No Pain, No Gain?

No Pain, No Gain?

Between 2H15 and 3Q16, the Chinese demand-driven and U.S. shale gas-fueled commodities supercycle entered free fall. As crude plunged by two-thirds in the span of mere months in 2015, oil futures dragged down the value of other commodities and a wide variety of ancillary asset classes. The resulting retrenchment has led to a staggering $1 trillion in aggregate CAPEX cuts over five years as well as $67 billion in energy patch bankruptcies, and with that, concomitant pain for the core industrials sector, with countless tons per year of mothballed industrial capacity and idle iron gathering in yards.

Now, heading into 2017, investors are sharply divided: is the global economy — which the IMF estimates will recover to 3.4% in 2017 — due for another recession or will the U.S. growth engine rev up soon following the election? Will India pick up China’s slack, and might the Eurozone even shake off Brexit fears? Will commodities mean-revert in 2017? Are industrial fundamentals on the mend? Or are we due for another inning of pain? In simplest terms: is the worst behind us or yet to come?

Coleman’s Energy & Industrials analyst team has followed the supercycle and capacity glut from peak to trough, and on several recent hosted events, has identified reason for optimism/pockets of continued resilience even while recession risk and decades worth of overcapacity weigh heavily on sector shares. While the team’s outlook remains cautious, the following few segments do represent select areas of opportunity where trader sentiment is unmistakably bullish.

  • 62% iron ore fines — benchmark prices up 30% YTD as China rationalizes its steel mills and as Chinese consumers buy SUVs en masse, which require flat rolled steel and in turn iron ore; BHP’s chief economist Huw McKay predicts that Chinese steel consumption will intensify to “reflect its maturing economic structure and ‘consumerization’, symbolized by increasing car ownership.” The question, as always, is whether this momentum will be sustained, a topic Coleman’s Hosted Events Energy & Industrials team discussed on a recent call.
  • TiO2/pigments/masterbatches — with Chemours’ (CC) much-vaunted Altamira production plant coming online, and with beleaguered Tronox (TROX) appearing to have a turned a corner with sequential growth across both the TiO2 and soda ash/alkali units, the industry — often considered a leading indicator of economic growth — seems to be shaking off its overcapacity woes and returning to profitable growth. The question here is whether TiO2 producers may jump the gun, raise output, and behave in a self-defeating manner, a topic Coleman’s Hosted Events Energy & Industrials team discussed on a recent call.
  • Natural gas/LNG exports — with an end in sight to the natural gas glut, with Golar (GLNG) shares up 51% YTD, with Cheniere’s (LNG) recent regulatory clearance to kick off Train 2 at the Sabine Pass terminal in Louisiana, and which Schlumberger (SLB) pursuing a major stranded gas business opportunity, there is much reason for optimism, a topic Coleman’s Hosted Events Energy & Industrials team discussed on a recent call.

We invite you to please join us on future calls where we will explore the mean-reversion theme and debate with our experts whether these and other developments are merely episodic or indicative of a firmer footing for next year’s fundamentals.