In every credit cycle when interest rates rise and inflation or recession is heard to be coming, the major banks make plans for greater loan losses. If the number is low, the bank makes bigger profits, if the number is high, the bank makes less profit. Given that every economy moves on ease of credit, the banks will determine which companies to slow credit to, similar to most industries the small and medium sized companies tend to see it first. It is why, politicians will say the system needs to change, but it rarely does because someone has to guarantee the credit. Usually, the large organizations are the last to have credit cut but it does happen.
In an article by Eric Onstad, Patima Desai and Peter Hobson of Reuters, the largest bank in the US JPMorgan Chase has reduced lending to China’s Tsingshan, one of the world’s largest nickel producers.
JPMorgan Chase is one of the biggest banks in the metals industry which tends to mean they should have better information than anyone in the business and when they cut back, it sends a signal which is not good. Not surprisingly there were few comments from JPMorgan. JPMorgan has cut credit or serve notice they will cut credit by the end of the year to several customers in Asia and Europe, besides Tsingshan.
In March, Tsinghan Holding Group was at the center of a crisis at the London Metals Exchange when Tsinghan was speculating prices would drop, however nickel prices doubled in a matter of hours. The LME halted trading and did the unusual step of cancelling billions of dollars in deals thus saving the industry. The action threatened to push some banks and brokers into default and JPMorgan took a $120 million loss provision.
Linking to dividend paying stocks, all commodities trade on exchanges and normally the markets are regulated, and everyone can see the information if desired. If you own investments in the commodity business, it is good to know how the commodity is traded and where it is traded. For all commodities there are the users and speculators in the market and the market needs both, however if one group gets ahead of itself, the other suffers for there is usually a balance. For your investments, you need to know where the company makes money and if the price of the commodity is higher, than you need to do little but wait for the profits to translate into dividends. When the price falls below you need to find alternatives till the commodity price moves above.
There are more questions than answers, till the next time – to raising questions.