Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can't Pay The Interest On Their Debt

Earlier today, Macquarie released a must-read report titled "Further deterioration in China’s corporate debt coverage", in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with "uncovered debt", or those which can't even cover a full year of interest expense with profit.

The report's centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x.

As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the "percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample."

To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in "uncovered debt" companies) of cash flows, was generally known.

What wasn't known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector.

We now know, and the answer is truly terrifying.

Macquarie lays it out in just three charts.

First, it shows the "debt-coverage" curve for commodity companies as of 2007. One will note that not only is there virtually no commodity sector debt to discuss, at not even CNY1 trillion in debt, but virtually every company could comfortably cover their interest expense with existing cash flow: only 4 companies - all in the cement sector - had "uncovered debt" 8 years ago.

Fast forward to 2013 when things get bad, as about a third of all corporations are now unable to cover their annual interest expense, even as the total addressable corporate debt has soared to CNY4 trillion for just the commodity sector.

And then in 2014, everything just falls apart. Quote Macquarie, "more than half of the cumulative debt in this sector was EBIT-uncovered in 2014, and all sub-sectors have their share in the uncovered part, particularly for base metals (the big gray bar on the right stands for Chalco), coal, and steel."

Compared with the situation in 2013, while almost all sub-sectors did worse in 2014, but things appear to have worsened faster for coal companies as more red bars have moved beyond the 100% critical level for EBIT-coverage.

It means that last year about CNY2 trillion in debt was in danger of imminent default.

The situation since than has dramatically deteriorated.

So are we now? Macquarie again: "Given the slumps in metal and coal prices so far this year, it’s quite likely the curve will have deteriorated further for commodity firms this year, with total debt getting better in the meantime."

In other words, it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can't even generate the cash to pay down the interest on their debt, let alone fund repayments.

We fully expect this to be the source of the next market freakout: when the punditry turns its attention away from macro China, which has more than enough problems to begin with, and starts to focus on the cash flow devastation in China at the micro, or corporate, level.

DAX Reverses Month-End Ramp, Suffers Worst Start-To-Q4 Since 2009

Germany's DAX has given back all of yesterday's exuberant month-end gains and more to suffer the worst start to Q4 since 2009 (and actually worse than 2007 and 2008)...

Early hope collapsed into reality...

Copper, Crude, Credit Crumble As Stocks, Bond Yields Tumble

Commodities terrible quarter in just one chart

Unless you were hiding out in rough rice or lean hogs, commodities were not your friend in the third quarter of 2015.

GoldCore compiled three-month relative performance of commodities with data from Finviz.com.

Worries out of Asia hurt commodities. China is rebalancing, emphasising consumption over investment. It's stock market gyrations also dragged down metals. The Shanghai Composite Index falling from the peak of 5,166 in mid-June to 3,038 at the end of September.

Copper price surges on South America supply cuts

On Wednesday copper futures staged a comeback from six year lows hit earlier in the week as supply disruptions from top producing countries Chile and Peru lift sentiment in beaten down sector.

On the Comex market in New York copper for delivery in December surged as much as 4.7% to a session high of $2.3575 or $5,200 a tonne. Today's advance lifted the red metal out of bear territory for 2015, but at a more than 17% drop since December 31 following a 16% retreat in 2014, no-one's celebrating a bottom yet.

Today's big jump in heavy volume came after news from top producing country Chile.  Output at one of the world's largest copper mines, Collahuasi, will be cut by 30,000 tonnes due to current market conditions.

The mine, owned by Anglo American and Glencore produced 470,000 tonnes of copper in 2014, roughly 2% of global output. Earlier this month Glencore announced it's idling mines in Zambia and the DRC that would remove more than 400,000 from the market.

Also on Tuesday Peru declared a state of emergency in the area around the Las Bambas mine after clashes between police and protesters left four people dead and 16 seriously injured.

