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Is This The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch?

Tyler Durden's picture




 

"The best way to define the mood in the market right now is panic," warns one commodity broker, adding that "everyone understands why we are going down, but nobody can tell where the bottom is." As the WSJ notes, the economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal - exacerbated by the vicious cycle of credit-collateral-contraction. So what is the cheapest way to play continued stress (with potentially limited downside)? The diversified natural resources company Glencore has a huge $55 billion of debt, is drastically sensitive to copper (and other commodity) prices, and its CDS remains just off record tights...

Is Glencore the most exposed to a decline in commodities prices? – A trading giant rated BBB with over $55bn of debt and heavy exposure to commodities. 

A downgrade to below investment grade would be catastrophic to Glencore’s trading business. 

Company’s 12/31/2013 presentation says a 10% decline in Copper Prices would reduce EBIT By $1.2bn...


As of 12/31/13, Glencore had $55.185 billion in Gross Debt

By 3/12/2014, Copper has declined to a 44 month low, 12% decline in YTD 2014

Glencore reports Net Debt of $35.882bn, which is $55.2bn of gross debt minus $2bn of cash minus $16.4bn of "Readily Marketable Inventories." Nowhere do they define what’s included in the Readily Marketable Inventories and whether or not the RMIs are hedged.  The firm is still highly levered for investment grade even if RMIs can be converted into cash at stated value.

As if that was not enough, the CFTC and DOJ are currently investigating commodities price manipulation and Glencore has been named in several aluminum antitrust suits; leaving the question of liability hanging over their head.

Via WSJ,

“The economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal

 

...

 

copper prices skidded to their lowest level since June 2010, bringing the metal's year-to-date losses to 12%. Iron-ore prices are down 8.1% this week, after falling to their lowest level since October 2012 on Monday. Aluminum, lead and zinc prices also have declined in recent days

 

...

 

"The best way to define the mood in the market right now is panic,"

 

...

 

Now that growth in the world's second-largest economy is downshifting from double digits to an estimated 7.5% this year, many investors and analysts predict global demand growth for industrial commodities will slacken...Iron ore is the main component of steel. China's steel consumption has surged in the past decade as the property and manufacturing sectors boomed. Now that China's leadership has pledged for a more consumer-focused economy, the demand trajectory for steel is in doubt, analysts said…Coking coal, used to fuel the blast furnaces that forge steel, has also been under pressure, with prices down 7.1% this year…

 

Last week's first-ever corporate-bond default on the mainland showed that the Chinese government isn't guaranteeing this corner of the country's credit market, as was widely believed. The yuan's weakening has made it more expensive for companies to import dollar-denominated commodities to be used as collateral for loans created outside formal channels for bank lending

 

...

 

"If there's a string of defaults in China, there's no question that demand for copper and iron ore and other commodities where China's been a major driver would be threatened in a material way,"

 

...

 

And some analysts and investors say the magnitude of the recent price declines in copper and iron ore aren't justified because Chinese authorities are unlikely to allow the country's credit markets to completely unravel…"You've got the credit issue in China...and you've got also reasonably high iron-ore [stockpiles]," said Jimmy Wilson, for iron ore at BHP Billiton, on the sidelines of a conference in Perth, Australia. "Traders have a view that the price is going to go down so they do everything they can to hold back" on buying.”

At 170bps and with 155bps as a floor for the last 6 months, it seems like a cheap protection play on further Chinese/Commodity contraction

 

h/t Manal

 

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Thu, 03/13/2014 - 21:05 | 4545978 DeadFred
DeadFred's picture

Sucks to be in the crosshairs of ZeroHedge

Thu, 03/13/2014 - 21:08 | 4545991 slotmouth
slotmouth's picture

I don't hear Tesla shareholders complaining.

Thu, 03/13/2014 - 21:16 | 4546027 Soul Glow
Soul Glow's picture

Arthur Anderson isn't compaining either.

Thu, 03/13/2014 - 21:21 | 4546046 James_Cole
James_Cole's picture

Citigroup just said Rio Tinto was still a buy lol, maybe that's a better short?

Thu, 03/13/2014 - 21:40 | 4546107 Pure Evil
Pure Evil's picture

And when Jim Cramer speaks, nobody listens.

