Wednesday, November 18, 2015

Russian Commodity, Economic Data and News


Russians having 13 children per 1,000 people

Population shrinking since Soviet breakup - from 148 million then to 144 million today (146 million including Crimea)

Estimated for population to shrink by 14 percent over next 35 years - economic growth at risk

On pace to have largest population implosion in world history.

World Bank say Russian economic growth will decline by 1.3 percent annually over next 25 years because of declining workers.

World Bank: the number of working-age Russians will fall by more than seven million in the 2020s

Oil and Natural Gas

About 50 percent of Russian exports in terms of value are oil and natural gas.

Russia has third largest oil reserves in the world.

It is first in world for natural gas reserves.

Gazprom Pao is the leading natural gas supplier, with a mix of 85 percent natural gas and 10 percent oil

Next is Gazprom Neft, with a mix of 22 percent natural gas and 79 percent oil. It is a subsidiary of Gazprom Pao.

Lukoil has a mix of 13 percent natural gas and 85 percent oil.

Russia sends 70 percent of its oil to Europe

Russian opening door to foreign investment in natural resource companies.

 Oil and natural gas sales generated 68% of Russia’s total export revenues in 2013

 Russian natural gas exports to Europe to increase

Other Commodities

Uralkali is largest potash producer in the world

Russia domestically controls 30 percent of global platinum and palladium output.

Looking to boost global market share in platinum and palladium in Zimbabwe deal.


Russia imposing food embargo against Ukraine starting in 2016.

Ukraine stops importing Russian electricity.

Saudi Arabia

Saudi Arabia emerging competitor with Russia for European market.


Russia gaining ground in supplying China with oil.

Russia looking to China to explore Arctic together.

Uralkali’s shipments of potash to China totaled about 2.3 million tons in 2014

General Data

Oil and natural gas sales generated 68% of Russia’s total export revenues in 2013

Saudi Arabia's Airports to be Privatized to Lower Budget Pressures

* Privatization of Saudi Arabia airports will reduce budget requirements over the next several years

* Over the next decade it two it could make a difference because of economic diversification, but not in the near term

* Vulnerability of Saudi Arabia to low price of oil

The cost of engaging in a long-term battle for oil market share is starting to weigh more on Saudi Arabia, which has drawn down reserves and borrowed in order to maintain most of its budget requirements because of falling revenue. Consequently, it has also had its credit rating lowered
by Standard and Poor's.

That will likely continue to be detrimental to the country as it has plans to increase it debt by issuing of billions more in bonds, which will probably result in more credit rating cuts, resulting in higher costs of doing business.

Saudi Arabia, at best, has about 5 years of reserves left, standing today at about $647 billion. Its budget deficit is now at about $100 billion a year.

Among the steps taken to slow down the process is to drop proposed projects, eliminate non-essential one's, and find ways to lower dependence on government largesse, which is about 90 percent dependent on the energy sector to drive revenue. The low price of oil is of course the negative catalyst driving the challenge.

Recently it was announced Saudi Arabia is going to privatize its airports in order to allow it to be freed from having to prop them up.

Airport strategy

Most Saudi cities of any decent size of a domestic airport in them, but the bulk of the value of privatization will be at its three international airports located in Riyadh, Dammam and Jeddah. The goal is to have all airports in the country privatized by 2020.

The project is scheduled to be launched in the first quarter of 2016, starting with the key international airport located at Riyadh. Once that is completed, all remaining airports will go private.

All the privatized airports and associated services will be managed by the Saudi Civil Aviation Company Holding, according to Business Times.

Some believe this is aimed at economic diversification. I don't. I see it as budgetary diversification, meaning it's cutting budgetary costs to reduce pressure on its reserves over time.

Value of the action

Saudi Arabia without a doubt knows the days of oil above $100 per barrel are over. It may even be making decisions on it struggling to reach $80 per barrel over the next five years. There is no way it can continue to afford the types of perks and subsidies its people have gotten used to, so it must take steps to reduce costs.

This is important to understand because it could be viewed as a growth mechanism if it is believe it's a move to diversify the economy, rather than to lower the budget.

That doesn't mean there won't be added value once the privatization takes place. In doing research over the years concerning the difference in performance of state-owned companies versus privately-owned companies, the private companies have always outperformed the state-owned companies. A good example of that is the Mexican oil industry.

