(B)(N) Extreme Economics – Steel

Figure 1: The flight to Rebar

Drama. The World is currently producing about 1.6 billion tonnes of steel every year and it retails for about $50/tonne (on average since some steels are more valuable than others) or $80 billion per year when it can find a buyer because it’s running at about 70% of capacity, and we can think of a lot of things that “produce” that much money every year much more easily.

For example, our six indifferently managed mutual funds “produced” nearly twice that much on average from money, which is neither steel nor coal but there is an “excessive” demand for it, and even if we combine global steel production with global coal production (about 9 billion tonnes at $40/tonne or $360 billion per year), we still get less than 1/2 of 1% of the World GDP (about $80 trillion).

Steel, Swords, and Plowshares

Obviously, the World is adding a lot of value to commodities and the real worry of the “economy” is not “shortages” but that we’re not “consuming” enough, fast enough, resulting in the overproduction and weak demand for “commodities” and the many millions of incomes and jobs that they create at every level of skill from coal to iron ore to stainless.

China has produced about 25% of the World’s steel since 2009 and 50% last year but China is still short of rebar (Bloomberg, April 22, 2016, China’s Great Ball of Money Is Rushing Into Commodities Futures) and the table in Figure 1 above tells the story of the feeding frenzy in steel and it is the likely harbinger of commodities stocks in every market, most recently in mining and agriculture (Reuters, May 23, 2016, Bayer defies critics with $62 billion Monsanto offer).

Figure 2: Iron, gold, potash, hogs – you name it.

An easy way to work the commodities market is through an ETF (Exchange Traded Fund) which is just an index fund geared to the price and volume of futures contracts in commodities – you name it, they’ve got it – and we can do that as a (B)-class portfolio with “no risk”; however, there is a problem in obtaining an “income” from these funds because “unrealized capital gains” won’t sustain us for long; please see Figure 2 on the right for more “exposure” to “burning” in commodities and our recent Post “(B)(N) What’s A Girl To Do” for more examples how we work mutual funds and ETFs no matter what they promise.

But the commodities markets are far from transparent and the experts and specialists who can make money in these markets on the day-to-day are unlikely to pass it on to us; so our problem today is to work in yet another market that nobody likes – steel – by buying and selling the companies that make it.

Steel, Swords, and Plowshares

And the reason that we need to do that is that all the markets will look like the steel market in the absence of excessive or feverish demand and the excess of ready supplies on demand at low prices.

Does that sound familiar already?

The World Steel Market has dozens of companies in it and many of them are privately or nationally owned and sustained, and we’re following twenty-two of the public companies in which the total assets ($1.3 trillion) are 70% owned by two Chinese companies, CITIC and Angang Steel (and there are even more which trade more or less exclusively in Shanghai and Shenzhen); however, the aggregate return on the shareholders equity was minus (-1%) last year and they’re trading today for $174 billion which is only 70% of their net worth ($248 billion) and they lost ($2.6 billion) last year.

But that’s not the whole story and we’re loading-up on them now, not for speculation but for an income that is more enduring than today’s “Wall Street Flash” and a global economy in which the “price of money” is zero; please see Exhibit 1 below for the cutting edge details.

Exhibit 1: The Steel Story

For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on Green Energy and The Coal War; the Canadian Mines have also taken-off – please see our recent Post “(B)(N) Extreme Economics – The (New) Canadian Mines” for a heads-up on that.

And for more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
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For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.