to be retested and fixed. Secondly, welds made using unqualified procedures needed to be replaced." And also: "there has been continued under-performance on the control and instrumentation contract, despite active interventions by Eskom over the past year, and it is now clear that the issues on the control and instrumentation for Unit 6 will take time to resolve."
And two companies have been fingered specifically for the control and instrumentation contract, as well as the technical issues surrounding the boiler, Alstom and Hitachi. Alstom is of course the French power generation company that not only produces power generating equipment, but also the TGV, that super quick train. As per their website: "Did you know that Alstom machines are fitted to more than 80% of the South African power plant installed base!" Impressive, long history with that one company! Alstom are providing the turbine.
Now the other contractor, the giant Japanese company Hitachi, as per their website: "Hitachi Power Europe and Hitachi Power Africa were awarded a contract from ESKOM to deliver and install boilers for power stations." In construction contracts there are often damages payable in terms of project delays. Hitachi are providing the boiler. We were updated with the project last year in June: Medupi Power Station: Update to The Media, which suggested December 2013 that the first unit (unit 6) would be delivering power to the grid. Last one delivered in mid 2017. I do wonder what it means for those dates and those units coming online, surely a delay to the first one, would be a delay to the rest?
The Three Gorges Dam (the biggest power generation plant in the world) took 14 years and cost 26 billion Dollars and has a fully installed capacity of 22.5 GW, or more than half of our current grid! The updated cost of this project is closer to 105 billion Rand (or around 10.5 billion Dollars) and if finished by mid 2017 would take 10 years, and have a installed capacity of 4764 MW. Did we get (or going to get) bang for our buck? Again, I'm no engineer! What do you think? My overwhelming feeling is that business is best with the business of business, whilst government is not the best. When you have a big shareholder with potentially never ending deep pockets, why push the limits? The question we should rather be asking, can we possibly get a better grid if there was more competition?
At the end of the day, it is about price. I am guessing that individuals and businesses will continue to save money by cutting their electricity costs. Hopefully between now and next year we can close the "potential gap in supply in 2014, with the most likely scenario being a gap of in the region of 700 MW." Change your bulbs! Set your pool pump for the middle of the day. Rich people problems.
What is happening in Egypt? Violence yesterday of the worst sort, scores killed and hundreds injured. Bearing in mind that the prior president was actually democratically elected, that part actually happened. Argue about low turnouts and infighting as much as you want, it happened. The truth is, that although Egypt has a very long and colourful history, democracy is very, very new to Egyptian citizens. The outlook is not that great, the economy is struggling, this FT article is OK(ish) in explaining The Egyptian economy in 10 charts. Matters are not quite dire yet, but close.
I think that the biggest impact for those outside of Egypt are probably twofold, one is the oil price that has strengthened on the news. Not because Egypt is a big producer of oil, in recent years for the first time they had to import oil for domestic consumption. That is partly because of falling production and partly because of increased demand as a result of a growing economy. But it matters for the oil price because of passage of oil through the Suez Canal. Now as far as I understand it, anyone is allowed passage through the canal, even if for the purposes of war. An Egyptian company manages the canal and it is an important source of income. And according to the website of the operator, The Suez Canal Authority, 8 percent of all seaborne trade passes through this important link. So it is very important.
I read on the newest and best project (NICARAGUA CANAL AND DEVELOPMENT PROJECT) that: "Between 1996 and 2013 the largest container ships have more than tripled in size, from 6,000 TEUs to the recently-constructed Maersk EEE ships at 18,000 TEUs, and the average ship size has grown at a steady 4% over that period." Wow!!! For the time being however, the Suez Canal represents an important trade route and a good source of income. Any trade and passage of energy products close to an area of instability is bound to cause more than a little anxiety. And as such the oil price has gone higher.
Notwithstanding this violence and seemingly fractured political landscape the economy has grown, albeit off a low base. An article I read suggested that the opportunity cost lost, as a result of violence over the last twenty years, suggests that the citizens could have been (nearly) twice as wealthy. I am never one for saying, oh well, this or that could have or should have happened. It didn't. No point in crying over spilt milk. Even if Cleopatra bathed in it!
The second impact outside of the oil price, which affects all of us in the form of higher transportation costs, is emerging market perceptions. It might sound crazy, the distance from here to Cairo is over 6200 km's. The distance from New York to Cairo is around 9000 km's. But in the eyes of investors in emerging markets, it might as well be the same, we might as well be next door to one another. I have seen many folks talking on the box sharing that sentiment, emerging markets should be sold, they say. Now year to date, the iShares emerging market ETF, ticker in New York EEM, is down 15.7 percent, whilst the S&P 500 is up 15 percent year to date. This suggestion seems Johnny-come-lately to me!! However fresh this idea may or may not seem, the renewed violence around emerging markets has a huge negative impact. And I am afraid that we fall into that category.
Byron beats the streets
According to a Business Insider article I read yesterday teeing us up for earnings season, when Alcoa beats estimates the price of the S&P increased about 80% of the time over the next three months. Well I am happy to report that Alcoa did beat earnings estimates but to be honest those kinds of stats mean nothing to me. History is one thing to look at when trying to predict the future but it is definitely not the only thing. What I am more interested in is what Alcoa had to say about global conditions and what future demand may look like according to their predictions.
Why is it important what Alcoa have to say? Because they produce and sell Aluminium which is a great barometer for the whole economy whether it be Aerospace, Auto, Heavy Trucks, Beverage Cans, Commercial building, Construction or Industrial gas turbines.
We do not recommend the stock or own any shares so I will skip any details with regards to actual operations. Here is what they had to say about aluminium demand:
"Alcoa continues to project 7 percent global aluminium demand growth in 2013 and essentially balanced alumina and aluminium markets. Alcoa projects global growth this year across the aerospace (9-10 percent), automotive (1-4 percent), commercial transportation (3-8 percent), packaging (1-2 percent), building and construction (4-5 percent), and industrial gas turbine (3-5 percent) end markets."
As you can see, 7% is a strong number if spread throughout all the regions. Aerospace is seeing good growth as more airlines demand new, fuel efficient planes to cater for growing middle classes in developing regions. Auto growth in regions such as China is also strong which you can see filtering through. The US building market is looking strong, the small variation in their prediction shows confidence and certainty in that market. I guess the US market is one of the most certain things out there at the moment. It is ironic that the country has been through so much financial scrutiny since the sub-prime crisis is the one viewed by investors as the best investment destination right now.
Further down in the report they go through their strategic goals and it is very clear that they are putting their money where their mouth is with regards to this demand prediction. Billions of Dollars are being spent on expansion plans.
Usually they do a geographic analysis looking at demand for each region but not this time. All in all a nice start to what, as always, will be a very interesting earnings season. If you are interested at looking at the earnings calendar, here is one from Yahoo! Finance.
Home again, home again, jiggety-jog. We are having a pretty decent day at the start. We are at the start of what is more important for market levels, earnings. More important than anything for me anyhow, that sets the absolute values in the long run. JP Morgan Chase results on Friday, that is good news! Citigroup next Monday, Coca-Cola next week Tuesday, as well as JnJ on that day too, then IBM Wednesday and then Google after market on Thursday, those are some of the bigger companies to report quarterly numbers. General Electric next Friday! The only thing that I do not like about quarterly numbers is that Mr. Market places way too much emphasis on these quarterlies. One swallow does not make a summer. One poor or good set of quarterly numbers do not make a company, even though many may get anxious!
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
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