What this should do is reduce the budgetary requirements over the next several years, as the airports start to compete on their own. This very well could be a benefit for the economy, as the increased efficiencies and customer satisfaction could boost revenue and earnings, and result in more hiring.

In my opinion that's not the reason for the move though. It's driven by the numerous risks associated with declining oil revenue. 

Saudi vulnerability to oil and oil prices

With about 90 percent of revenue coming from oil, the risk to Saudi Arabia is obvious. The current price war shows how quickly even this energy giant, which has the largest oil reserves in the world, can be taken down.

It's not taken down yet, but we now know it only has at most about a five-year time period to solve its problems under a low-cost oil environment.

That five-year period is subject to understanding it must take action long before that. Five years is how long it has before running out of reserves. It can't wait that long to deal with it, and it isn't.

Saudi Arabia basically makes the decisions on behalf of OPEC, and controls the economic fate of the Middle East members. There is risk there because it refused to give up market share, which has been putting enormous pressure on about half of the OPEC members, several of which are located in the region.

Even though Saudi Arabia has some time to respond to the issues, the other countries in the Middle East don't. If the result is unrest, the Middle East could go up in flames; far worse than we're seeing now with the ongoing wars there.

This has historically turned in to a contagion spreading across the region, which could easily appear in Saudi Arabia. On top of this Saudi Arabia is underwriting some of the wars against ISIS in different countries.

There are more risks, but you get point, which is the low price of oil, which will remain subdued, will only magnify these challenges until a decision is made or agreed upon to slow down production in order to support the price of oil.


I don't believe investors should consider this an attempt at economic diversification. After all, a publicly run airport still sends a passenger out on a plane in the same way a privately run airport would.

There will be some savings and possible an increase in revenue and earnings from the private airports, but that will be only a small part of the revenue the country takes in, and will have little effect on the reserves.

This is a cost-cutting move to remove some of the pressures on the budget of Saudi Arabia, to work in conjunction with the stoppage of projects it had in its pipeline, and the removal of those services that aren't considered of major importance to its people.

A lot further down the road this could be very important and productive, but over the next several years the value will primarily in reducing costs so its revenue can target those services considered essential to maintaining order in the country.

Wednesday, September 2, 2015

Gazprom's Earnings Continue to Soar

 If weak gas and oil prices were supposed to devastate the industry, Gazprom (OGZPY) is one of the last companies to hear about it, as it has been producing great earnings. And with a P/E ratio of about 5, it is a great value play.

There have been two major catalysts behind Gazprom's great year. The most important has been the shrinking value of the ruble, and second, was the decision by Russia to lower export taxes earlier in 2015. That combination has driven nice results for the natural gas and oil giant.

In its latest quarter it generated $4.75 billion in net profit, a gain of 29 percent year-over-year. It also enjoyed an annual growth rate of 50 percent in the first half.

Investors need to understand that even in the midst of a low-price or depressed commodity market, there is more than one way for a company to make money. Those able to identify them, as in the case of Gazprom, will get in before prices are bid up.

The reason why Gazprom has been doing so well is its costs mostly are domestic, which means they're traded in rubles, while its sale are primarily in the U.S. dollar and euro. The difference in value between them is what is driving Gazprom's success.

Add to that its continual strong performance in Europe, which represents approximately 56 percent of its export business, and the deals with China which will be a serious revenue and earnings source for many years, and you can see why Gazprom should continue to surprise to the upside.

As for the ruble, it's under pressure from low gas prices, but when it moves up again, it will take the ruble with it. That means, unless the ruble really soars in response to a rise in gas prices, margin and earnings should continue to do very well.

In the meantime, it's good entry point for Gazprom, and if you believe there is more room for gas prices to drop, it'll get even better. But as it is, this is a great time to think seriously about taking a position in Gazprom, as risk/reward is aligned nicely.

Tuesday, August 25, 2015

China Loading Up On Depressed Commodities

While the demand for commodities in China without a doubt has been weak, that doesn't mean China isn't a buyer in this market, because it is.

What must be understood is the demand now isn't domestic or for exports, but from the fact the prices have fallen so much, China, as it has done historically, is buying up the resources at bargain prices.

When measured by customs data, there are at least 21 commodities China has increased imports in by over 20 percent in July, according to Reuters.

