skipper54

Why I'm Worried About China

Dead right Josh about the Baltic Exchange index. Spot rates have hit the floor (actually we still don't know where the floor is) but this simply reflects the fact that the trading world is frozen, holding its breath, and waiting for letters of credit. It is inconceivable that the combined ingenuity of worldwide bankers/governments cannot ease the credit issue. And when that happens, the cork will blow out of the bottle, commodities and agricultural products will start moving across the oceans, and freight rates will pick up. They will never reach the insane levels of the last 2 years but the running costs of a Panamax ship are only about $5/6,000 per day so we don't need to see rates of $30/40/50,000 daily in order to have a healthy market for shipowners. As a side comment, the author refers to Diana Shipping's fleet employment with alarm. It is in fact superb in that they have 5 of their capesize ships fixed at stratospheric rates for at least 2 years to first class charterers (i.e. the risk of reneging on the contract is minimal). The returns on these ships would allow DSX to lay up the rest of the ships and still be profitable (although obviously at a much lower level than investors have been used to).
With regard to the Chinese, we should have learnt by now not to underestimate them. Brazil, where I live, has a very active steel industry (and of course is fortunate enough to sit on billions of ton of high FE content Iron ore). The annual production of steel in Brazil is equivalent to one month's production in China.
Another important consideration is that China is not a democratic country which makes the business of implementing economic policies an absolute doddle compared to the West. Just look at the dilemma facing Obama with Detroit - one of his core electoral bases. He can't afford not to bail out the automobile industry there. The Chinese would have no such qualms. I'm not saying that is good but it is the reality.
Brazil's big mining company Vale tried to strongarm the Chinese into increasing the price of iron ore as recently as 3 weeks ago. Now the Chinese have Vale eating out their hand and delivering the stuff to China free of freight.
The Chinese alone could probably kickstart world trade back into action but I believe they are sitting back taking advantage of the drastic 'realignment' of prices in order to make their move.


On Nov 17 09:36 AM Josh Stern wrote:

>
>
> In earnings reported over the last two months, results from domestic
> focused Chinese companies are holding up a lot better than the overall
> market while the stocks are doing a lot worse than the overall market
> - a good percentage are posting huge year on year gains while the
> stocks are down 50-90% and trading at outrageouly low valuation levels
> relative to trailing earnings/sales/cash flow/liquid assets. At the
> same time, many domestic facing Chinese companies reported blowout
> earnings, though many also cautioned about a sudden demand drop in
> October that clouded near term forecasts. From everything I've read,
> the lack of bank lines of credit for importers continues to be a
> huge problem for international trade and hurts Chinese exporters
> and manufacturers. At the same time, this factor is presumably temporary
> and causes indices like the Baltic Dry to severely underestimate
> even current low cyclical end demand for dry bulk shipping.
>
> Taking all of the above together, I see the category of being a domestic
> facing Chinese company as currently a big investment plus when looked
> at purely from a macro POV. Bears counter that they think fraud is
> much more widespread. I don't see fraud as being plausibly common
> enough to come anywhere close to making up the huge discount in valuations
> these companies are getting now. I'd suggest instead that they deserve
> some discount because the immature investment culture tends to result
> in mgmt. that sees investors as more of a source of potential/past
> funding and less like actual owners of the company. As a result,
> I don't see valuations getting to par until dividend paying, share
> buybacks, and corporate buyouts become much more common than they
> are at present. But valuations are so compressed that Chinese companies
> still represent excellent opportunity for investors with longer time
> horizons.
>