Credit Crunch Makes Everything Local

Why The Credit Crunch Will Make Everything More Local

Date 29/08/2008

The Right Side

Garry White

Money makes things happen. At the moment there is a lack of access to money. So, things aren’t happening.

People are not moving house. Companies are trying to cut their debt. Raising new cash is a nightmare.

That’s why I felt a bit sorry for a chief executive I met yesterday.

His company is trying to develop a copper mine in Southern Africa. The business looks interesting. The chief executive is a competent and experienced man.

His utter belief in the prospects for this business means he owns almost 8% of the equity personally. But he has a problem. A big one.

The company has no producing assets. This means it is not generating cashflow. And it is rapidly burning cash.

The company only has enough money left to get through the next couple of months. But it will take years before it can become a viable producer.

So he has to raise funds in the next eight weeks or so. I wish him luck.

Another vital part of the commodity chain is experiencing the same problem. It is going to hit the industry for years to come and is going to force consumers of commodities to look much closer to home.

If they can find them.

It means that any company – like one particular stock I have in my portfolio – in which have access to supplies of key commodities close to their point of use will be laughing all the way to the bank.

The shipping news is good

It’s all to do with boats. Or dry-bulk shipping to be exact.

Dry bulk ships are essential for any resource business. They transport the coal, iron ore, or copper from where it is mined to where it is used.

I expect that the cost of transporting key commodities across the world by ship is going to soar over the next few years – and a research report issued by Morgan Stanley yesterday has confirmed my view.

Companies that have to ship their goods for thousands of miles are going to see their profits squeezed.

“Anecdotal evidence from shipping industry participants indicates that up to 75% of newbuild orders across all ship types may not have secured financing and 30% ($150bn) of the newbuild orders could face a shortage of debt financing.”

It also noted that even the biggest and best shipyards in the world were struggling to complete orders on time due to a shortage of engine parts. Delays are now an integral part of the shipbuilding business.

All of this means that $22.7bn of newbuilding dry bulk contracts face cancellation over the next three years.

This is around 7% of the total tonnage, which may appear insignificant. But with the industry being overstretched at the moment, even marginal changes will have a significant cost effect… and the situation could be worse than Morgan Stanley thinks.

Most shipyards are unlisted companies. That means they have no obligation to announce order cancellations. This means that cancellations are likely to be significantly higher than those looked at by Morgan Stanley.

And it’s not just cancellations you need to consider…

Delivery delays are also expected to affect around 20% of the global scheduled order book.

All of this means that the new shipping capacity expected by the market is not going to happen. This is good for companies that already own ships, but bad for purchasers of commodities from faraway places.

The company in my portfolio set to benefit from this trend is producing already, which means it has cashflow. Its resource is in the right location and can be transported to its customer with relative ease.

The local aspect of the business makes it very attractive indeed. To discover more click here.

Regards

Garry White
Editor
Smart Commodities UK

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