Month: September 2014

Submitted by Andrew Topf via OilPrice.com,

For climate change activists and those hoping for an energy future dominated by renewables or even less-polluting natural gas, the death of coal cannot come quickly enough. But with coal still the dominant form of cheap electricity throughout the world, it is unlikely the bogeyman of climate change will disappear anytime soon.

That's because the price of coal, compared to other fuels, is just too good to refuse. Just look at China, where the country's double-digit economic growth has largely been fueled by coal, which fulfills 60 percent of its energy mix.

According to a chart showing the levelized cost of energy — the price at which electricity must be generated from a source to break even — coal is the second-cheapest form of energy behind hydropower, at $40 per megawatt hour.

Compare that to the cost of nuclear at $60, natural gas at $70, and solar — which at $280 per MWH, is seven times the cost of coal. Coal is also plentiful, relatively easy to extract — though admittedly dangerous if mined underground — and requires minimal processing. And it can be used for power generation (thermal coal) or steelmaking (metallurgical coal).

Of course, coal-fired plants have exacted an enormous price on air quality, and the Chinese government – which has declared war on pollution — recently banned the use of coal in smog-cloaked Beijing. Last week, it was announced that for the first time in over a decade, Chinese coal imports and coal consumption both dropped.

While that may seem like a dart in coal's balloon, coal's continued use elsewhere is more than making up for China’s restraint.

Germany doesn't like to talk about it, but the world leader in the use of renewable energy, particularly solar, is also a big consumer of coal. As The Economist recently pointed out, Germany's production of power from lignite coal is now at 162 billion kilowatts, the highest level since the smokestack-belching days of East Germany.

The same article notes that Japan, which has no natural energy resources of its own and is scrambling to meet electricity demand — most of its nuclear reactors have been offline since the 2011 Fukushima disaster — approved a new energy plan in April that includes coal as a long-term electricity source. The Japanese have also invested almost $20 billion in overseas coal projects in the past seven years, according to the Natural Resources Defense Council.

In the United States, even though a shale-gas supply boom has seen many utilities shift to cheaper natural gas, the country will still be generating a third of its energy from coal by 2040 (only 10 percent less than now), according to the U.S. Energy Information Administration (EIA). That’s despite a concerted effort by the Obama administration to force the nation's coal-burning power plants to reduce their carbon emissions by a third over the next 15 years.

U.S. coal producers have responded to the trend of falling domestic consumption by exporting more coal overseas. A Wall Street Journal chart shows exports of U.S. coal grew from around 50 million metric tons in 2000 to 106.7 million MT in 2013. Most U.S. coal is destined for Europe, with Brazil, South Korea and China close behind.

All of this is not to suggest that coal producers haven't had their problems. The price of benchmark thermal coal over the past three years has dropped from more than $130 a ton to around $80. Metallurgical coal is also at a six-year low.

Despite a huge cutback in production, the coal market continues to be oversupplied. As Oilprice.com pointed out recently, waning steel demand in China has forced mines in Australia to close. Australian producers are also threatened by Chinese plans to build more rail capacity for its domestic coal, which would undermine its coal imports.

In the United States, coal producers are finding it increasingly difficult to lock utilities into long-term contracts that provide stability and protection from price fluctuations. That's because the utilities want the flexibility to have short-term contracts, or even buy coal on the spot market, since natural gas continues to be a competitive option.

Looking ahead, though, there doesn't appear to be a declining demand curve for coal. Consider this: in Africa, some 60 percent of the continent's population, or more than 600 million people, do not have access to electricity. The EIA predicts African coal consumption will rise by 70 percent by 2040. In India, another big consumer of coal, 300 million people remain disconnected to the electricity grid. The country plans to increase its use of renewable energy by 15 percent by 2020, but still faces the challenge of energy demand exceeding supply by 10 percent.

Coal is a likely contender to fill that gap. A recent article in Australian Mining states that by 2025, India's electricity generation from coal will be reduced from 60 percent to “only 50 percent of installed generation – but that doesn't necessarily mean less coal generation.”

In the end, it all comes down to price and government policies. If the economics of coal can be beaten by other electricity sources, the old-school fuel will face pressure, as it already has in the U.S. But as market forces continue to drive the various options available for utilities, coal use — particularly in developing nations — is almost certain to go up. Unless governments enact American-style laws to sharply curtail coal power plant emissions, expect King Coal to retain its crown.

 

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As the “Big Mac Index” is to global purchase price parity levels of inflation, so when it comes to the state of the “recovery” if not for everyone, then certainly for the 0.1%, there is no better metric than the “Porsche Indicator.” Recall: “Porsche Reports Record Sales in 2013; 21 Percent Increase Over 2012” which certainly didn’t come on the back of yet another year of declines in real incomes for the middle class (spoiler alert: it came on the back of some $10 trillion in liquidty injections by the world’s central banks).