Thu, 03/13/2014 - 21:42 | 4546116 Soul Glow
Soul Glow's picture

He's still alive?

Thu, 03/13/2014 - 22:01 | 4546183 National Blessing
National Blessing's picture

Jim Cramer is more of a hired clown.  His job is to garner laughs.  I don't think people follow his financial advice.  Bitches.

Thu, 03/13/2014 - 22:11 | 4546214 Soul Glow
Soul Glow's picture

He sure looks the part.

Fri, 03/14/2014 - 01:38 | 4546726 Schmuck Raker
Schmuck Raker's picture

I agree. Individuals that follow Cramer's advice should not be characterized as people. "Sheep" sounds right. Or..."Muppets"??

Thu, 03/13/2014 - 21:42 | 4546112 Soul Glow
Soul Glow's picture

Citigroup?  Didn't they go bankrupt?

Ha, Anderson strikes again!

Thu, 03/13/2014 - 23:27 | 4546475 old naughty
old naughty's picture

Oligarchs playing a decisive role.

Thu, 03/13/2014 - 21:39 | 4546103 Atomizer
Atomizer's picture

Tesla doesn't have electricity stations built across US. Obama is killing coal plants. NJ is the third state to ban direct auto sales. My tea leaves tell me that the electric car business is going to receive the same bitch slap as during the GM EV 1 Tom Hanks failure. 

Thu, 03/13/2014 - 21:45 | 4546121 Soul Glow
Soul Glow's picture

Electric cars would do very little considering that the USA still runs most grids off of fossil fuel - coal/NG.

Thu, 03/13/2014 - 21:11 | 4545994 TruthInSunshine
TruthInSunshine's picture

Financial Markets, especially traders and IBs in New York & London, are going to gnash their teeth and beg for a Chinese version of Hank "Tanks In The Streets" Paulson's TARP/TALF blank check bailouts, but it's already been decreed by the Chinese Premiere that THAT "ain't gonna happen."

China's Premiere just fired an ominous warning (buckle up, bulls) -

And so it begins; the "Economic Depression" that so many naive investors had thought Bernanke & his equally incompetent and/or malicious central reserve fractional fiat bankers saved us from gets an official renewal shot across the bow in the form of this warning:

http://www.theguardian.com/world/2014/mar/13/china-li-keqiang-wans-inves...

Phillip Inman economics correspondent
The Guardian, Thursday 13 March 2014 16.29 EDT

"China's Premiere, Li Keqiang, WARNS INVESTORS TO PREPARE FOR WAVE OF BANKRUPTCIES."

- "World's second largest economy is facing 'serious challenges' and many companies with high debts are being forced to the wall"

It's a good thing American and other multi-national firms don't do massive business in China, haven't invested TENS OF TRILLIONS in factories, plants & R&D facilities there over the last 19ish years, and that these firms and their shareholders have hedged accordingly.

/s

Thu, 03/13/2014 - 21:18 | 4546035 Soul Glow
Soul Glow's picture

Economics is a study based on unsound theories.  All will soon know.

Thu, 03/13/2014 - 21:25 | 4546058 SHRAGS
Thu, 03/13/2014 - 22:35 | 4546281 TruthInSunshine
TruthInSunshine's picture

Thank you 100x over.

Thu, 03/13/2014 - 21:27 | 4546064 Dollarmedes
Dollarmedes's picture

And I was waiting for a second high-profile default as "confirmation" for the other Chinese on the fence.

Looks like China's Premiere beat them to it.

Daaayyyyyuuuuummmmm!

Thu, 03/13/2014 - 21:28 | 4546071 DormRoom
DormRoom's picture

G7 will monitor, and coordinate.  There will be no financial crisis, unless the G7 disbands.

Thu, 03/13/2014 - 22:54 | 4546355 MrSteve
MrSteve's picture

Disbands, you mean from being the former G-8? Seems like only yesterday...

Thu, 03/13/2014 - 21:37 | 4546077 Pure Evil
Pure Evil's picture

And just think, it was D.C. and Wall Street that was planning the downfall of China.

It's now looking like the shoe is about to transfer to the other foot.

Maybe with all that gold and stored commodities the Chinese feel comfortable with their market taking a dive and want to see if the US can survive the process.

To the presses Yellen my dear, this is a job for Super Inflator!

