Juggling Dynamite

Danielle was a guest today with Phil Mackesy on Talk Digital Network discussing recent developments in the world economy and markets. You can listen to an audio clip here.

My base thesis the past 4 years, has been that the commodity sector hit a secular peak along with the consumer credit bubble in 2007-08. Since then, resource companies have struggled to downsize operations and costs fast enough to keep pace with falling commodity prices and fleeing investment capital. Cash burn has been high and new revenue and capital has been in short supply. Although quantitative easing has prompted some bouts of resumed speculation, risk-on bumps remain fleeting. Excess inventories and over-supply weigh heavy amid a secular decline in global demand and investor appetite that continues to sour on the once-loved sector. The trouble with long periods of boom is that the participants become overly optimistic, over-invested and over-levered and fail to prepare for the inevitable decline phase thereafter.

As with the over-built shipping industry, market cycles suggest that the resource sector continues in a prolonged period of rationalization and consolidation, as weaker players falter and are cannibalized by more liquid peers. In this clip geologist and mining analyst Brent Cook explains the liquidity crunch continuing to hit junior resource companies for foreseeable months ahead.  See: Juniors to hit a fiscal wall.

During the consumer credit bubble, global shipping capacity was ramped up to carry the volume. Now that the bubble has burst, the sector finds itself awash in vehicles vying to carry still shrinking volume. This is deflationary, and is positive for consumers in the sense that this overbuilt infrastructure will help to suppress consumer prices over the next few years. It is not so good for transportation companies as many over-levered themselves to buy new vessels and are now struggling to keep cash flow positive on lower revenues. As always, those that manage with the most financial discipline will survive and garner a larger market share after consolidation in the industry serves to clean out those with weaker balance sheets.

This clip offers a good discussion on the topic. Tim Ross, Head of Asia Pacific Transport Research, Credit Suisse expects a bleak outlook ahead for the sector. He warns freight supply will rise, which will impact Asia-Europe routes. Here is a direct link.