Yet one place where the “Porsche” recovery forgot to make landfall, is none other than the biggest casualty of Europe’s artificial monetary, political and wealth-transferring union: insolvent Greece.

The chart below, from the Greek department of transportation, hardly needs an explanation or commentary, suffice to say that far better than any revised, annualized, seasonally-adjusted non-GAAP GDP it captures the true state of the Greek “recovery”…

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As the “Big Mac Index” is to global purchase price parity levels of inflation, so when it comes to the state of the “recovery” if not for everyone, then certainly for the 0.1%, there is no better metric than the “Porsche Indicator.” Recall: “Porsche Reports Record Sales in 2013; 21 Percent Increase Over 2012” which certainly didn’t come on the back of yet another year of declines in real incomes for the middle class (spoiler alert: it came on the back of some $10 trillion in liquidty injections by the world’s central banks).

Yet one place where the “Porsche” recovery forgot to make landfall, is none other than the biggest casualty of Europe’s artificial monetary, political and wealth-transferring union: insolvent Greece.

The chart below, from the Greek department of transportation, hardly needs an explanation or commentary, suffice to say that far better than any revised, annualized, seasonally-adjusted non-GAAP GDP it captures the true state of the Greek “recovery”…

via Zero Hedge http://ift.tt/1s6Gin3 Tyler Durden

By: Chris Tell at http://ift.tt/146186R

A little while ago I shared 6 ways to improve decision making. In response I received a number of comments, the most insightful of which I’d like to share with you today. My main point in the previous article was that information, together with a strong filtering process, form the basis for making sound decisions.

I love these emails. You write essentially about what it all comes down to which is psychology playing out in life, and markets.

 

However, can someone from your organization, please elaborate on the last point, on procrastination. What if procrastination is the humility in knowing that you don’t know enough to make a decision now, and are simply waiting either for more facts to come to you, or waiting for the dust to settle? In this age of tremendous deception I’ve discovered that waiting a roughly set amount of time is the ONLY objective truth we have in this world of subjectivity. By that I mean that a lot of the fakers get weeded out, and the truth rises to the top, upon which you can then make a decision to commit to the idea, product, or partner. I find that one can be more quick in committing to an industry, partner, or pattern that has been worked in the past, and is not novel.

 

In the last year or so, I made a few errors, but I substantially saved a lot on two deals where I let the early adopters be my guinea pigs, and they blew up tremendously, precisely because of procrastination. The only novel idea I got into was bitcoin, I got in just after that initial guinea pig stage and made 500% thus far, though who knows where exactly it’s headed in the long term. My one year of procrastination benefited me here as well. The key is to procrastinate to roughly the right moment.

 

I’m curious if this is how it works in the business world on the level that you guys play out in, as well, as I find that the worst decisions are made when we think we have a gun to our head, when we think in terms of scarcity instead of abundance… the concept that if one misses the opportunity to max out on this chance, that another one is right down the pipe.

 

Cheers

I’m not sure I see this the same way. To me procrastination is carrying out tasks that are easier, more enjoyable and less taxing than tasks which are often more important, yet more difficult either physically, mentally, or emotionally. This is a poor strategy as it involves delaying what needs to be done.

More than just the obvious problem of failing to deal with something that needs dealing with, the psychological impact (stress) of this is the real killer. Procrastination leaves this nagging, persistent, unfinished problem that won’t leave you until you’ve dealt with it, and it affects your overall mindset and performance.

This is very different from deciding that you have insufficient information on which to proceed and make a final decision. This simply means that you’re still in the information gathering stage. There is nothing wrong with this. There isn’t any nagging stress hanging over you, as you’ve determined that you simply don’t have sufficient information at this time to make a decision. That information may come in way of the company validating their thesis or any number of other things.

On the other hand, if you’ve gathered all the possible information and still don’t feel confident in proceeding then this could be your gut instinct at work. It probably means that you’re working in an environment that is unfamiliar to you and this could be affecting your ability to process the information you’ve gathered.

When this is the case, and even when it isn’t, we rely on people smarter and more skilled than ourselves to brainstorm the issues. This does a number of things.

One, it builds our knowledge base. Do this day in, day out and I guarantee you you’ll learn something. It’s tough to engage with brighter minds than your own and not learn something new. It also often highlights both positive and negative elements you’re possibly unaware of, and after having done this, if you’re still unsure then you need to move on. Time is too valuable a resource to be spent burning through issues which you’re not comfortable with. There is HUGE power in saying “NO”.

There will always be another deal. And guess what – the next deal will be one which you come armed with a new set of experiences and knowledge gained from having been through the previous deal. Personally I’m not shy to look at dozens of deals a week. Naturally I have a rapid culling process but the point is that each deal allows you to hone your skills whether you participate or not.

