Mark Latham Commodity Equity Intelligence Service

Monday 15th May 2017
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    Is A Chinese Recession Imminent? Yield Curve Inverts For First Time Ever

    Is A Chinese Recession Imminent? Yield Curve Inverts For First Time Ever

    While China growth has been slowing, and monetary conditions tightening, few (if any) have predicted any prolonged deflation (let alone a recession), yet overnight - for the first time ever - the $1.7 trillion Chinese bond market inverted, flashing a warning signal to the world that something is wrong.

    Early on Thursday, the five-year yield rose to 3.71%, breaking above the 10-year yield for the first time since records began - even though the latter, at 3.68%, was near a 25-month high.

    Some of the overnight weakness in the 10Y yield was eased by reports that PBOC would offer some Medium-Term Loans.

    Of course it's not just bonds that are getting dumped...

    But, as The Wall Street Journal writes, such a “yield-curve inversion” defies normal market logic that bonds requiring a longer commitment should compensate investors with a higher return. It usually reflects investor pessimism about a country’s long-term growth and inflation prospects.

    Perplexed traders and analysts offered up many excuses...

    “Many of us are scratching our heads for an explanation because this kind of curve inversion is absolutely not normal,” said Wang Ming, a partner at Shanghai Yaozhi Asset Management Co., a bond fund that manages 2 billion yuan ($289.66 million) in assets.

    “The inversion is a form of mispricing in the bond market,” said Liu Dongliang, senior analyst at China Merchants Bank . “The fact that no one is taking the bargain despite the higher yield on the five-year bond just shows how depressed investors’ mood is.”

    “It’s really difficult to predict when the selloff or such anomalies will end because China’s bond market is reacting to the regulatory crackdown only and is no longer reflecting economic fundamentals,” said China Merchants Bank’s Mr. Liu.

    But of course, the reality is - without massive and contonued credit creation, there are very large questions about just how 'dynamic' Chinese growth could be and while technical flows are certainly part of the reasoning for 5Y yields rising, the question is, why wouldn't the rest of the world pile in to 'reach for yield'... unless the fundamentals really did have them worried?
    MGL Comment
    The authorities are squeezing the private sector. Surely in inverted curve is evidence of 'brakes' being applied via the bank system rather than slowdown per se? 
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    China's power use increases in April

    China's electricity consumption, an important indicator of economic activity, increased significantly in April, suggesting economic improvement, official data showed Friday.

    Power use rose 6 percent year on year to 484.7 billion kilowatt-hours in April, according to data from the National Energy Administration.

    In April, electricity use by primary industries dropped 1.1 percent year on year. Power consumption by secondary industries went up 5 percent, while tertiary industries saw a 12.7-percent rise amid economic restructuring.

    In the first four months, power consumption rose 6.7 percent from the same period in 2016 to 1.93 trillion kWh, data showed.

    Electricity use in the service sector rose 8.9 percent in the first four months, while the industrial and agricultural sectors saw increases of 6.9 percent and 6.7 percent, respectively, according to NEA.

    The rates reflect positive changes in China's economic structure, as power use in the service sector grew faster than the industrial sector.

    Attached Files
    MGL Comment
    There's a real mix shift apparent in China now. Primary, which is generally commodity related, doing nothing, but tertiary, the consumer, making all the running. Which does leads you directly to the property market doesn't it?
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    Wooing investors after Elliott, BHP boss to play up shale

    BHP Billiton CEO Andrew Mackenzie, batting off an attack by activist funds, will tell investors in Barcelona next week that the top global miner can pump more for less out of its unloved shale assets.

    But don't expect a fresh public response to the attack by hedge fund Elliott Management, which last month called for an overhaul of BHP's structure.

    "You are not going to see a rebuttal to Elliott," said a source close to BHP, who was not authorised to speak publicly about the matter.

    Mackenzie, among the executives due to address a Bank of America Merrill Lynch mining conference next week, will outline how BHP is increasing output and cutting shale drilling costs, gaining better acreage by trading assets, and extending its reach by partnering with other players, the source said.

    Elliott is pushing a three-point plan to collapse BHP's dual-listed structure, spin off its US oil and gas assets, and boost returns to shareholders - all of which BHP has rejected.

    Sydney-based Tribeca Global Natural Resources Fund last week called for a board shake-up and a sale of the shale assets.

    The idea that has gained the most traction among investors contacted by Reuters is that BHP should rethink its involvement in US oil and gas.

    The source close to BHP said the company is also conscious that the oil and gas argument has generated the most discussion.

    However, investors differ over the timing of any sale and whether BHP should pursue a trade sale of the shale assets, a public listing of all of its US assets, as Elliott has suggested, or even a total exit from petroleum.

    BHP says oil and gas is core to its strategy, with good growth, strong margins and fewer market-share obstacles to acquisitions compared to its iron-ore, copper and coal arms.

    Outgoing BHP chairperson Jac Nasser said earlier this month that the petroleum business, including deepwater oil assets in the Gulf of Mexico, is the company's highest-margin business.

    A BHP spokeswoman and a spokesman for Elliott declined to comment on the address or sideline meetings. It was unclear if Elliott would be travelling to Barcelona.


    "Oil as an asset has actually been good as part of the overall BHP portfolio," said Argo Investments portfolio manager Andy Forster, a top 20 investor in BHP's Australian arm.