Minmetals acquired Las Bambas from Glencore in April last year in a controversial $6 billion deal tied to the Swiss giant's merger with Xstrata

Las Bambas is majority owned by China's Minmetals and the 400,000 tonnes per year mine is set enter production in January next year. Minmetals acquired Las Bambas from Glencore in April last year in a controversial $6 billion deal tied to the Swiss giant's merger with Xstrata.

New mines in Peru coming on stream this year and 2016 would double production to 2.8 million tonnes, placing the Peru in second place globally behind Chile.

Copper's move higher gave a bit of a lift to beaten down copper stocks with Glencore's (LON:GLEN) jumping 14% as it continues to recover from a more than 30% fall in London in Monday. Anglo American (LON:AAL) shares also also traded up in New York but year to date declines at the diversified miner remain more than 50%.

Freeport-McMoRan (NYSE:FCX), which vies with Chile's state-owned Codelco as the world number one copper miner in terms of output, was trading 5% higher in early-afternoon dealings but investors in the the Phoenix Arizona based company are nursing a 59% decline since the start of the year. Freeport announced a month ago it is cutting in half output at is El Abra mine in Chile and idling two US mines.

The copper industry has a long history of these supply-side surprises.

Typical disruptions associated with adverse weather (Freeport has predicted lower output at the massive Grasberg mine in Indonesia related to El Niño weather patterns), technical problems, power shortages and labour activity coupled with falling grades and dirty concentrates at old mines (especially true in Chile) make forecasting a tough proposition.

The copper industry has a long history of these supply-side surprises

Add to those factors project deferrals, commissioning delays, slower ramp-ups, mothballing and downsizing of mine plans due to the declining price environment of the last two-three years and it becomes easier to understand why forecasts are all over the place.

Last week Goldman Sachs predicted the slump in the copper price could last years due to the slowdown in China and that prices will probably drop to $4,800 a metric ton by the end of December and $4,500 at the end of next year as the market suffers from oversupply of 530,000 tonnes next year 2016 rising through 2019 to reach 657,000 tonnes oversupply.

On the opposing side independent research house Capital Economics forecasts a strong pickup in the price of copper towards the end the year on the back of lower than expected mine supply growth and output disruptions.

Senior commodities economist Caroline Bain says Chile’s recent earthquake highlights these risk. Although output was only interrupted briefly, the earthquake and tsunami that struck the South American nation halted operations at the Los Pelambres and Andina mines, which together produce  600,000 tonnes of copper.

Apart from the effects of El Niño (low rainfall is behind the Grasberg output reduction, but on the other side of the ocean the occurrence causes flooding), ongoing strikes and protests, Bain also points to relatively low warehouse inventories which in the case of LME stocks represent only 2–3 weeks of annual consumption for the bullish case.

The house view at Capital Economics is for the price of copper to reach US$6,250 per tonne by end-year, rising to $7,000 by end-2016.

The Year of the Jubilee of Shemitah cycle

The Year of the Jubilee: 

One can not help, but be struck by the unique and very rare occurance of the Tetrad of four Blood Moons during the Shemitah of Shemitah's year, and now the Jubilee Year comes with yet another set of very unique features!Jubilee Cycles: 
Jubilee Years are based on the Shemitah Years which occur every 7th year.  Seven Shemitahs makes a Shemitah of Shemitahs.  (7x7=49 years is the Shemitah of Shemitah cycle period.)  The year following the 7th Shemitah Year is a Jubilee Year.  The Jubilee Year follows the 7th Shemitah Year thus becoming the 50th year.  However, if we keep the Shemitah cycle going every 7 years, then the next Jubilee year is also the first year of the next Shemitah cycle, in which case the next Jubilee year follows 49 years after the first.  However, if you start the next Shemitah cycleafter the Jubilee Year then you have Jubilee years occurring every 50 years, however, this breaks the 7 year cycle.  Bible scholars are in a disagreement are to which version is correct.   The following is based on the 49 year cycle which keeps the 7 year cycle in tack. 
The 40th Jubilee since Jesus Crucifixion:
The number 40 has special meaning in the Bible, and is repeated a number of times in the Bible.  It rained for 40 days and 40 nights as Noah and his family rode out the flood in the Ark.  The Great Flood was a punishment for men's sinful ways.  The Israelites wandered 40 years in the desert in repentance for disobeying God.  Jesus fasted in the desert for 40 days and was tempted by Satan.  After Jesus' Resurrection he remained for 40 days until he ascended to Heaven.  The period of time of 40 in the Bible is understood as a period of repentance and redemption for past sins.  So it is of special interest to Christians around the world that this Jubilee Year is the 40th since Jesus was Crucified in Jerusalem in 31 AD.  Will this 40th Jubilee finalize the end period of repentance and redemption for mankind, and usher in the start of a new period?  Many believers feel something important is about to happen from God.