In terms of “having a gun to your head”. I have had a 100% failure rate with this. Every time I’ve felt like I have a gun to my head, or felt like I’m in a position where I’m forced to do something, I should have walked away… EVERY TIME.

The truth is, you never have a gun to your head. That is dealing with things on an emotional not a logical business level. Throwing good money after bad works only if structural changes are implemented. This is where activist investors such as Carl Icahn excel. Like him or loathe him, he often turns the tables on companies which “put a gun to shareholders” heads.

Very good post, Chris. I would also add that part of good diligence is ensuring there is sufficient corporate governance in place at the beginning to avoid wiggle room for founders to change how much they report or disclose down the road. I’ve had a situation before where a founder/manager started making decisions unilaterally within the context of a closely held company, and it was not so obvious initially what was going on. This probably falls under your point #1, with a need for good info both at the outset and throughout the life of the project or business until a liquidity event cashes you out. It’s often those closely held start-ups where problems can sneak in with a founder going off the reservation.

 

I have had to learn that lesson the hard way with a decent chunk of change, as you put it.

 

Keep up the great work!

Corporate governance. Ah, yes. Something I wrote about recently when talking about the Chandler brothers. You’re dead right! And just remember that good corporate governance doesn’t always magically happen as often founders don’t even know what they’re meant to do and need guidance on this one. Well structured term sheets with things like step in rights and so forth can be valuable.

Hi Guys,

 

Another great write up.

 

As you know my ‘first’ private placement went sour and obviously I didn’t do all of the items you listed.

 

In most things, I’m way too trusting of people, assuming the best in them until they show me otherwise. I think I must still be this way in my personal life as I just don’t think life would be fun going through it with the opposite view. But you’re right, as an investor it is a lousy way to think of things.

 

Knowing that Doug Casey, with all of his “P rules” and experience, also got caught in the same investment make me question whether the private placement game is just that – too much of a game of personality reading and information masking? I’m not saying that public m
arkets are much different, but some of the reporting ‘requirements’ help.

 

Perhaps y’all could do an article on what can be done (if anything) when a private placement goes bad?

• Are we just SOL?
• Are their any clauses that could insure shareholder recourse that ‘might’ be accepted in documents by companies?
• Are their any practical legal recourse’s within corporate jurisdictions?
• Is criminal ‘fraud’ prosecution ever remotely possible in any jurisdictions?
• Most other shareholder are unknown, so can one get organized or weighted shareholder influence over a company?
• Are there techniques used against bad public companies that may be applied?

I’m sure y’all have seen it all and know other questions in this area that could be addressed.

 

I realize this type of article may not be a good subject for your business. But I assume others, like me, may find comfort in knowledge rather than ignorance. Likely many of your customers or potential customers think about the issue some anyway.

 

Take care

I don’t think being trusting is a bad thing at all. Who wants to live a depressing negative existence believing that the world sucks, everyone is out to get you and bogeymen live under your bed? Trust but verify is my best answer to this.

The easiest way to avoid being hurt is to not get involved in the first instance, right? There is a saying which builders use “measure twice, cut once”. The same principal applies on due diligence on companies. There is nothing wrong with asking for the obvious, well before getting involved. When someone tells you they have X, and you ask for proof, this is not only your right but just plain common sense.

Further to this, I have a rule I apply – don’t ever lie to me or provide me with half information. I’ll provide an example from a recent exchange with a company. I was told that a particular company had X. I asked to see the contracts to prove this. I was then told that there was actually a letter of intent (LOI). I will never deal with that person again. An LOI and an actual contract are not the same thing. I was clearly told that the contract existed.

In response to the questions on jurisdictions. Sure, though they differ widely. It’s best to have companies incorporated in investor friendly jurisdictions even if they’re doing business in jurisdictions which may not be so robust legally. Criminal fraud prosecution is definitely an option, though it really depends whether or not this is worth pursuing. It really is best to have investor protections in term sheets at the outset.

With respect to the question regarding weighting of shareholders and shareholder influence. Depending on the jurisdiction it is typical that you can obtain the cap table and shareholder register and pursue organizing a shareholder led effort to force removal of directors, disclosures etc. The topic is really too wide to answer in a paragraph…

– Chris

PS: Accredited investors interested in proprietary deal flow, and participating in investments alongside Mark and myself can inquire here.

 

“There can be as much value in the blink of an eye as in months of rational analysis.” – Malcolm Gladwell

via Zero Hedge http://ift.tt/1qfT76X Capitalist Exploits

China warns "the outside world doesn't get it, we do," in a statement related to the "stealth QE" they unleashed yesterday, noting investorsd "do not realize that today's Chinese economy is moving towards "new normal" in the process," and "need to accept the volatility of economic data," during this transition. Crucially, PBOC adviser Chen Yulu clarifies what Western central banks simply cannot grasp: "Hoping for stimulus policies in the face of increased economic pressure is short-sighted and does no good to long-term economic development," warning investors should not expect "strong stimulus." Wall Street is less than exuberant about the liquidity injection, as the impact on real economy may be limited due to lenders' risk aversion.

