The steel collapse
At present production levels, China alone could totally requite global demand with a surplus left over.
The current global steel price collapse, whichjoins oil in a formative worldwide glut, unfortunately is signaling further deterioration of the gross domestic product recovery percentage projected by the professional “stargazers” earlier in the year.
While the current global oil glut traces its present surplus to the voluminous U.S. millions of daily crude barrels injected into limited world market demand, steel’s current price collapse is due to China’s vast overproduction. This has had no rationale in relation to global demand. At present production levels, China alone could totally requite global demand with a surplus left over.
This unprecedented production capability by a growing variety of Chinese steel mills is playing increasing price havoc with big users/producers India, the U.K., the U.S., and Germany. These all have substantial domestic steel production and export capability, which have been severely undercut by China’s low-ball pricing.
Part of the problem lies in the fact that the Chinese have had no agreements with other major steel producers and their specific export activities. This Beijing world-dominating steel production was first generated with the communist Mao-Tse-tung regime that urged its incipient industry to stretch its capacity to the very limit.
The alarm bells that have been sounded around the world are encouraging frantic steel producers to aggressively cut prices in a vain attempt to protect their domestic markets and exports from the tidal wave of unprecedented Chinese overproduction.
While this unrestrained Chinese steel production is not limited by global treaties with other major producers, the reaction at the market levels is more severe as large overstocks of steel derivatives have been piling up all over the world at both the distribution and end-use levels.
The latest example of this capacity overage is India’s Tata Steel conglomerate. It has announced the closing of its steel plants in the United Kingdom that have been employing thousands of workers. This has generated political calls for setting up tariff walls by the major developed nations, but this after-the-fact move may be coming too little and too late.
Energy sector bankruptcies
While the global oil glut combines with maximum 10 million daily barrels of oil production by Saudi Arabia, Russia and the U.S., the massive bank loans that put most fracking shales into business are increasingly endangered by the continuation of unacceptable oil price costs.
At this stage of the loan crisis, all types of loans, amounting to 50% of all commercial/industrial debts outstanding, are affected to some extent. This is causing banks to stop lending on new loan requests, while attempting to sell off existing loans at whatever discounts it takes to get rid of them.
While such major oil producers as Exxon/Mobil, Conoco Phillips and Chevron, etc., will keep their oars in the fracking water, expect a growing majority of marginal startups to soon be out of business barring a snapback to prices double those existent at the end of the first quarter 2016.
The impact on major commercial banks likely will be in the low single-digit percentage range as a component of too many loans outstanding. They will, therefore, not be adversely affected by outstanding loans as are those shale drillers that are overwhelmed with repayment problems.
But what now is transpiring from the current financial energy crisis is the severity of cutbacks in both oil and natural gas accelerating in the second half of 2016.
Even under the best of circumstances in the rise of oil prices and the beginning of natural gas shipments for worldwide export, the current reduction of fossil fuels (coal, oil and natural gas) will cause only limited inventory shrinkage while demand will be starting to pick up at the time of lessening supply.
If past experience is any indicator, the last quarter of 2016 might see a 180-degree upward turn of the January 2016 drop to a low of $26 per daily barrel.
If the superimposition of an as yet undefined geopolitical development causes an even greater price reversal than currently expected, more dire supply/demand inversion and consequently higher prices remain a distinct possibility.
Venture capital surge?
While the world’s sovereign wealth and venture capital funds have more than recovered from the deep chasm of the 2008-11 financial crisis, both these global liquidity-type providers have been wary in diving into headlong new aspirations.
But with the first half of 2016 coming to a close, venture capital firms are raising additional funds at a rate not seen since the turn of the current millennium. According to knowledgeable sources, this monetary aggregation is due to top $13 billion. Much of this monetary buildup has come from collegiate endowments and pensions, which continue to replenish the sovereign wealth and venture capital providers at an increasingly rapid pace.
But with the increasingly murky global outlook, the flattening of China’s blistering growth pace and the indefiniteness of interest rates, these previously aggressive business-development providers have become increasingly conservative regarding investment placement of their fast-growing coffers.
Although anxious to put their increased billions to work, the danger-fraught experiences of the last decade have found management’s general restraint awaiting a clearer picture of world economics going forward.
Contacts with certain fund managers have indicated increased uncertainty regarding all aspects of energy development, especially with such high-risk ventures as offshore drilling, Canada’s oil sands and particularly shale fracking.
This includes even those such as the Permian Basin, Eagle Ford and Marcellus shales that have established a comparatively respectable record in years past. Increasingly worrisome to some top-fund managers is the acceleration of negative interest rates in Europe and Japan. Even independent business startups in such potentially high-growth sectors as high technology, health care and a wide range of beaten-down commodities such as iron, copper and steel, are being avoided by the heavy monetary accumulation now festering on the sidelines.
However, venture capital, in general, has become increasingly bullish on business startups. This is especially true of those engaged in sectors that have become oversold in the most recent months. Venture capitalists find these especially attractive due to the deflationary environment of much of the commodity sector.
Even such unexciting subsectors such as scrap metal and pipe fittings have gained attraction as underlying trends awaken increased interest. For instance, natural gas prices, which reached a new low price earlier in the year, are anticipating major usage by the chemical processing industry. They are returning to facilities in the U.S. due to readily available unmatched low-priced natural gas.
All in all, this ongoing monetary accumulation, whose second half 2016 period may set new records, will be ready to provide instant liquidity as the “commodity depression,” for instance, rebounds from its lengthy travail.
M&A drought equals recession?
After a sizzling merger/acquisition record and strong initial public offerings seemed to prophesy a strong global growth future last year, just the opposite seems to be happening in 2016.
With the end of the first half of this year coming increasingly into view, U.S. merger activity has dropped 40% this year, while IPOs are on their way to the lowest level since 2009. Globally, merger-and-acquisition activity dropped 25% in the first quarter of this year compared with 2015.
This has generated deep disappointment in the financial world community after a near $5 trillion in worldwide merging activity seemed to indicate a rosy year ahead.
This all-time record, however, is being followed by an unexpected overall investment drop, with a U.S. first quarter down drastically from the previous year — the lowest since the end of the financial crisis.
This has panicked such major banks as Citigroup and JPMorgan Chase into sending out pessimistic warnings, projecting a 25% drop in investment banking revenue compared to 2015. These factors also have indicated a worse-than-expected projection of initial public offerings activity. This means a far lower intensity of bond underwriting and debt assumption, which is reaching all corners of the world.
The dominant factors that reversed the post 2008-2010 financial crisis boom have been followed by the following economic troubles encompassing most of the world:
1) The continuing diminution of China’s previous multi-year economic growth, affecting exports and consumer sector expansion.
2) The slow and unsteady comeback of oil prices, which are not meeting the recovery levels previously predicted.
3) The expanded militant activities of ISIS, and further instability in the Mideast geopolitical confrontations between the Sunni and Shia blocks.
Although a worldwide recession does not look to be in the cards during 2016, stagflation (the insidious combination of stagnant economic growth and disinflationary sagging) is sure to provide the overriding limitation to a worldwide economic forward movement.