    "It's just unfortunate they went and bought the US shale assets. Potentially over time they maybe should get out of the US shale business, but I just don't think now's the time to do it."

    BHP paid $20-billion for the US shale assets, bought in 2011 and 2012, but the subsequent collapse in oil and gas prices forced it to write down the value by $12.8-billion.

    The company last month said it had put its Fayetteville assets in Arkansas, bought for $4.75-billion but now valued at $919-million in its books, back on the block.

    Elliott is "not convinced that the piecemeal sale of little bits of assets is the best way forward," a source close to the activist fund said.

    London-based Bernstein analyst Paul Gait said Mackenzie needed to prove that oil majors like ExxonMobil Corp were not "missing a trick" in lacking mining divisions.

    "If they are not, then BHP is mistaken in its ownership of oilassets and Elliott is right. Basically, either BHP is right on this or every major oil company apart from them is wrong."
    MGL Comment
    Even if we were to suppose the BHP managed to up its game in the Oil shale to peer group standards, then mining investors will instinctively dislike it intensely. Oil investors will never go to BHP for oil flavour. What, to our mind would be a mistake is to focus on the shale alone, in our view it's the of the best assets in that portfolio. Shaving out the shale just leaves BHP with a BP like 'also ran' set of offshore assets, that frankly look almost blighted. The only possible rescue for the offshore is the development of shale based FPSO/subsea exploitation, and for that you will need shale expertise. It's all or none here. 
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    Australia's BHP heads back to roots, drops Billiton from its name

    Australia's BHP heads back to roots, drops Billiton from its name

    One of the last reminders of a merger 16 years ago that created the world's biggest mining house will be erased on Monday when BHP Billiton changes its name back to just BHP.

    Dropping the Billiton reflects a move to simplify its corporate structure, the company said, and return to its founding roots in Australia more than a century ago, when it was known as Broken Hill Proprietary Co Ltd.

    BHP, which has operations in 25 countries, will retain its dual listings in Australia and London.

    BHP head of external affairs Geoff Healy dismissed suggestions that the name-cropping is in response to a call by activist shareholder Elliott Management for the miner to scrap its dual-listing mechanism in Sydney and London and spin off assets, specifically its U.S. shale oil unit. "There is zero connection with Elliott's proposals," Healy said. "We've been doing this for 18 months."

    The company is spending an initial A$10 million ($7.4 million) on an advertising campaign in Australia to promote the shortened name.

    The merger of BHP and South African mining house Billiton in June 2001 created a company with an initial enterprise value of $38 billion. The joining, however, came to be widely regarded by analysts as value-destructive, even during the China-fueled boom years at the end of the last decade.

    Most of the original Billiton assets were included in a 2015 spin-off, South32, and no longer contribute to the company's bottom line. South32 was initially derided as a compilation of BHP Billiton's most unwanted assets, but it has frequently outperformed the parent company.
    MGL Comment
    We're pretty sure this is not what Elliott had intended. 
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    China, India plans for electric cars threaten to cut gasoline demand

    Demand for gasoline in Asia may peak much earlier than expected as millions of people in China and India buy electric vehicles over the next decade, threatening wrenching change for the oil industry, oil and auto company executives warned.

    They said refiners should prepare for a future in which gasoline, their biggest source of revenue, will be much less of a cash cow.

    Change is being prompted by policy moves in India and China, where governments are trying to rein in rampant pollution, cut oil imports, and compete for a slice of the fast-growing green car market.

    In its "road map", released in April, China said it wants alternative fuel vehicles to account for at least one-fifth of the 35 million annual vehicle sales projected by 2025.

    India is considering even more radical action, with an influential government think-tank drafting plans in support of electrifying all vehicles in the country by 2032, according to government and industry sources interviewed by Reuters late last week.

    "We will see a clear shift to electric cars. It's driven by legislation so electric cars are coming, it's not a niche anymore," Wilco Stark, vice president for strategy and product planning at German car maker Daimler (DAIGn.DE), told Reuters.

    Stark and other executives were interviewed during the Asia Oil & Gas Conference in Kuala Lumpur this week.

    Daimler sees electric vehicles contributing 15-20 percent of its overall sales by 2025 and at least an additional 10 percent of sales coming from hybrids, he said.

    Electric cars currently make up less than 2 percent of the global car fleet, and any faster-than-expected growth in that percentage will materially impact oil demand and the refining business.

    "Technology is moving fast. In 10-15 years... our gasoline market might not be the same as it is today," said Dawood Nassif, board director at the state-owned oil company Bahrain Petroleum Company (BAPCO).

    With gasoline responsible for up to 45 percent of refinery output, and one of the highest profit-margin fuels, a slowdown or fall in demand will have far reaching implications.

    Credit agency Moody's says that the fast pace of technological development makes accurate predictions difficult, but warned that direct financial effects from falling oil demand, including gasoline, "could be material by the 2020s."

    The changes are so big that the influential International Energy Agency (IEA) plans to revisit its analysis of electric vehicle trends and oil demand.

    "The choices made by China and India are obviously most relevant for the possible future peak in passenger car oil demand," an IEA spokesman told Reuters.

    In its current policies scenario, last updated in November 2016, the IEA still expects oil demand from vehicle use to rise until 2040.

    It's not just China and India that are changing fast.

    Asia's major car makers, Japan and South Korea, already sell significant volumes of hybrid vehicles - which operate off gasoline and electricity - while fuel efficiency gains will continue to cut gasoline consumption for standard vehicles.