As Xinhua reports,

China should stick to prudent monetary policy even as its economy faces “relatively large” downward pressure, Xinhua reports, citing PBOC adviser Chen Yulu.

• China should not cut interest rate as long as it can avoid it, Chen says
• China has plenty of fine-tuning tools to maintain M2 growth at about 13%
• China shouldn’t adopt “strong stimulus,” Chen says
• China has targeted RRR cut, open market operation tools
• Chen hopes China can introduce deposit insurance by year-end

Calls for stimulus policies including interest rate cuts following negative economic data suggest a lack of faith in China’s reform efforts, Xinhua News Agency said in an unsigned commentary in Chinese yday.

• Hoping for stimulus policies in face of increased economic pressure is short-sighted and does no good to long-term economic development: Xinhua
• China has enough tolerance and policy tools to deal with economic slowdown: Xinhua

And Wall Street, while happy it happened in the short-term, is less sanguine about the impact in the future… (via Bloomberg)

PBOC’s reported liquidity injection is aimed at addressing seasonal swings in cash availability, while impact on real economy may be limited as lenders turn risk-averse, analysts say.

Haitong Securities:

• Monetary easing is moving in the “wrong direction”; quantitative easing so far this year has yet to bring down borrowing costs
• PBOC should still lower interest rates to spur investment and consumption

UBS:

• PBOC is likely preempting a seasonal surge in demand for cash, especially since recent increase in FX inflows has been poor despite record trade surpluses; may also aim to buffer negative impact from recent CBRC rule on deposit deviation
• Liquidity provided to five big commercial banks that are less constrained by loan-deposit ratios would make it easier to increase credit supply across the board
• Interest rate on standing lending facility likely in 3.5%-4% range
• Liquidity injection may have little impact on continued property downturn, excessive industrial capacity and weak business outlook

Barclays:

• Targeted easing measures since June provide PBOC more flexibility and control in managing monetary conditions and offering short-term liquidity, but impact on real economy and targeted sectors is limited
• Measures may not arrest growth moderation; still sees rate cut inevitable in coming quarters, likely 4Q 2014-1Q 2015

China Merchants Bank:

• Given rising risk-aversion among lenders, liquidity injection may not motivate them to lend
• SLF may be authorities’ last attempt to test new policy measure instead of easing via conventional tools; if it fails to achieve expected results, they may introduce more broad-based easing
• Rate cut would be a more effective tool; will also provide more stable environment for reform

Citic:

• Move avoids being too aggressive in easing while funding support may come from likely jump in fiscal spending in December when SLF expires
• Tenor of SLF means money more likely to be invested in bonds rather than off-balance-sheet lending
• Rate cut may not be good option; limited rate tool means cut to current benchmark rate may trigger outflow of liquidity from banking sector

Guosen Securities:

• Move may be aimed at providing liquidity before end-Sept. IPOs and likely seasonal cash squeeze; use of SLF instead of reverse repos shows PBOC wants to avoid sending a “too-loose” signal in its monetary stance
• Putting cash into big lenders’ pockets is a way of pushing commercial banks not to hoard cash; big banks are likely to buy more long-end bonds to help push down funding costs

Nomura:

• Size of injection equivalent to broad-based RRR cut of 50 bps, and this is the first time PBOC has used SLF since Feb.

BofA:

• “A slew” of other easing and stimulus measures may be announced in coming weeks, likely including lowering mortgage rates and easing the loan-to-deposit ratio
• Chances of universal RRR cut or rate reduction have shrunk, especially given a Xinhua article saying that calls for a rate cut suggest a lack of trust in reforms
• If news of injection confirmed, bonds may rally and swap curve will go down, especially front end
• While this injection is bigger than the SLF conducted in the first quarter of 340b yuan, considering upcoming IPOs and the national holiday, the immediate liquidity impact may not be as big as it seems

Credit Agricole CIB:

• Targeted measures may be capping rates, and impact is likely to be seen more at front end of swaps, while any reaction on tenors beyond two-year may not be sustained
• CNY repo-IRS curve is likely to steepen across 1-2 year or 1-3 year segments

*  *  *
As Chen concludes:

"Strong regulatory reform + clever" policy model is becoming the new normal in China's economy to maintain the development of "stabilizers" to achieve China's promised steady growth, pro-reform, structural adjustment, benefit people's livelihood.

*  *  *
It appears Iron Ore prices are not buying the exuberance…

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