2015 the year of Sevens This Shemitah Year started with two cows being born with the number 7 on their faces. The Shemitah year is the 7th year of rest. 2015 is the 7th Shemitah (7x7=49) since the last Jubilee Year, making it a Shemitah of Shemitahs. 2015 is the 7th year since the 2008 Stock Market Crash, where it went down 777 points. 2015 is 14 years since the 911 terrorist attack. (7+7=14) 2015 marks 70 years since the end of the Holocaust. 2015 is the 70th year following the end of World War II. 2015 marks the 70th year since the first atomic bomb was dropped. 2015 is the 70th anniversary of the founding of the United Nations. Sept. 2015 is the start of the 70th year of the Jubilee since God ordained them in the Old Testament.

The 70th Jubilee, 2015-2016: 
The numbers seven and seventy both have special meanings in the Bible.  God created the Heavens and Earth in six days and rested on the seventh day.  God had completed his task by the seventh day.  From this God established the week which is completed on Saturday and is a day of rest.  In Daniel 9:24 we have the following:

Seventy weeks are determined for your people and your holy city,
To finish the transgression,
To make an end of sins,
To make reconciliation for iniquity,
To bring everlasting righteousness,
To seal up vision and prophecy,
And to aniont the Most Holy.  

This prophecy from Daniel is about restoring Jerusalem until the Messiah returns in a period of seventy!
In Matthew 18:22 Jesus tells Peter to forgive not just seven times, but seventy times seven.  So seven and seventy have the Biblical meaning of perfect completion.  
So this coming 70th Jubilee Year will very likely have very special meaning for mankind.  It could be God's time of Perfect Completion for Redemption.  Be prepared!  Be right with God.  

The Jubilee Year starts with a Partial Eclipse.

The Jubilee Year starts with a Solar Eclipse:  As the Jewish New Year begins on September 13, 2015, Rosh Hashana a Partial Solar Eclipse will be taking place over the Indian Ocean.  Jewish Rabbis consider a solar eclipse to mean a harsh period of time for countries of the world.

This Super Moon Lunar Eclipse will be seen in Israel in the western morning sky.

The Final Blood Moon of the Tetrad: As seen from Jerusalem this Lunar Eclipse will be seen in the early morning sky just before sunrise.  The Moon will be a super moon which means it will apear larger then normal, and will we setting in the Western sky.  A Red Lunar Eclipse has the meaning of a sword coming for the whole world.  If the Eclipse is at dawn the calamity is considered to be forth coming.  This eclipse will happen the evening of Sunday Sept. 27 in the Western Hemisphere and the morning of Monday Sept. 28 in Europe, Middle-East  and Africa.  (See more details at the bottom of the Blood Moons page.)

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Events during the Past 4 Blood Moons