    There will, though, be some major hurdles before a country like India goes mostly electric. High battery costs would push up car prices and a lack of charging stations and other infrastructure in India means car makers may hesitate to make the necessary investment in the technology.


    Asia has long been the main driver of future oil demand thanks to supercharged growth in sales of autos.

    China sells more than 2 million new cars a month aCNDSLSAUT and is challenging the United States as the world's biggest oil consumer. India now is the world's third-biggest oil importer, ahead of Japan.

    More than a third of the world's refineries are in Asia, up from just 18 percent in 1990.

    For refiners, the growth of vehicles that run on electricity and other alternative fuels is a wake-up call. They can tweak the products they make from crude oil to an extent, but still mostly rely on gasoline consumption for revenue.

    "Rising pressure on margins and cash flows will potentially lead to stranded assets," Moody's warned, using a term for assets that no longer provide an economic return because of changes in the market or regulatory environment.

    The oil industry is taking note.

    Royal Dutch Shell (RDSa.L) said this week that it "is looking into ... the potential to introduce electric vehicle charging points at our retail sites in several countries."

    Oil executives say it is still premature to expect overall oil demand to fall soon.

    "Our industry will not disappear," said Abdulaziz al Judaimi, senior vice president for downstream at Saudi Aramco, the world's biggest oil export company.

    They are envisaging a shift towards producing more petrochemicals like plastics or household chemicals, areas where consumption is soaring.

    Saudi Aramco is jointly developing the huge Malaysian RAPID refinery and petrochemical complex with state-owned Petronas, and the two said this week they are exploring an expansion of its petrochemical capacity.

    Exxon Mobil this week said it would buy a petrochemical plant in Singapore.

    Refiners also still see strong oil demand from heavy industry.

    "Refiners may shift their focus from gasoline to middle distillates," said KY Lin of Taiwan's Formosa Petrochemical (6505.TW), a major Asian refiner. "Gasoil is used widely, including in farming/industrial equipment... and also as a marine fuel."

    Attached Files
    MGL Comment
    Even if you dismiss Li-ion electric as some kind of transition fuel, there are some serious contenders for alternative fuel cars out there:

    Mick Gilluley took his Toyota Prius to Martin Motors in Muirhead to boost its fuel economy even further by converting it to run on LPG. According to Mick, his Prius usually returned around 60mpg, so by converting it to run on LPG-which costs around half the price of petrol-he in effect boosts the fuel economy of his car to the equivalent of 120mpg.

    more realistically:

    Now, about the consumption... my LPG system starts to work when the engine reaches 15 degrees Celsius (after 2-3 seconds) and it consumes on this time some gasoline. Because of this, the gasoline tank manages to stay in my 45 liters tank about 4-5.000Km / 2.300-3.100 US/UK miles, while the consumption for LPG (including the one on gasoline) is:
    -in Bucharest/city is around 6L/100Km = 47MPG(UK) = 39MPG(US) = 3EUR/100Km!!!
    -outside city 5L/100Km = 56MPG(UK) = 47MPG(US) = 2.5EUR/100Km!!!

    Whereas we are not convinced Li-ion full electric has as much future as the Tesla price implies, there are plenty of interesting alternative fuel technologies arriving on our roads today. It's just not clear which one makes it to prime time. 

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    Fortis to buy Teck Resources' stake in British Columbia dam for $875 mln

    Canadian utility Fortis Inc said on Friday it would will buy Teck Resources Ltd's two-thirds stake in the Waneta dam in British Columbia as well as any related transmission assets for C$1.2 billion ($875 million) in cash.

    A Teck unit will then get a 20-year lease to use the assets to produce power for its Trail Operations, the company's zinc and lead smelting and refining complex in southeastern British Columbia, the companies said in a joint statement.

    Vancouver-based Teck, which primarily mines coal, zinc and copper, said last September it was considering selling some infrastructure assets, including the Waneta Dam and the Ridley coal terminal in British Columbia.

    Teck, which has been using cash flow and profit to cut debt, had debt of $5.1 billion at the end of the first quarter.
    MGL Comment
    That $875m, not coincidently, will nearly extinguish the EPA settlement figure for pollution related claims of cleaning the river.
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    Oil and Gas

    Saudi Arabia, Russia agree oil output cuts until March 2018

    Saudi Arabia and Russia, the world's two top oil producers, agreed on Monday to extend oil output cuts for a further nine months until March 2018 in a bid to erode a global crude glut, pushing up prices.

    The timing of the announcement ahead of OPEC's next official meeting on May 25 and the statement's strong wording surprised markets, and the move will go a long way to ensure that other OPEC members and other producers who participated in the initial round of cuts fall into line.

    In a joint statement that followed an earlier meeting, Saudi energy minister Khalid al-Falih and his Russian counterpart Alexander Novak said they had agreed to prolong an existing deal by another nine months until March 2018.

    The ministers pledged "to do whatever it takes" to reduce global inventories to their five-year average and expressed optimism they will secure support from producers beyond those in the current deal, the statement said.

    "There has been a marked reduction to the inventories, but we're not where we want to be in reaching the five-year average," said Falih at a briefing in Beijing alongside Novak.

    "We've come to conclusion that the agreement needs to be extended."

