Killing Chickens

By Derek On January 31, 2012 Under Broker Notes, Post

“Sometimes you have to get to know someone really well to realize you’re really strangers.”  - Mary Tyler Moore

The slow motion train wreck that is Greece has reached a very interesting point with Germany throwing down the gauntlet and insisting the Greeks give up sovereignty in order to receive their desperately needed (second) 130 bn euro bailout in March. Of course, the Greeks are up in arms over this and any politician that agrees to such a demand from a foreign power is signing his own death sentence. Implications:

1)       Germany is now willing to see Greece out of the Euro zone

2)       Germany is sending a strong message to the PIIGs (as the Chinese say, “Kill the chicken to scare the monkey”).

Angie” by the Rolling Stones, will be the song they start singing on the rocky streets of Athens:

“….Angie, you’re beautiful, but ain’t it time we said goodbye?

  Angie, I still love you, remember all those nights we cried?

  All the dreams we held so close seemed to all go up in smoke…”

The other unusual move in recent days by Germany that also oversteps normal boundaries of sovereignty is that Merkel has announced she will go on the campaign trail with Sarkozy to help him win re-election in France! I guess this makes sense on one level since the two are known now as “Merkozy” anyway….


Our roving commodities team of Henry Liu and Shirley Zhao went underweight China’s thermal coal market in November and that call proved to be well timed with domestic prices falling 10% since then. Now at Rmb 780 a ton, coal prices are the lowest in over a year. In the last couple of weeks the Newcastle spot price of coal has rallied and has risen above the domestic price. Henry and Shirley are saying we are near the bottom of thermal coal prices. Look at this chart which shows the historical pattern of domestic coal prices when import prices reach a premium:

Other reasons supporting their view that this is the bottom (or close to it) is the bottleneck of coal transportation in the rail network still persists and will for another 1 – 2 years. Finally, coal inventories have fallen at IPPs and they are accumulating again.

Stock implications:


Yanzhou Coal (1171 HK), the thermal coal producer most geared to spot prices.


Sell the IPPs which have had a nice rally on the back of falling coal prices and a recent tariff hike.

Huadian (1171 HK) is the most sensitive to coal cost and that stock is up 72% from its October low.

Huaneng ( 902 HK) is the second most sensitive to coal prices; the stock is up 49% from its October low.


Derek Hillen, CAIA

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