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Earlier this year we had the opportunity to visit China Rongsheng Heavy Industries, one of China’s leading shipbuilding companies.  Rhongsheng was founded in 2005 and floated in November 2010 on the back of winning an enormous order from Vale to build twelve ore carrier vessels each 360 metres long, 65 metres wide and 30.4 metres deep with a deadweight tonnage of 400,000.  The ambitious founder, 46% shareholder and Chairman, Zhang Zhi Rong, was desperate to challenge the global leaders, South Korean based, Hyundai Heavy Industries and Daewoo Shipbuilding & Marine.

Back in 2008, Rongsheng represented all that is good and bad in China.  With Government support, Chinese corporate support, recently announced offshore diversification and the cost of shipping dry goods such as grain, coal and iron-ore at US$55,000 per day, the outlook was superb.

Let’s fast forward to July 2012 and the price of Rhongsheng’ shares have declined from HK$8 to HK$1.  For the six months to June 2012, China’s 1,536 shipyards have announced a combined 50% decline in orders.  The cost of shipping dry goods has crashed to sub US$10,000 per day (-82%), and Rhongsheng is experiencing a number of operational and credibility issues.

With the global slump in ship orders caused by a glut of vessels, Rongsheng is trying to diversify from shipbuilding and earlier this year they won a contract to build an offshore support vessel for CNOOC, one of China’s largest government controlled oil production and exploration companies.

Last week CNOOC announced a US$15 billion offer to acquire Nexen, a US listed Canadian based oil company.  Nexen rose 52% on the announcement.  The US Securities and Exchange Commission (SEC) just announced various traders had stockpiled shares of Nexen in the days leading up to the takeover bid.  The SEC has claimed US$13m of illegal profit was realized and the finger is being firmly pointed to a Hong Kong based company controlled by none other than Zhang Zhi Rong.

The development of China has seen some extraordinary national champions in industries like ship building, however we wonder how many of these companies will ultimately become global champions.  With several front page newspaper disasters associated with misfeasance, we continue to be wary of China’s corporate governance record.

In the meantime we believe a lot of companies in commoditized industries like shipbuilding, steelmaking and cement production are likely use their upcoming results presentation as an avenue to downgrade their outlook.

by Roger Montgomery Posted in Insightful Insights, Investing Education, Manufacturing.

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Shareholders in the 135 year old London Metal Exchange (“LME”) voted overnight to sell to Hong Kong Exchanges & Clearing for US$2.1 billion.  The LME will help the HKEx, whose focus has until now been almost exclusively on equity markets, challenge the Chicago Metals Exchange (CME) and the Intercontinental Exchange (ICE) for dominance in commodity markets.

The CME and ICE and the NYSE Euronext were all trying to acquire the LME in a wave of consolidation that has swept the global exchanges industry.

The concept of traders gathering in the coffee houses in the City of London (in 1877) with an open outcry system is rapidly being taken over by 24 hour electronic trading!

by Roger Montgomery Posted in Insightful Insights, Investing Education, Takeovers.

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As we have been actively commenting since the start of the year, a key thematic concern we hold for investors in both Mining and Mining services businesses was the potential for commodity prices and in particular Iron Prices to begin to fall. In such an environment, falling prices would result in lower profits and cash flows for our miners and hence we could see significant future risk of projects being either scaled back or shelved in future periods.

Our view is anchored by a supply response in two new Pilbara regions coming on stream over the next few years and also falling demand from the world’s biggest consumer of additional supply, Asia (China).

With Iron Ore falling to $123.6/t, down 9% in two weeks; we are now at a critical juncture.

Critical because this is the price considered by many to be the ‘floor’ / the most Iron Ore prices can fall given China’s own estimated cost of production is $120/t. This compares to Australia/Brazil at $40/t and Canada/USA/Europe $65/t. A price lower than $120/t would make China’s Iron Ore production uneconomic and hence, a fall below this level “just cannot occur”.

Our experience with commodity producers is a little different. Our experience tells us that marginal producers are the first to lose when commodity prices fall materially.

And in this light we continue to expect over the coming months and years we will see lower prices and perhaps, marginal / high cost producers suffering and mining services starved of work. Even if they are operating at full steam right now.

To ask a question: is the recent moratorium of all Greenfield exploration activities by BHP a sign that they see the world in a similar light?

by Roger Montgomery Posted in Companies, Energy / Resources, Investing Education.

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Roger Montgomery certainly thinks so, and he explains why in this Weekend Australian article published 21 July 2012.  Read here.

by Roger Montgomery Posted in In the Press, Insightful Insights, Investing Education, Value.able.

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I thought the downgrade in earnings by a major stockbroker of the Chinese cement stocks by 20-30% for the years to December 2012 and 2013 was revealing.  Anhui Conch, for example, one of China’s largest cement producers, is expecting its sales volume to grow by 17 percent per annum from 158 million tonnes in 2011 to 251 million tonnes in 2014.  While the average selling price per tonne for 2012 is down 15% to 20% on 2011, and the gross margin has halved.  This drives home the cyclical nature of the industry and in the past year the Anhui Conch stock price has also halved to HK$20.

by Roger Montgomery Posted in Companies, Investing Education, Market Valuation.

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Roger Montgomery certainly thinks so, and he discusses with Ticky Fullerton how his Value.able investing strategy provides much lower valuations of the current market in this interview on ABC’s The Business broadcast 18 July 2012.  Watch here.

by Roger Montgomery Posted in Companies, Insightful Insights, Investing Education, TV Appearances.

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Major mineral sands producer, Iluka Resources, announced this week its 2012-2014 Key Physical and Financial Parameters Guidance” released in February 2012 was “now redundant and as such no longer applicable”.

Discussions with both zircon and high grade titanium ore customers about ordering volumes for the December 2012 half-year have indicated “lower ordering patterns or an unwillingness to commit to volumes except on an “as needed” basis”.

Deteriorating economic conditions, subdued customer confidence in China, continuing weakness in the main ceramic export markets for Spain and Italy and some softening in the US manufacturing sector were all to blame.

We assume these same factors would be affecting most materials exporters.  Remain cautious.

by Roger Montgomery Posted in Energy / Resources, Investing Education.

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Fresh from signing up as CEO of Leighton Holdings in August 2011, Hamish Tyrwhitt seems to have streamlining on his mind.  After selling HWE Mining to BHP Billiton for $705m, Leighton have just approved the sale of Thiess Waste Management to Remondis AG for $218m.  Proceeds will be used to cut debt which hit$2.14 billion at their 31 December 2011 balance date.

With several earnings downgrades, the Leighton share price performance has been diabolical, down from $61 in late 2007 to the current $16.40 (-74%).

by Roger Montgomery Posted in Investing Education, Market Valuation.

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Roger provides details of the sad decline of Hastie Group (HST) in this Money Magazine article for July 2012.  Read here.

by Roger Montgomery Posted in Companies, In the Press, Investing Education.

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Roger Montgomery discusses why excessive focus on High Yield stocks is likely to yield disappointing returns in this Australian article published on 23 June 2012. Read here.

by Roger Montgomery Posted in Companies, In the Press, Investing Education.

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