    Under the current agreement that started on Jan. 1, the Organization of the Petroleum Exporting Countries (OPEC), and other producers including Russia pledged to cut output by almost 1.8 million barrels per day (bpd) during the first half of the year.

    Saudi, the defacto leader of OPEC, and Russia, the world's biggest producer, together control a fifth of global supplies.

    While it was broadly expected that OPEC and Russia would agree to extend the cut, the timing and wording of the statement sent crude prices up more than 1.5 percent in Asian trading.[O/R]

    "I think OPEC and Russia recognize that in order to get the market back on their side they will need 'shock and awe' tactics where they need to go above and beyond a simple extension of the deal," said Virendra Chauhan, Singapore-based analyst at Energy Aspects.

    "The market will also be looking at export cuts and not just production cuts, which is what is required to rebalance the market."

    Major producers had been forced to consider lengthening the cuts as crude futures LCOc1CLc1 have languished around $50 per barrel as markets remain well supplied even after the current deal.

    An OPEC source familiar with the market situation told Reuters earlier on Monday that oil inventories in floating storage have declined by one-third since the start of the year.

        Russia and Saudi Arabia together control around 20 million bpd in daily output.
    MGL Comment
    Oil's near 2% rally on this news is mainly relief that the two largest producers could agree the obvious. Rosneft, crucially, said the other day they would abide by any instructions they were given. The 'do whatever it takes' line from Falih is a tough ominous, it is suggestive that Russia and Saudi also quietly agree the need for a $40 handle.  It will be interesting to see whether the rally runs into a shale wall of hungry US E&P's whose hedge books are looking a little short dated, and on the light side. 
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    Russia sees oil market balance in winter if cuts deal extended: agencies

    Global oil markets will reach a supply-demand balance in late 2017 or early 2018 if a pact to cut output is extended, Russia's energy minister was quoted by local news agencies as saying.

    "Judging from the current dynamics in the decline of the oil and oil products inventories, the markets will see such decline in inventories by the end of 2017 - early 2018, which will lead to cuts in inventories to a five-year average," Alexander Novak was quoted as saying.

    The Organization of the Petroleum Exporting Countries and other producers including Russia pledged to cut output by 1.8 million barrels per day (bpd) in the first half of the year to lift oil prices.

    But global inventories remain high, pulling crude back below $50 per barrel earlier this month and putting pressure on OPEC to extend the cuts to the rest of the year.

    Novak told the agencies that OPEC countries and other leading oil producers would discuss extending the deal in the second half of the year or "maybe further than that".

    He also said that he expected the parameters of the deal to be unchanged, meaning deeper cuts were unlikely.

    OPEC and industry sources said there had been discussions about extending curbs until the end of the first quarter 2018, when crude demand is seasonally at its weakest.

    Novak added that Russia would keep output cuts of 300,000 barrels per day from the level of October 2016 as stipulated by the December 2016 deal, he added.

    He said that Russia's oil output forecast of 549-551 million tonnes for this year remained the same but could change depending on the outcome of oil producer nation talks in Vienna later this month.
    MGL Comment
    So this time the bulls will say:
    ~We depleted all the 'black inventory', (OPEC floating, Caribbean tanks, tertiary product inventory etc)
    ~Demand is ok, and the shale has depleted the 'good stuff' i.e high graded.
    ~Therefore service pricing will rocket, and the the shale wall will move to $60 odd.

    We're not so sure.
    ~The main shortage in the shale space is not equipment or labour, but equipment and labour in the right place.
    ~We've been picking up all year the surge in hotel activity around Midland Tx, and on craigslist Odessa, this is mobilisation of the workforce.
    ~Evidence of service 'inflation' remains thin, but hope reigns eternal, and I am sure the OIH will give you a good bounce. 
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    Floating oil storage has dropped by one-third in 2017: OPEC source

    Global oil inventories in floating storage have declined by one-third since the start of the year, a source from the Organization of the Petroleum Exporting Countries told Reuters on Monday.

    The drop in stockpiles is the latest sign that output cuts by major producers have helped deplete a global glut.
    MGL Comment
    Off hand, I would be inclined to suggest that this is disappointing. Floating storage is expensive, and should have borne the brunt in any contraction in inventory. 
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    Caspian oil pipeline eyes massive expansion thanks to new oilfields

    The Caspian oil pipeline is seen boosting its capacity this year by around 47 percent thanks to new oilfields in the region including the giant Kashagan deposit in Kazakhstan, the consortium's director general, Nikolai Gorban, said on Friday.

    Oil exports via the Caspian Pipeline Consortium (CPC) rose by 3.6 percent to 44.3 million tonnes in 2016 and are expected to grow to almost 65 million tonnes (1.3 million barrels per day) this year.
    MGL Comment
    400kbpd gross Boee from Kashagan, which has finally sorted out its plumbing issues. 
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    Nigeria's Forcados oil pipeline said fully fixed, ready to ship

    Nigeria's Forcados oil pipeline said fully fixed, ready to ship. 2 Forcados cargoes to load in May + another cargo CIF Europe offered for June/July. sources.

    MGL Comment
    200kbpd returns. 
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    Tidewater in bankruptcy deal to eliminate $1.6B in debt

    Tidewater, one of the world’s largest offshore vessel owners, has entered into a debt restructuring support agreement with certain consenting creditors.

    The U.S.-based vessel company has entered into the deal with lenders under its Fourth Amended and Restated Revolving Credit Agreement, dated as of June 21, 2013, and holders of Tidewater Senior Notes to put into force a proposed prepackaged plan of reorganisation of the company.

