BHP (ASX:BHP), Coal and Allied (ASX:CNA) and Xstrata (LON:XTA) are itching to get more coal out of port. So the trio, along with 11 other coal miners, is proposing a private expansion of Newcastle port.
They’re putting up AU$2.5 billion to double Newcastle’s capacity. The port can manage to ship about 100 million tonnes of coal per year at the moment. Of course, 200 million tonnes would be better.
Newcastle currently prices coal at $174.70 per tonne. It’s the biggest coal port in the world, so we suspect coal prices would drop if miners could shift more of the stuff. But if coal firms can lock in the expansion, there’s potential tens of billions of extra revenue in it for them.
At this stage, the state government has worries the private deal would block new entrants. It probably would, if the companies involved had anything to say about it. So this deal is up in the air. But we’ll keep an eye on where it floats. Remember, a lot of coal companies have lost a third of their market value in the last few months alone. That’s a big discount.
Why NAB Isn’t “At the Bottom”
Usually, reader, our goal is to offer you ideas that you can make money from. Here’s an idea on how you can prevent losing some.
First…an extremely short anecdote. We headed out to country on the weekend to surprise our mother for her birthday. It worked a treat. Your editor and his younger brother snuck into the house Friday night and sprung her with well-wishing the next morning. She was so happy to see us. No-one told here we were coming. That heightened the impact.
The stockmarket finished last week with a bit of a surprise too.
NAB dumped the news on investors Friday morning. It snuck into the house Thursday night and waited till dawn. Then it leapt onto the shareholder’s bed, yelling and screaming something about a sub-prime loss. Right at the end of a good week too.
No-one told shareholders NAB was coming. That heightened the impact.
Specifically…the NAB boss John Stewart set aside an additional provision for credit risk. An additional provision of AU$830 million. That was the part where the leapt dove into the sleepy-eyed market’s midriff. An extra credit provision tells us all that there may be more sub-prime losses to come. Oooff.
But get an eyeful of this:
“This is the bottom for us for housing in the U.S. because we are now cleared out.” - John Stewart, NAB boss.
That’s quite a statement. Especially seeing as Stewart considers the US to be less than half-way through this crisis. Total losses equal US$450 million. John Stewart sees the total topping US$1 trillion.
Of course, if the bank has cleared the table of those rotting sub-prime assets, it must be at the bottom. That would imply the bottom for share prices. In fact, if you’re an efficient market fan, that would imply the bottom for share prices at some time in the past. The market likes to pre-empt things like this.
Well, the bottom isn’t here. Not the way we see it.
It’s useful to think of the credit industry as a web. There isn’t one direct line between each Australian bank and “subprime”. There are thousands of different mortgages, sliced and manufactured into more different securities, split between thousands of different institutions. Each firm is connected to many of the threads.
What NAB is talking about here are ten collateralized debt obligations (CDOs). Each CDO is a blend of different types of assets…packaged as one security. They aren’t all 100% subprime. But they all contain subprime exposure.
That’s one thread NAB has woven between itself and the subprime industry. It’s direct exposure. But that’s the very reason why the pain isn’t over. Direct exposure isn’t the only exposure.
NAB and banks like it have thousands of different loans spreading out in different directions. They provide exposure to other institutions that have exposure to subprime. They provide exposure to institutions that have exposure to institutions that have exposure to subprime.
It sounds a little pedantic. But all of it adds up. One financial firm drops a bit, and it tugs on the credit quality of thousands of others.
This means more credit pressure on big banks. If you need some tangible evidence, Standard and Poors lowered its credit rating on NAB Friday too. Please refrain from jumping on investors’ beds in the morning.
So don’t look at this at the bottom. NAB shares probably haven’t finished the longer slide. And other banks? Well, if one is at risk, so are the rest. ANZ put out a statement today. Its EPS is likely to be down 20-25% this year, thanks to larger provisions for credit losses.
Avoid the dip in financials. The bottom for NAB looks like one of the best ways to lose money in the market today.
The Two Announcements that Could Move the Market This Week
Bank earnings, as you can see, aren’t giving the market much inspiration. In fact, despite a good lead from Wall Street on Friday, they’ll probably help push the market lower.
Aside from Earnings, there are two other market-moving Es to keep track of: Energy and the Economy. There’s some great news about Energy further down…and it’s not even a fall in the oil price.
But the Aussie economy isn’t giving away any clues this week. Don’t camp out for any big announcements. Not in Australia anyway.
Over in the US though, house prices and unemployment numbers come through on Wednesday and Friday. They might be good or bad.
Actually, scratch that. They will be bad.
But the Dow Jones doesn’t care about quality…it only really gives a hoot or two if numbers surprise analysts. Be prepared for a chain reaction if that happens. A worse-than expected economy equals falling US stocks. Falling US stocks are, in the absence of anything important happening here, a bad omen for the ASX.
As Gabriel put it last week, the All Ordinaries is sitting just above a key support line. That makes any big event more important than usual.
So we’d rather just watch the market this week. It doesn’t quite have a clear direction yet. And those US releases have the potential to louse things up again.
We did notice two key developments in the resource sector though.
China Signs Aussie Uranium Deal with ERA
Yep, the good news seems to be isolating itself in the energy sector.
If all goes right, Energy Resources of Australia (ASX:ERA) will deliver a small parcel of uranium to China in the fourth quarter this year. It has signed a contract, the first of its kind. ERA is scarce on details at this stage. But it’s a good sign for business.
China’s planning to add 30 new nuclear reactors by 2020. It currently has little nuclear electricity capacity.
While NAB is trying to untangle the threads connecting it to subprime, ERA has fired one out to the Chinese nuclear industry. Those 30 plants will need a lot of uranium. This, in other words, is the first real link between Australian’s uranium mining and China’s need for it.
Good Investing,
Al Robinson
