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25.05.2020

Monthly Agenda May 2020 – Alternatives


Iron ore prices have rallied strongly over the last month, up over 15% in May as stronger than expected demand from China coupled with disruptions to supply from the world’s second largest producer of the metal, Brazil, have helped push prices higher.

Exports from Brazil have been greatly hampered in recent weeks as the South American nation struggles to deal with the spread of Covid-19 throughout the country. Vale, Brazil’s largest producer of iron ore said it will struggle to meet expected production figures as a result.

Iron ore port inventories are at their lowest levels since 2016. 

Chart 14: Iron Ore Price and China Port Inventories

Enlarge Source: Bloomberg

The underperformance of the property sector has been well flagged as A-REIT prices have fallen further than the broad index, industrial had been the outperformer coming into the crisis and remains the most resilient area within property.  Reported collection rates in retail are ranging from as low as 20% to 65% for April with May expected to be much the same. Growth in net operating income had already begun to fall significantly pre Covid-19 and will likely come under further pressure as tenants struggle to generate revenue at this time.

Chart 15: A-REITs Year to Date Performance

Enlarge Source: Bloomberg

The number of oil and gas rigs operating in the US has dropped by more than 50% from its March peaks with analysts forecasting further declines. Although we observed a slight recovery in oil prices in recent times, the commodity remains volatile and well below the break-even price range of US $48 to $54 per barrel. The sector has already cut $53bn from planned spending of $130bn this year. The fall in oil prices below its breakeven level is leading to widespread job losses and bankruptcies in the US shale industry. According to the Federal Reserve Bank of Kansas City, nearly 40% of drillers would be insolvent before the year was out if WTI averaged $30 per barrel.

Chart 16: Baker Hughes US oil and gas rig count

Enlarge Source: Bloomberg

 

Darragh Kennelly
Investment Analyst

 

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