    The plan, that includes Tidewater and some of its subsidiaries filing for Chapter 11 bankruptcy by May 17, will, the company says, substantially deleverage its balance sheet and better position Tidewater “to weather the extended downturn in the offshore energy industry while maintaining the company’s position as a worldwide market leader in offshore vessel services.”

    The prepackaged plan has the support of the company’s lenders holding 60% of the outstanding principal amount of loans under the credit agreement and holders of 99% of the aggregate outstanding principal amount of Tidewater’s Senior Notes. Tidewater expects that it will eliminate approximately $1.6 billion in principal of outstanding debt.
    MGL Comment
    Creditors end up with 95% of the equity. New pro-forma market cap is $800m. Tidewater's  marine supply business has fallen 70% in revenue terms since 2014, and this figure includes long term contract roll off. We're cannibalising the Oil service industry now, and I seriously doubt the Oil Service index, the OIH, can endure the pain. 

    We would still want to trading the OIH on the short side. 
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    Japan’s spot LNG prices continue to drop

    The average price of spot LNG for delivery into Japan that was contracted in April 2017 was at US$5.7 per mmBtu.

    According to the monthly report from the Japanese Ministry of Economy, Trade and Industry (METI), the contract-based spot price dropped 9.5 percent from $6.3 per mmBtu recorded in March.

    Compared to April 2016, when the ministry reported a contract-based price of $4.2 per mmBtu, spot LNG price rose over 35 percent.

    The price of spot LNG arriving into Japan during the month of April 2017 also dropped in comparison to the previous month.

    According to the data, the arrival-based price reached $5.9 per mmBtu in April 2017, down 21.3 percent from $7.5 per mmBtu reported in March 2017.

    However, in comparison to April 2016 when the ministry reported the arrival-based price of $5.8 per mmBtu, the price of spot LNG has risen 1.7 percent.

    Only spot LNG cargoes are taken into account in this assessments, excluding short, medium and long-term contract cargoes, as well as those linked to a particular price index.
    MGL Comment
    For your average LNG producer that's likely a P&L loss, and a 70c 'cash' margin. It is 35% better than last year, but in that 12 months period, another 5% of the market has likely dropped from contract to spot (2% decay/3% volume growth HH related prices for the most part.)
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    Gazprom hopes to agree in 2017 main terms of gas exports to China from Russian Far East

    Gazprom hopes to agree in 2017 the main terms of natural gas exports to China from the Russian Far East, the CEO of Russia's state gas giant Alexei Miller said on Sunday.

    The gas supplies from the Russian Far East are considered to be an extension of an already signed 30-year contract on exporting of 38 billion cubic meters of natural gas to China from Siberian deposits, Miller told reporters in Beijing.
    MGL Comment
    Now the original contract was around the $12 level, which at the time, rocked the LNG industry badly, because they were licking their chops at selling LNG to the Chinese for $15. Today, and three-four years on, and LNG into China is $5-6, which means citygate at $8. So once again, Petrochina is licking its wounds on a massive implied contractual loss. 

    We simply do not believe the extension is at $12. Note over the weekend US representatives accepted an invitation to turn up at the 'belt and road' initiative, and Alaska, once again moves into focus. 
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    Qatar cargoes could weigh on Australian NWS condensate premiums

    Premiums for Australia's North West Shelf condensate could slip in May amid faltering refining margins and the recent spike in Middle Eastern spot supplies, market participants said Friday.

    Four regional condensate traders surveyed by S&P Global Platts said they expected July-loading NWS condensate cargoes to trade at between $1/b and $1.50/b premium to Platts Dated Brent crude assessments on an FOB basis.

    Two traders said that the spot differential could possibly fall below Platts Dated Brent plus $1/b, though a third one said the premium might rise to around $2/b this month.

    Chevron was said to have sold a cargo of NWS condensate for loading over June 6-10 at a premium of around $1.50-$1.60/b to Dated Brent crude assessments in the previous trading cycle.

    Regional traders said that refining margins had been trending lower with both light and middle distillate crack values tumbling to multi-month lows in recent weeks.

    "Many companies buy condensate for refining and blending purposes, not just [to manufacture] petrochemicals ... when [distillate] margins are poor, condensate market takes hit as well," said a trader with a South Korean refiner.

    The second-month gasoil/Dubai swap crack fell to $9.25/b last Thursday, the lowest since August 10, 2016, when it was $9.24/b. The second-month jet fuel/kerosene to Dubai swap crack also fell to a multi-month low of $9.79/b last week.

    "The outlook [for ultra-light grades] isn't that great," a North Asian trader said, adding that gasoline and naphtha cracks had fallen even lower.

    The second-month spread between Singapore naphtha and Dubai swaps averaged minus $2.54/b to date in May, compared with the April average of minus $1.78/b.

    For gasoline, the spread between second-month average of Singapore 92 RON gasoline and Dubai swaps averaged minus $8.82/b in May to date. Last month, the spread averaged $11.24/b.


    Asian condensate traders said the recent spike in Qatari ultra-light crude supply in the spot market could draw buyers to the Middle Eastern material.

    The regional market saw a flurry of deodorized field condensate cargoes being offered over the past several weeks due to an operational glitch at Qatar's Laffan Refinery complex in early April.

