Commoditiвes news - 11/15/2014

Depression-Level Collapse In Demand: In Historic First, Glencore Shuts Coal Mines For 3 Weeks

Zero Hedge,

14 November, 2014

In a historic move showing just how profound the collapse in global commodity demand and trade is, earlier today the Sydney Morning Herald reported that Australia's biggest coal exporter Glencore, which last year concluded its merger with miner Xstrata creating the world's fourth largest mining company and world's biggest commodity trader, will suspend its Australian coal business for three weeks "in a move never before seen in the Australian market, to avoid pumping tonnes into a heavily oversupplied market at depressed prices." Putting this shocking move in context, it is something that was avoided even during the depths of the global depression in the aftermath of Lehman's collapse, and takes place at a time when the punditry will have you believe that the US will decouple from the rest of the world and grow at 3% in the current quarter and in 2015.

"This is a considered management decision given the current oversupply situation and reduces the need to push incremental sales into an already weak pricing environment," the company said.

Glencore chief Ivan Glasenberg

For those who don't recall some of the more paradoxical moves in the Australian commodity space in recent months, Glencore is not only the dominant coal exporter in the global coal market, but one which has continued to raise its thermal coal output in Australia and push its coal business towards a new production record this year, even as prices for the commodity crashed to five-year lows. Thermal coal is selling for about $65 a, about half of the $120 price from three years ago.

Said oterhwise, Glencore took the first and only page out of Amazon's playbook and has been pumping excess production in hopes of crushing marginal prices to the point where its competition goes out of business.

Unfortunately, things are not working out as expected and earlier today Glencore surprised the market by saying it would shut its Australian coal business for three weeks, starting mid-December, shaving about 5 million tonnes of output.

As SMH notes, "while it is understood Glencore's overall Australian coal business is the black, the size and length of the shutdown is unprecedented and suggests a level of financial distress at some of its mines."

Glencore owns 13 coal mines in NSW and Queensland

So in a completely unshocking turn of events, rushing to create the biggest loss possible finally backfired on the company itself.

Staff will be forced to take three weeks paid annual leave as a result of the suspension. Glencore has 13 Australian mine complexes, including about 20 mines and employs about 8000 staff.

Still, in a world in which non-GAAP appearances are all that matter, Glencore was quick to put some lipstick on this historic pig

On a tour of its Australian operations in September, Glencore told analysts that its coal output this calendar year would be 14 per cent greater than in 2012. Glencore also has a series of brownfield expansions in the pipeline. Glencore stressed its positive outlook for coal in the medium term, when it tips the "supply and demand balance will be restored".

Odd how it is always about the "medium run" where companies are optimistic, never the short run, especially when they suddenly find themselves in what can only be classified as a global depression in commodity demand.

And now that Glencore is finally facing the music, the question is whether the other two majors who also took the beggar-thy-competitor route to prosperity, BHP Billiton and Rio Tinto, who Glencore chief Ivan Glasenberg "has attacked for dramatically expanding production in the face of falling iron ore prices" will follow suit or merely double down making Glencore's pain that much more acute.

Mr Glasenberg's criticism of Rio Tinto and BHP for their massive iron ore-expansion programs raised the eyebrows of some in the market, given Glencore had been running its very own coal expansion in the face of falling prices.

 

Mr Glasenberg has repeatedly attacked the price impact of the expansion strategies being used by the iron ore majors, as part of his attempt to pitch a $190 billion "merger of equals" with Rio.

The rest of the story is familiar: crush the competition by flooding the market with ever cheaper commodities:

Glencore is forecasting total managed coal production of 168 million tonnes in the 2014 calendar year, beating a previous record of 157 million tonnes set last year. However, that will be lower, given the December suspension of its Australian coal operations.

 

Glencore's total managed production in Australia is forecast at 94 million tonnes this year, up on 81 million tonnes last year, as its new Clermont thermal coalmine, in central Queensland, comes online.

And therein lies the paradox: by adopting what is ultimately a self-destructive practice, the iron-ore majors, facing crumbling global demand, are merely accelerating the deflationary pressures facing not only iron but all other commodities, as they seek to flood the world with excess production and put producers who cost of production is below the margin price out of business.

Something which Saudi Arabia is also allegedly doing to its US shale-based competition.

The only thing that is certain is that absent some massive global reflationary spark, many companies are about to go out of business. And should it be someone as massive and prominent as Glencore, the global deflationary wave will only acclerate further, leading to an even faster slow down in global growth, until finally decades of excess capacity and production find their new equilibrium with an epic slam, one which may involve yet another round of global taxpayer-funded bailouts.

For now, however, keep a close eye on Glencore, which may just be the canary in the coalmine. No pun intended.

Oil-Producing Countries' Currencies Are Getting Crushed

Zero Hedge,

15 November, 2014

While most people's attention has been focused on the demise of the Russian Ruble this year, since the June highs in Crude Oil, the oil-producing nations of the world have seen their currencies devalue rapidly. From Brazil to Nigeria and Algeria, the impact of lower oil revenues is starting to create a vicious circle for many of these nations... and having consequences for the very Petrodollar flows that the US relies upon...

Mission Accomplished - if the goal was crashing Russia's Ruble - but the consequences of the collapsing Petrodollar flows (as we noted here) may wellcome back to bite...

As we concluded previously,

• The stronger US dollar is having an inverse impact on dollar-denominated commodity prices, including oil. This will affect emerging market (EM) credit quality in various ways.
  
  
• The implications of reduced recycled petrodollars has significant ramifications for financial markets, loan markets and Treasury yields. In fact, EM energy exporters will post their first net drain on global capital (USD8bn) in eighteen years.
  
  
• Oil and gas exporting EMs account for 26% of total EM GDP and 21% of external bonds. For these economies, the impact will be on lost fiscal revenue, lost GDP growth and the contribution to reserves of oil and gas-related export receipts. Together, these will have a significant effect on sustainability and liquidity ratios and as a consequence are negative for dollar debt-servicing risks and credit ratings.
  
  

In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.