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World's Largest Steelmaker Reports Huge Loss, Suspends Dividend, Blames China
It’s no secret that Beijing has an excess capacity problem.
Indeed, the idea that a yearslong industrial buildup intended to support i) the expansion of the smokestack economy, ii) a real estate boom, and iii) robust worldwide demand ultimately served to create a supply glut in China is one of the key narratives when it comes to analyzing the global macro picture.
That, combined with ZIRP’s uncanny ability to keep uneconomic producers in business, has served to drive down commodity prices the world over, imperiling many an emerging market and driving a bevy of drillers, diggers, and pumpers to the brink of insolvency.
As we noted late last month, if you want to get a read on just how acute the situation truly is, look no further than China’s "ghost cities"...
Here's the simple, straightforward assessment from the deputy head of the China Iron & Steel Association:
“Production cuts are slower than the contraction in demand, therefore oversupply is worsening. Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”
To which we said, "meet the deflationary commodity cycle in all its glory":
China’s mills -- which produce about half of worldwide output -- are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation amid a property-led slowdown. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas.Shanghai Baosteel Group Corp. forecast last week that China’s steel production may eventually shrink 20 percent, matching the experience seen in the U.S. and elsewhere.
“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”
Right. Well actually there's that, and the fact that they can't get loans despite multiple RRR cuts and attempts on Beijing's part to boost China's credit impulse. In fact, over half the debtors in China's commodity space are generating so little cash, they can't even cover their interest payments.
So, considering all of the above, the obvious implication is that China will simply export its deflation...
Given that, it shouldn't come as any surprise that on Friday, the world’s biggest steelmaker suspended its dividend and cut its outlook.
Here's more from Bloomberg:
The world’s biggest steelmaker on Friday cut its full-year profit target and suspended its dividend, putting the blame on the flood of cheap steel from China’s loss-making mills. The market is being overwhelmed with material coming from the nation’s state-owned and state-supported producers, a collection of industry associations said Thursday.
“It is obvious that we are operating in a very challenging market,” Chief Financial Officer Aditya Mittal said on a call with reporters. “This is essentially the result of very low export prices out of China that are impacting prices worldwide.”
The steel industry has been roiled by the slowest economic growth in two decades in China, the biggest consumer.
The flood of cheap exports from the nation has drawn complaints from Europe and the U.S. that the shipments are unfair. Bloomberg Intelligence estimates Chinese steel shipments overseas will exceed 100 million metric tons this year, more than the combined output of Europe’s top four producing countries.
While demand for steel in the company’s largest markets of the U.S. and Europe is recovering, producers’ profits are being hit by slumping prices because China has been pushing excess supply onto the world market as its economy slows.
So again, we're seeing disinflation (the exact opposite of what DM central bankers intended when they decided to expand their balance sheets into the trillions) as global growth and trade enters a new era, characterized by a systemic slump in demand. Here's the damage in terms of the Arcelor's equity:
And here's more from The New York Times on the impact of Chinese "dumping:
“The Chinese are dumping in our core markets,” Mr. Mittal said. “The question is how long the Chinese will continue to export below their cost.”
The company’s loss for the period compared with a $22 million profit for last year’s third quarter.
ArcelorMittal, which is based in Luxembourg, also sharply cut its projection for 2015 earnings before interest, taxes, depreciation and amortization — the main measure of a steel company’s finances. The new estimate is $5.2 billion to $5.4 billion, down from the previous projection of $6 billion to $7 billion.
On a call with reporters, Aditya Mittal, Mr. Mittal’s son and the company’s chief financial officer, said that a flood of low-price Chinese exports was the biggest challenge for ArcelorMittal in the European and North American markets.
The company estimates that Chinese steel exports this year will reach 110 million metric tons, compared with 94 million tons last year and 63 million tons in 2013. ArcelorMittal produced 93 million metric tons of steel in 2014.
Of course when the standing government policy is to roll over bad debt and avoid SOE defaults at all costs, uneconomic producers can and will continue to produce. This means the deflationary impulse ArcelorMittal cites isn't likely to dissipate anytime soon, and on that note we close with what we said just a week ago:
The cherry on top is that China itself is now trapped: it simply can't afford to let anyone default, as one bankruptcy would cascade across the entire bond market and wipe out countless corporations leaving millions of angry Chinese workers unemployed, and is therefore forced to keep bailing out insolvent companies over and over. By doing so, it is adding even more deflationary capacity and even more production into the market, which leads to even lower prices, and even greater bailouts! In short: this is a deflationary toxic spiral.
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Hurry and push that TPP legislation through you sellouts!
The CONgress and Senate already have their payoff envelops from the TPP lobbyist.