Just press ctrl+P about a quadrillion times.

Thu, 03/13/2014 - 21:47 | 4546130 Soul Glow
Soul Glow's picture

Shanghai is 3 multiples lower than it was at the high in '07.  US equities are back at the highs.  China decided not to leverage stocks.

You aren't a trader, are you?

Fri, 03/14/2014 - 03:08 | 4546811 Offthebeach
Offthebeach's picture

China is too big to fail. Mr. Yellen will bail them out.

Has the Hitler Downfall commodity YouTube come out yet?

Fri, 03/14/2014 - 00:27 | 4546622 SAT 800
SAT 800's picture

The author is naive. it's probably Glencore who are driving the price down. That's the problem with Mercura buying JP Morgan's trading desk; now there are three players who can all play nice with each other and fuck you; and they're entirely without oversight.

Thu, 03/13/2014 - 21:13 | 4545995 SDRII
SDRII's picture

John Mack just joined the board: bad omen. 

What trading firm was behind that Libyan Cargo? 

Thu, 03/13/2014 - 21:10 | 4545999 joego1
joego1's picture

Stack copper?

Thu, 03/13/2014 - 21:49 | 4546134 Soul Glow
Soul Glow's picture

No.  Stack gold if you can, silver if you can't.  And go long platinum if you have balls.  I think platinum could be a huge payout.

Thu, 03/13/2014 - 21:54 | 4546151 Atomizer
Atomizer's picture

If you remember during Greenspan housing collapse, EBT folks were breaking into new home construction projects to steal copper and resell on black market. Not on my computer, Tyler's...pull up the story on the Chinese boat that sunk carrying copper. I think it was about two years old. It was a good laugh. 

Thu, 03/13/2014 - 22:11 | 4546206 Soul Glow
Soul Glow's picture

It was meth heads.  Meth heads steal copper.  EBT folks sit on their sofas all day watching TV and sipping slurpees.

Thu, 03/13/2014 - 21:36 | 4546007 DormRoom
DormRoom's picture

Buying during this crash will be the best play over the next 20 years.

Stagflation or global, total war is the only out developed countries have left.  Both outcomes are favorable for the commodity complex.  The Great Moderation which had absorbed global inflationary pressure, also had a dampening effect on global deflation (breadth first traversal along nation-state nodes).  But the emerging markets can no longer absorbed deflation forces.  Hence the latent effect.  Societies are now buckling under the force.

Moreover, climate change (drought) has/will disrupt global agri-business causing realignments along the supply chain, which will be favorable for dry bulk shippers (every nation becomes an importer of wheat/fruits/vegetables/ etc). 

 

Keynes had favored anchoring a global reserve currency with a basket of commmodities for a reason.  It's also why China has been buying up commodities, and colonizing Africa:  They want to anchor the yuan as the new reserve currency using commodiites.

Thu, 03/13/2014 - 21:15 | 4546021 Soul Glow
Soul Glow's picture

Japan is limit down.

Thu, 03/13/2014 - 21:15 | 4546023 jcaz
jcaz's picture

China will let prices fall to $.0001 and sit on their stockpile until everyone is their bitch,  just to make their point-  no doubt they're laughing at the daily 400 point drops in their stock market-  just doesn't matter to them.

Thu, 03/13/2014 - 21:20 | 4546039 Soul Glow
Soul Glow's picture

What is a dollar worth?

Thu, 03/13/2014 - 21:31 | 4546083 fasTTcar
fasTTcar's picture

What is a Yuan worth?

 

All that matters is how many of them it takes to buy an ounce of real money.

Thu, 03/13/2014 - 21:39 | 4546105 Soul Glow
Soul Glow's picture

What is fiat currency worth?

The dollar is the reserve currency, in case you weren't aware.

Thu, 03/13/2014 - 22:58 | 4546376 fasTTcar
fasTTcar's picture

I would argue that the real reserve currencies are oil, gold, rice and timber.

How many fiats of what ever flavour (correct spelling) are only how they are denominated.

Thu, 03/13/2014 - 23:12 | 4546421 Soul Glow
Soul Glow's picture

Trees grow, rice grows, oil and gold do not.  Oil is also not easlily transportable - gold is.

Gold is money, and nothing else is.