Agricultural imports were especially strong, "with wheat up 158 percent, barley by 67.9 percent, corn by 1,184 percent, cassava by 28.5 percent, rice by 78.2 percent, soy oil by 25.8 percent, palm oil by 53.3 percent, natural rubber by 70.1 percent and sugar by 72.7 percent."

Crude oil imports jumped 29.3 percent in July.

Metals were also strongly represented. Molybdenum imports climbed 139.8 percent; uranium was up 227 percent; zinc ores up 84.5 percent, and silver up 63.3 percent, among others.

Among major commodities, copper ore and concentrates increased 7.2 percent, and iron ore imports were up a modest 4.4 percent.

What was also interesting in this was China's decision to increase imports at a time its currency was extremely weak. While low prices were definitely a part of the impetus, a declining yuan also had to play a part. If the currency loses more value, the cost of imports would rise even if commodity prices remained stable.

It looks like China was pressed into acquiring the depressed commodities before its currency weakened further. Or course China knows what its policy is going to be, and it's possibly a nod to further debasing of its currency after it buys the commodities it wants at low prices.

Thursday, August 20, 2015

Gold and Silver May Be About to Launch into Orbit

A lot of gold investors have been scratching their heads over the inability of the precious metal to gain traction during a period of time when many underlying fundamentals should have supported the price of the yellow metal.

I don't think that's going to be the case for too long, as the underlying cracks in the global economy are starting to reveal themselves, as Asia is getting economically crushed, led by weakness in China, as well as Japan.

The U.S. has enjoyed a prolonged period of smoke and mirrors with its economy, which in light of the global slowdown, will soon be exposed as well.

This is preparing for a resurgence in the price of silver and gold, and those positioned to take advantage of that, could have one of the most explosive period of growth in this sector they've ever had.

As the stock market showed today, investors are very fearful of the bull market, which anything negative sends them scurrying to the sidelines, as bargain hunters scoop up their shares.

We're only just beginning to see this major correction and early stages of the next recession, and the combination of the deflating of the bull market and economic weakness ensures gold and silver are going to enjoy a long and profitable upswing.

I'm already in with my investments. It's now time to look seriously at allocating capital to the two precious metals before prices really take off.

Thursday, August 6, 2015

An Opportunity Of A Lifetime For Some Oil Investors

Headlines like the one screaming the oil crash has caused losses to date of about $1.3 trillion, should be ignored by those that weren't affected by the disaster, as it has brought about opportunities rarely seen in one's investing lifetime.

The demand for oil is never going to go away, and the price it is now at won't remain at that low level for a long period of time. Producers will simply cut back until the price starts to rise to a level that is profitable to them. That of course has already happened, and it will take time until the effect of it works its way through the market.

read more

Tuesday, August 4, 2015

U.S. Economy Failing to Meet Expectations

As has been the case for the last ten years or so, the U.S. economy continues to grow at a rate that has failed to meet expectations. The recently released numbers from the Commerce Department show GDP growth is at only 2.3 percent, significantly below the expected 3 percent being looked for.

It has been a full decade since the last time the GDP has grown above a 3 percent rate, making it the weakest recovery in about 70 years. Economic growth hasn't surpassed the 3 percent mark since 2005, according to the Commerce Department.

more on U.S. economy

Why U.S. Dollar Will Remain Strong in the Near Term

There has been some confusion among those interested in the U.S. monetary policy and why the U.S. dollar has remained strong even as the Federal Reserve created enormous amounts of money out of thin air. Under normal conditions that would have put downward pressure on the value of the greenback.

Since economics are no longer operating under normal conditions, neither will the usual performance of the U.S. dollar; and it hasn't.

read more 

Friday, July 24, 2015

Turquoise Hill Will Be A Long-Term Winner

At a time when it appears there is nothing to stop the disintegration of the commodity bear market, my outlook for Turquoise Hill (NYSE:TRQ) remains strong.

My reasoning is I believe commodities are closing in on their lows in general, and are likely to begin a rebound in the not-too-distant future. But even if there is more downside to come for an extended period of time (meaning about a year or so), I don't see it having a negative impact on those holding a position in Turquoise Hill for the long term. That's because of the timing of the completion of the second phase construction at its flagship property Oyu Tolgoi.

Another reason is gold is going to get a hefty rebound once it bottoms out, and that is the second-most important metal at Oyu Tolgoi, behind Copper. Rounding out the top three is silver.

read more on Turquoise Hill