A royal screw-job for Americans.
Cmon guys, 2100 on the S&P, hunker down and finish strong!
This is what the world would be like with out Bens printing....
The city and the chart..?scarry huh
Doesn't include China upon which the world trade now largely depends.. Let's see, let's have a' trade' agreement that reduces business in China, because we just don't like how they're doing business. If only 2% of their population then try to take off to greener pastures that'll be 26 million roaming the lands and seas. But it would probably be more like 5 % i.e. 65 million coming to a place near you. We could try working together instead of the Trojan TPP, but nah, let's be confrontational.
TPP-TTIP-CETA omits quite a large portion of the planet, over 45% of world population, with 70% of Foreign currency reserves and they aren't included in a World Trade deal?
These 'agreements' are simply power grabs, by the Corporates, I notice Uruguay dropped out of the TiSA negotitions in late September, probably found out they would have to cede Sovereignty and Public Service rights, something the EU and UK have no problem with. We are being 'sold', enslaved by the Corporates and Bankers, the next move will be 'Cashless' and we'll be well and truly 'controlled'!
http://of-enslavement.beforeitsnews.com/alternative/2012/12/beware-cashl...
when does the shooting start? What team are we on again?
We've always been at war with East Asia.
We're on the team of the 'moderate tearrists.'
What a recovery! Unemployment going down. Shipping decreasing.
What could go wrong?
First US Steel, now ArcelorMittal.
So fucking bullish, I can't even stand it.
Buy woar, sell moar.
Deflationary toxic spiral ..
Driven by mercantilism, the Chinese are exporting their unemployment. If they can sell for more than their variable cost, and contribute even a small amount to fixed cost, they will do it. Basic econ.
And if the DMs let them sell this cheap, shame on us. Historically, a war will ensue when this is not dealt with.
sschu
Why don't we wall off a ghost city in China, round up all the migrants from the middle east and put them in one of these empty cities.
Kill two birds with one stone.
I betcha the Chinks, being the racists they are, would object to smelly dirty crazy people without slanty eyes living with them.
Thats so rayciss. I can't understand why they wouldn't want a million war-torn, aggressive, angry young virile, beheading men in their midst.
It's odd.
Fences make great neighbors.
please discuss that with Moscow and Kiev.
Can't be done because these ghost cities actually belong to people. Chinese park their savings this way. It's bizarre but that's what it is. There are no jobs in most of these places either, but it has been said people move to these places pretty quickly as soon as the government builds a metro. I might have read the reasons on the BBC or reuters website. Who is going to pay the rent and the water etc for Syians in a ghost city? Syrians have also complained about being settled in Sweden where it is so cold, and some of the ghost cities may be in a cold area.
Posted this with the BDI story and speaks to just how severe the problems are in the economic foodchain. Yep (the BDI), one of the four key macro data points I'm most focused on which include the BDI (record lows), commodity index (in a free fall over the past year), interest rates (now rising across the board), and the USD (set to break past 100 are roar north of 110). My take on all of this is as follows:
- PMs: What was the title of MC Hammer's one hit, oh yeah, "Hammer Time" (at least in USDs). Hard to see any real support for paper prices in PMs in the near future as gold retreats back to $1,080, then to $1,050, to $1,020 and then breaks below $1,000 maybe to finally find a room in the basement at $800. Of course this is all on paper and priced in USDs as it will be a challenging period for PM investors (myself included) but it will also pay to be very patient and diciplined, especially when acquiring physical.
- Deflation: Will fully take hold across tangible products/business models (while service models such as healthcare continue to see price increases) and then spill throughout the entire economy as the USD appreciates and deflation is imported into the country. But deflation will only be temporary as before hyper-inflation can take hold, a deflationary period needs to occur. In this period, the economy and tax base will struggle to expand, begin to deflate, and then compress the tax base as taxable earnings deflate. This will collapse the GDP and tax receipts but with constant (and increasing) debt obligations, it will become harder and harder to service debt at all levels - personal, private business, and public. Everyone must cut back or sell assets to repay debt, thus amplyfying the downward spiral until at first a debt crisis is realized and then a currency crisis (triggering hyper-inflation).
- EMs: What a mess this has become and spilling over into DMs such as Canada. For companies that borrrowed in USDs and did not hedge (whatever value this may offer), repaying debt will become extremely difficult and lead to asset sales (at fire prices), cost reductions (read chopping heads), or defaults. Further, EMs will have to defend plunging currencies with interest rate increases or sales foreign reserves (e.g., US assets such as bills/notes/bonds) to support domestic currency prices. On top of this, EMs dependent on base materials, metals, etc. are already seeing decreased demand and lower prices via USD pressure so you've got a perfect storm brewing in these markets. Oil speaks perfectly to this mess as the damage done from low prices is only starting to work through the global markets.