• Ebola outbreak in Africa and several cases in the U.S. 
• People dying of the Bubonic Plague in the U.S. 
• Unstable Global Economy with many economist predicting world wide Stock Market Crashes. 
• Immigration of Refugees in Europe. A majority of them are young men from all over the middle east.  (Likely, an Islamic army invades Europe.)
• Numerous Natural Disasters. Earthquakes, and fires. 
• U.S. Government acts illegally numerous times by disregarding the Constitution, thus ending the 'Rule of Law' in America.  Movement to replace Constitutional Law with Islamic Sharia Law. (Sharia Law puts Christians, gays and woman in grave danger.)  
• Moral Crises increases which offends God. 
• Gay Marriage Legalized against the Biblical definition. 
• Killing Babies and selling human body parts for profit. 
• Government defends rioters and attacks on the police. 
• The U.S. Government turns against Israel. (A danger to America, as God curses those that oppose Israel.) 
• The U.S. Government is increasing hostel to Christians supporting law suites leveled against Christian businesses and Christians in the military. 
• War between Israel and Hamas. 
• Russia invades the Ukraine.  China building up its military navy and aerospace.  
• The rise of ISIS threatens which destabilizes the Middle East, leading to mass killings of Christians, by beheading, and crucifixion.  (End time prediction of the Bible.) 
• The U.S. Government signs a treaty with our enemy Iran who vows to destroy both Israel and America.  In the treaty we give our enemy 160 billion dollars, and lift economic sanctions on Iran.  There will be few if any inspections which will lead to Iran obtaining a Nuclear Bomb. 
• Chinese and Russian warships and aircraft off the U.S. Coastline.  Rumors of a surprise attack on America being planned by our enemies.  

Shemitah Year Events of the Twentieth Century:  The rising up and the falling of empires. 

1917- America rises to power ending World War I.  The rising of the Communist State of the Soviet Union.
1917- The defeat of Germany. The fall of the Czar of Russia.  The fall the Austrian-Hungarian Empire.  The fall of the Turkish-Ottoman Empire.
1938- German Nazis attack Jewish businesses and burn Jewish Synagogues on Kristallnacht (the Night of Broken Glass.)
1945- Nazi Germany is defeated.  The Atomic bomb is dropped on Japan thus ending World War II.  Japan signs peace treaty the same week of the end of the Shemitah year.
1945- The United States becomes a military super power. The U.S. dollar becomes the world standard currency. The United States is the richest country in the world, and the world's largest lender nation.    1973- The United States Supreme Court declares that America's can kill their unborn babies.
1973- The World Trade Center is completed which is a symbol of Americas economic strength. 1973- America looses its first war to Vietnam.  Nixon takes America off the Gold standard.  This sets in motion the decline of the U.S. dollar.
1980- The U.S. Supreme Court bans the posting of the Ten Commandments in Public Schools.  Thus God is now completely banned from our public schools in America.
2001- The World Trade Center buildings (the symbols of Americas economic strength) are destroyed by an Islamic terrorist attack.  One week later Wall Street has one of its greatest collapses on the last day of the Jewish Shemitah Year.
2008- Exactly seven years later, Wall Street suffers its largest decline.  America is now the world's largest debtor nation.
2014-2015-  In Sept of 2014 we start a new Shemitah Year.  This happens in connection with a Tetrad of 4 Blood Moons which all occur on Jewish feast days.  As the United States has turn away from God and endorsed many sins, it is very possible that God's judgment will fall on America during this year of the Shemitah. 

Source: http://www.shemitah-blood-moons.net/jubilee.html

Seven year cycle in the DJIA

Copper leads fall in metal prices on China worries

Copper led losses in industrial metals, falling by 2% while zinc dropped to a five-year low, on uncertain demand from China. The plunge also sent the shares in some of the world’s largest mining companies tumbling while hurting copper-dependent economies from Chile to Zambia.

Freeport-McMoRan (NYSE:FCX), the world's largest publicly traded copper producer, fell as much as 4% at $10.11. Rival BHP Billiton (NYSE:BHP) was trading 4.3% to $32.68 at noon, while Southern Copper (NYSE:SCCO) was down around 2.3%.

In Canada, First Quantum Minerals (TSE:FM) and Teck Resources (TSE:TCK.B) sank at least 9% as copper for delivery in three months dropped to a two-week low. While Lundin Mining (TSE:LUN) followed closely, losing almost 7% of its stock value at noon ET.

Copper and other metals have suffered from a slowing Chinese economy and a shift in growth towards sectors that require less commodity imports.

So far, copper prices have failed to react significantly to news of supply disruptions in Zambia and Chile, remaining more responsive to news from China, the world’s largest consumer, accounting for about 45% of world demand last year.