    A handful of prompt-month DFC cargoes had flooded the Asian spot market in April, while Qatar Petroleum for the Sale of Petroleum Products awarded at least five 500,000-barrel cargoes of DFC for loading in June in its previous spot tender, traders said.

    Earlier, QPSPP sold just one or two DFC cargoes via monthly spot tenders during Q4 2016 and Q1 this year.

    "I expect to see just as many cargoes offered and sold [for loading in July]," the North Asian trader said, adding that the operating rate of the Laffan Refinery complex might have dropped below 40% in recent months.

    DFC is a primary feedstock for Laffan Refinery's condensate splitters.


    Meanwhile, market sources said the preliminary July program for NWS condensate reflected a major reshuffle in the grade's loading schedule following the suspension of production at the Karratha gas plant in mid-April. The program seen by Platts showed that four 650,000-barrel cargoes of NWS condensate are scheduled for export in July.

    The Japanese consortium of Mitsui and Co. and Mitsubishi Corp., or MIMI, holds the first cargo for loading over July 1-5 while BHP Billiton has the second cargo for loading over July 9-13.

    Prior to the loading delays caused by the production hiccup, MIMI and BHP had been scheduled to lift the cargoes on June 19-23 and June 26-30 respectively.

    As for the rest of the July program, BP holds the third cargo for loading over July 17-21 and Chevron has the fourth and final cargo for loading over July 23-27.

    "Buyers are still wary about further delays, and this could also hurt NWS premiums," said a Southeast Asian condensate trader.

    Attached Files
    MGL Comment
    Condensate is often produced as a sideline from big LNG projects. 'Wet' gas processing yields condensate, lpg, and natural gas. About five years back we were noting that LNG developers were picking off high condensate deposits as primary development sites. That leads us to wonder whether Qatar is bringing onstream a particularly 'wet' part of the North Field to support it's LNG expansion plans. 

    If true, and it seems likely, then we could be seeing yet another straw in the wind that the combination of shale, and LNG is leading to a steady surge in liquids volumes. Not only are these barrels poorly recorded in supply data, but they are also outside the classic remit of OPEC/nOPEC agreements. That we're being shown these barrels because Qatar's dedicate Laffan refinery has some teething issues is not helpful, Qatar recently completed a double in the size of this refinery:

    Qatar Petroleum (QP) subsidiary Qatargas Operating Co. Ltd. has formally commissioned the 146,000-b/d condensate splitter of its Laffan Refinery 2 (LR 2) at the Laffan refining complex in Ras Laffan Industrial City, Doha, Qatar (OGJ Online, Aug. 19, 2011).

    The LR 2 project doubles condensate refining capacity of the Laffan complex to 292,000 b/d in line with principles of Qatar Vision 2030, which aims to create a sustainable economy and advance the standard of living in Qatar, Qatargas said.

    This one project is approximately 10% of net Oil demand this year on the most optimistic numbers. Add in Yamal, Gorgon and Wheatstone and its plausible we have 500kbpd+ of condensate in markets by year end. 
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    Egypt to cut down on LNG imports

    Rising domestic natural gas production prompted Egypt to start talks with its LNG suppliers to cut down on contracted cargo deliveries.

    The Egyptian Natural Gas Holding Company (EGAS) is looking to defer a number of cargoes scheduled for delivery through 2017, Reuters reports citing analysts.

    In addition to deferring 2017 cargoes, the company is looking to cancel up to 40 LNG cargoes for delivery in 2018.

    Talks on deferring the cargoes are currently ongoing while traders and producers are looking where to divert the cargoes to, analysts say.

    The company has already deferred some ten shipments in 2017 already with up to 17 deliveries due by the end of the year.

    Egypt that has turned a net importer over the course of 2016, due to falling production, increased domestic consumption and gas shortages, has deployed two FSRUs in Ain Sokhna that serve as the country’s import terminals.

    The Höegh Gallant FSRU, provided by Höegh LNG, began operations in April last year, while the FSRU BW Singapore, provided by BW, has been in full operation since October 2015.

    The country became a major importer and cutting down on imports could impact global gas prices if the deferred cargoes are not delivered to other markets.

    A report by Wood Mackenzie notes that the Egyptian market is set to undergo change over the next five years, as new gas discoveries and production start-ups push the country’s gas market back into surplus.

    With BP’s West Nile Delta and Atoll fields and Eni’s massive Zohr find, the North African country will add a cumulative 41 billion cubic meters a year of gas production by 2022, according to WoodMackenzie.

    However, the surplus is expected to be seasonal and Reuters cites Anne-Sophie Corbeau, a research fellow at the King Abdullah Petroleum Studies and Research Center as saying that, although the LNG demand could be challenged it will not disappear completely.
    MGL Comment
    Egypt's gas start-ups appear to be eating into demand earlier than expected. 
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    Permian Dominates Again: Rig Count Rises 17th Week

    Baker Hughes released its weekly rig count today, announcing the seventeenth straight week of increasing drilling activity.

    In total, eight rigs came online in the U.S. this week, meaning there are 885 active rigs in the country. Seven land rigs were added, while inland waters lost one rig and two offshore rigs came online.

    Oil continues to dominate U.S. activity, as nine oil-targeting rigs came online this week. One gas-targeting rig came offline, meaning there are 540 more oil-targeting rigs than gas-targeting rigs in the U.S.