Fri, 03/14/2014 - 10:09 | 4547679 TruthHunter
TruthHunter's picture

 "Oil is also not easlily transportable - gold is."

Oil is easily transportable if you have a tanker.

Gold is easily transportable if you have an armored car and guards.

 

All things I don't have.

Thu, 03/13/2014 - 21:39 | 4546092 Pure Evil
Pure Evil's picture

About, the length of time it takes to wipe a Venezuelan ass.

I don't know if that's a lot cause they're out of TP.....

or if the TP runs out but you have a wheelbarrow full of dollars will you cup the ole hand or make a run on the wheelbarrow.

Thu, 03/13/2014 - 21:22 | 4546047 Dollarmedes
Dollarmedes's picture

"...the CFTC and DOJ are currently investigating commodities price manipulation..."

So they're investigating the Chinese manufacturers? 'Cuz I guarantee you they aren't investigating the people trying to stabilize copper even if they have to manipulate commodity prices to do it.

Thu, 03/13/2014 - 21:24 | 4546057 Dollarmedes
Dollarmedes's picture

This shit is just like the BoE; the government is begging their cronies to stabilize the market. But China is too big for that...that's why "this time is different."

Thu, 03/13/2014 - 21:23 | 4546051 new game
new game's picture

how many more glencores are lurking in the hollows? credit in china has hit its' limit. but what are all the spin off consequence? another aig lurking...tags gm,wachovia,countrywide,lehman,chrysler(did i forget any?)

Thu, 03/13/2014 - 21:36 | 4546096 Pure Evil
Pure Evil's picture

Yeah, you forgot D.C. and Brussles, bitchez!

Thu, 03/13/2014 - 21:46 | 4546128 Dr Benway
Dr Benway's picture

There are many, many others. The level of corruption and outright criminality that is condoned in major Australian companies is hidden by regulator coverups.

Regulators cover up the crimes they stumble upon, so that Australia can keep its undeservedly good governance reputation. This governance reputation is effectively sold to criminals.

Thu, 03/13/2014 - 21:40 | 4546106 Wilcox1
Wilcox1's picture

Is there a Walk-Thru on this play?

Thu, 03/13/2014 - 23:00 | 4546384 fasTTcar
fasTTcar's picture

Yep.

Step 1:  Buy gold and silver.

Step 2:  Sleep well at night.

Step 3:  Repeat.

Thu, 03/13/2014 - 23:17 | 4546448 Soul Glow
Soul Glow's picture

Step 4:  Drink beer.

Thu, 03/13/2014 - 21:49 | 4546136 Quantum Nucleonics
Quantum Nucleonics's picture

Kind of idiotic.  Wouldn't just loading up on puts on copper futures be a more "leveraged" bet?

By the way, copper will probably find a bottom soon and rip of the faces of short sellers.  Remember, there are a bunch of countries that depend on copper exports.  Why wouldn't they step in to support their economies - even if it means destroying their long term finances.

Thu, 03/13/2014 - 22:07 | 4546203 Soul Glow
Soul Glow's picture

After today I would not short copper.  Why gain 3% when you could risk 20%?  As of now I would bet my bottom dollar for gold/silver to continue its long term trend.  Oh, and that is up, by the way.

Thu, 03/13/2014 - 23:14 | 4546430 TheCosmicTaco
TheCosmicTaco's picture

Steel is made outta iron ore? Well whoda thunk that? I thought it was made out of green jelly babies.

Iron ore, huh? Stuff was $10 a ton in 1999, $100 a ton now. Anyone would think it had gold in it...

Fri, 03/14/2014 - 04:35 | 4546865 SmittyinLA
SmittyinLA's picture

Iron ore and energy, and the energy is the more expensive half

Fri, 03/14/2014 - 04:32 | 4546864 SmittyinLA
SmittyinLA's picture

What if copper goes up?

What if all the "fraud" was in non existent copper collateral?

...and when the collateral call comes, there's nothing to collect, because 100 different debtors were using the exact same collateral?

Now what?

You got your project, you need your copper, but it doesn't exist, you gotta buy more.

When the herd catches up and realizes copper cost "real" money (a reflection of both copper ore costs as well as energy costs) and not fiat script copper will rise in proportion to currency debasement, almost exactly.

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