- US Debt: My question to everyone is simple - Who is left to buy this crap? I know, I know, the correct answer is the Fed through its proxies, backdoor partners, and incestuous CB relationship (e.g., BOJ or more appropriately, just BJ). Also, the four largest banks in the world in desperate need of perceived collateral to support their derivative positions that will explode are most likely buyers. And of course the sheepies in the US that fall for the MyRA accounts. But with EMs now in a liquidation mode (e.g., China), large oil producing countries now in survival mode (and liquidating), institutional investors fleeing all debt markets (HY, IG, US, etc.) and even the largest trust fund in the world having to sell net US holdings (i.e., social security that has more payments than receipts), it would appear to me that the UST market could get out of control very quickly.
Hard to see how this ends well and about the only outcome I can invision is the excessive rocking of a ship, with the passengers moving from side to side, back and forth, too quickly until the ship flips over and capsizes. Right now, the passengers are rushing back to the USD too quickly that may ultimately create a shock on the other side, each time becoming more and more severe. And when the move out of the USD finally occurs as too many people realize they are on the wrong side, well that is when all hell will really break loose.
Doubtful this year or next but I would watch the speed at which these four markets adjust as if the UST market breaks via the rush to liquidate and the Fed can't control a rapid increase in rates, it will take every asset down with it including equities, commodities, real estate, and credit. What a fine mess the Fed will have to deal with as if it stands back and let's the market price assets with fair interest rates, a massive asset price deflation will take place. If it attempts to stablize the market by really becoming the only "market maker" left that can handle massive selling in credit markets, then in effect it will have undertaken QE 4, 5, etc. and any credibility remaining will be lost (increasing rates while buying credit).
One thing is for certain is that I don't recall a period over the past 40 or 50 years of rate increases (whether undertaken by the Fed or forced by the market) that ends well for assets prices, period. And BTW, its not so much the fact that a rate increase of 25 basis points is important but rather the relative size of the rate increase. If cap rates used in valuing real estate transactions increase from say 7% to 7.5% or 8% (due to increasing rates), this would drive implied values in a commercial property down by 12 to 15% with a 1 point increase over a period of let's say 12 months. Not good news for the owners or lenders as just like that, the value of collateral has tanked and now impaired the value of the loan.
In the past, it has taken about 9+ months for rate increases to work through the economy and start to create some real damage in asset values. I would expect this time frame to compress and the asset price correction to be more severe/violent this time around as leverage across the board is excessive. So watch interest rates closely as the damage from an increase in borrowing costs of 50 basis points from say 2% to 2.5% (a 25% increase) is going to cause far more damage than an increase of 5 to 5.5% (just a paltry 10% increase).
Your points are valid, which is why I believe no rate hike will ever come.
Agreed.
Fed will go neg, then print.
They are balls in.
Get Gold.
"Your points are valid, which is why I believe no rate hike will ever come."
As Max Keiser has so often told us, "You can't taper a Ponzi"!
Where would the US get the extra revenue to 'service' her debt? Approx $180bn pa @ just 1% extra?
wercome to Palis Flance,
home of the Eiffer Towel
move along folks, nothing to see here...
dont pay any attention to what you see or hear...everything is fine.
What does that do to Miners here in the USA? We have layoffs, but they slowed lately and things were moving again. This sounds bad.
I guess it means nobody is going to do anything with the 40 square miles of run down polluted wasteland surrounding Detroit.Chinese investors welcome.
We have been wanting to put up a new barn/tackroom/extra shop. Are steel building kits down? I guess I need to research. Just trying to make lemonade.
I buy a lot of steel for my shop. Been a long time since i've seen it this low. Of course, it should never got so high to begin with. Like many other things. There are buildings not being used in the US that are crammed pack with steel. Probably wallstreet fkheads, no less.
We keep hearing 'cheap imports from China' but don't see any prices? What price are China charging and why are they so different to 'the west', considering wages in the East have been rising 10% yr on yr for the last 10 years? Could it be the 'directors' don't take such huge salaries in China?
“The Chinese are dumping in our core markets,” Mr. Mittal said. “The question is how long the Chinese will continue to export below their cost.”
The real question is how long the miners will continue to export precious metals below their costs. Yeah, I know they got permission from their sociopathic banksters who finance them. But the question remains, "How long?"
Hope poor Mr Mittal paid off his billion dollar house in Mumbai.
http://www.dailymail.co.uk/news/article-2628672/Home-fit-billionaire-cos...
The biggest fuck-you to the poor of India will stand as a monument to this bastards hubris. I for one will laugh when he goes bust.