    Eight horizontal rigs were added this week, ending the week with 742 rigs active. Other trajectory rigs were mixed, as one directional rig came offline and one vertical became active.

    Horizontal activity is even more dominant than oil, as horizontal rigs outnumber vertical and directional rigs combined by 599.

    Rigs continue to move to Texas, as the state added eight active rigs this week and now has 451 operational rigs. Texas now has 51% of all rigs active in the United States. Several other states experienced small changes, with one rig coming online in Colorado, North Dakota, Ohio and Wyoming while Alaska and New Mexico lost two and Oklahoma lost two.

    Permian remains ground zero

    The Permian is still the heart of oil and gas activity, as the basin added eight rigs this week.

    The Permian now has 357 active rigs, more than all the other major basins Baker Hughes tracks combined. Like the states, basins otherwise saw only minor changes. Two rigs came online in the Cana Woodford, and one was added in the Granite Wash, Utica and Williston. One rig shut down in both the Arkoma Woodford and Mississippian.

    Canadian rigs have not quite hit the bottom of the spring shutdown yet, as two more rigs came offline this week. Four gas-targeting rigs came offline, while oil-targeting rigs added two. Unlike in the U.S., where 80% of rigs target oil, 64% of all Canadian rigs target gas.
    MGL Comment
    8 rigs a week right now.

    H&P made this comment in their quarterly:

     22 AC drive FlexRigs with 1,500 hp drawworks and 750,000 lbs. hookload ratings were upgraded to include a 7,500 psi mud circulating system and/or multiple-well pad capability, resulting in 122 rigs in our fleet today with rig specifications in highest demand(4).

    This cost them $18m in writeoff of old cannibalised equipment. They increased their 'superspec' rig fleet by 22% in the quarter, and claim they have a further 50 rigs capable of this transition.

    Now if we infer that the market is doing the same trick, that would imply 7 rigs per week are being made 'shale ready', and by that we mean walkers, electric direct drive, and all the gadgetry required to use a rig on a pad. 

    So of the 8 rigs being added weekly, we have 7 upgrades entering the market, and plausibly 1 redeployment. 

    Further, we can do this trick for another 2 quarters before we run out of 'easy' upgrades. 

    If we further suggest that 662 rigs are actually producing the near 900kbpd run rate of adds to US shale production, then we can guess that at peak current annual adds we can make 1.3mbpd net adds.

    We need to tweak this math some:
    1> ~400 rigs were required to keep US shale production flat, ie 262 rigs are the growth driver. That would imply 1.8mbpd adds at existing rig count plus super spec rig conversion, which is actually 'midrange' on US shale surges.
    2> If we assume that last year was mainly old vintage wells at 30% decline, then the first 1.8mbpd in year one is 'surge' capacity.
    3> Year 2, the 1.8 declines to 600kbpd, so year 2 sustain requires 300 odd rigs add to the original 400, ie 700 rigs post q3 is 'steady state', and we need to find another 250 rigs to upgrade next year to continue growing production.

    Caveat emptor: more and more Oil professionals are cautioning that the rig count itself is no longer the US shale 'driver'. Some argue it is now sand and completions.

    On sand for example, 25000 wells per annum at one unit train of sand per well is 25000 unit trains of sand moved. (Peak Oil by rail was 17000 unit trains?)
    Image titleLast cycle it was Canada/Bakken to the coasts with Oil. This cycle it is midwest to Permian with sand. 
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    U.S. Shale's Favorite Financial Trick Is Getting Less Attractive

    Oil bulls, take heart! U.S. drillers have dramatically reduced their hedging activity, a move that could portend a break in the production gains that have upended global crude prices.

    The relative cost of options protecting against a drop in West Texas Intermediate crude has fallen to its lowest since August, thanks to a big drop in producer hedging, Societe Generale SA said on Friday. The so-called put skew for contracts delivered a year from now -- weighing the difference in value between bullish and bearish options -- fell to just below 6 percentage points, after rising above 8 points in February.

    Hedging contracts lock in payments for future production. U.S. drillers signed onto such agreements in droves late last year, after an OPEC-led deal to cut output raised prices. The Catch-22 is that the guarantees gave drillers the security to boost output, undercutting the rally. Now, futures have languished to the point that the industry’s favorite financial safeguard no longer makes economic sense.

    The fall in WTI 2018 swap prices has made it “unattractive for most U.S. shale oil producers to hedge," Jesper Dannesboe, a London-based commodity strategist for SocGen, wrote in Friday’s report. Unless oil prices rally meaningfully, that will continue, he said.

    Changes in drilling-rig counts on the ground tend to follow a few months after shifts in hedging activity, since many shale companies prefer to hedge new production before committing to more spending, Dannesboe said.

    “In other words, the recent decline in WTI prices may, if maintained, over time cause U.S. oil production growth to slow meaningfully," he wrote.

    WTI crude for June delivery rose 7 cents to $47.90 a barrel at 9:26 a.m. Friday on the New York Mercantile Exchange, after the U.S. reported a steeper-than-expected drop in crude inventories.

    Standing Pat

    In quarterly earnings reports over the past month, oil companies indicated they’d chosen to stand pat with their hedges this year, after the surge at the end of 2016. Apache Corp. and Anadarko Petroleum Corp., two of the most active hedgers last year, hadn’t added significant new contracts as of the end of the quarter, for example.

