Courtesy of Russ Winter of Winter Watch at Wall Street Examiner
In the whodathunk department, Reuters is reporting that Chinese buyers are defaulting on deliveries of iron ore and coal shipments. As I have been reporting for months, ships have been mothballed, triggering another round of under-reported banking losses. Also reported from China is a 15% drop YoY in property sales, and more importantly it saw a 19% drop in land sales. Land sales are how China’s local governments finance themselves (see China Bubble Bursts Symposium).
This is all part of the general extreme maladjusted theme that I wrote about earlier on natural gas and more. This creates impossible conditions for producing firms in which to operate. It should now be no surprise that this climate is creating a bust in the shale gas area, which has now spread to the coal area. The problems with both shale gas and coal are high, capital-destroying production costs.
Apparently coal companies drank the “sell to China forever” Kool Aid, and ramped up production. As a result of the over-production, coal company stocks have experienced a historic sell off and panic. Like shale gas producers, many coal firms are leveraged, and are now facing insolvency. In turn this has spread to electric utilities where marginal rates have collapsed. Many utilities are also now selling the marginal power below cost of production, and are thus destroying capital.
In my glass-empty view, the idea that three key industries — natural gas, coal production and electric utilities — are operating well below the cost of production is not a bullish event, even if it temporarily results in price breaks for industrial users. And what are industrial users suppose to do? Ramp up production based upon the continuation of bargain prices as the three industries proceed to liquidate themselves? Of course not. Once again I ask: How does any industry plan to operate smartly in this unstable environment? I submit that this development is disruptive and very bearish. This is made even worse by the end-game Keynesian/Wizard of Oz economics of the day.
As investors, these short-term booms followed by severe busts are hard to navigate. As an operating theme though, one can see that once the bust gets underway, capital and lending is withdrawn, and the market begins to see who (CHK for example) was swimming without a bathing suit when the tide went out. One can also see the potential for mezzanine“rescue deals” to materialize as these assets are thrown into the tar pit and liquidated. Interestingly, so far there has been little interest in acquiring shale nat gas assets, suggesting the capitulation is still to come.
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