    “Given that oil prices have declined so far in 2017, I would imagine that there was a deceleration in hedging activity," Peter Pulikkan, a Bloomberg Intelligence analyst in New York, said in an interview.

    Still, drillers are also forging ahead with plans to increase production, in part thanks to the financial cushion provided by existing hedges. Pioneer Natural Resources Co., one of the most prolific actors in Texas’ Permian shale basin, has contracts in place for 85 percent of its expected oil and natural gas output this year, the company said on a May 4 conference call.

    Pioneer has already hedged more than 20 percent of next year’s oil production and 15 percent of its gas volumes for 2018 as well, Chief Executive Officer Tim Dove told analysts on the call. Parsley Energy Inc., Devon Energy Corp. and RSP Permian Inc. also said they either had 2018 hedges in place or were planning to add them.

    That’s likely to continue complicating the oil market. OPEC members plan to meet in Vienna on May 25 to discuss additional production cuts that could resuscitate oil prices. Dove, on his call, said he sees it as his next opportunity to lock in hedges.

    Attached Files
    MGL Comment
    So what we are seeing in the quarterlies looks like this:

    $60= 150%+ returns.
    $50=70-100% returns.
    $40=0-30% returns.

    The shale is super sensitive to price, and the fall from $55 t0 under $50, took the fizz out of the system.

    Unfortunately for the bulls, this 'slow burn' market in Oil allows people and capacity into the system at some sort of rate, and doesn't allow the 'blow off' that would tighten the Oil service market into exciting pricing power. We're still visibly adding productivity at the well head. Companies are building out logistics, teams and inventory at a steady pace. The phrase of the quarter in the Permian was 'bulking up' as the industry engages in swaps, acreage moves and rock evaluation to put some decent numbers together on padd deployment. Each padd, recall costs roughly $50m, and whereas when we first described Permian well pads we were looking at triples, now we've seen a distinct movement towards quadruple wells per padd, and Encana disclosed one mammoth Canadian style 12 well padd. 

    Crucially capex intensity is clearly falling, with EOG head turning $7.6k spend per 1000 bpd gross add. Out of the corner of our eye we're watching well duration increase by a factor of 3-4 times. Typically the 'turnover' point of a well has been around 30 days. Now it's moving towards the 100-120 days. (Turnover point is when the well moves from rapid depletion of the fracked volumes, to slower depletion of the higher surface area now facing the low porosity shale. ) Again, worst yet for the bulls, is the increasing mobilisation of companies on 'refracs', old wells drilled with primitive fracks, that typically left 50-80% of the recoverable Oil behind pipe on cluster length that was too high, or sand volumes that were too low. 

    I keep looking at Union Pacific's 32% rise in Sand volumes, their dominance of the Permian, and that '1unit train per well number' and thinking that this is one of the few stocks that rallied on the q1 number. 
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    EOG in a nutshell.

    Image title
    MGL Comment
    Image titleEOG has this concept of drilling only premium wells. A premium well uses high end data management techniques to accurately drill the most prolific hydrocarbon lenses in the shale. There is a perception out there that the shale is uniform, EOG, (and Oxy), are championing a methodology that directs the well bit into the best rock in the area. Most tier 1 companies in the E&P space have a manufacturing methodology that simply drills fast, and effectively through all the rock. My hesitation on EOG this last year has been largely due to the fact that in the last cycle the 'manufacturers' (eg CXO, CLR) massively outperformed the 'designer well' strategy stocks (Whiting being the obvious example). 

    Note: EOG uses After Tax Rate of Return in its calculations, and not the slightly misleading IRR commonplace in the industry. ATROR is a much 'tougher' return hurdle. 

    The question we faced was whether the 'data intensity' at EOG would create a situation where they were unable to create enough feedstock to propel the P&L account. In the first quarter EOG claims to have created enough premium locations (1.4bn boee in 1200 drill locations) to more than replace reserves this year. These premium wells shatter two distinct barriers to the conversion of the shale from 'massive experiment', or bubble as the doomsayers would have you believe, to business, where EOG can both grow volume AND drive positive cash flow. That is nearly but not quite unique. Oxy nearly has the trick, but they MIGHT be able to grow volume 5% with positive cashflow. EOG is saying 18-19%, and these guys are conservative. The metric that matters here is EOG saying 7.6k capex per annual flowing barrel of growth. The industry is at $50k, and even Oxy is at $30k.  
    Image titleThis combination of high end data science, and the use of every 'knack' EOG has learn't is demonstrably producing better wells. We would simply point out that on EV/EBITDA EOG is no different from its peers, despite producing measurably better numbers. Unfortunately its not all sweetness and light. 

    EOG gross drilling adds estimate= 130k
    Capex in last 12m= $2.9bn.
    Implied capex per flowing boee=$22k. (50% premium)

    So we must assume non premium at $36.4, which is still credible by industry standards, just not as 'wow!' inspiring.Image title

    This year EOG say 80% at premium, which implies total company $15k per flowing boee  capex cost , we achieve 265k gross adds, minus decline of around 110, leaves 150kbpd new vintage boee kpbd, which declines something like 60% in year one, leaving net adds of some 60kbd. That figure is inline with most analyst expectations. 

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    Oil companies drill down on industrial cyber security

    In recent months, more U.S. oil company boards have demanded IT managers prove refineries and drilling rigs are protected against cyberattacks, the chief of a security firm says.

    Rising oil prices and increased awareness of industrial cyber threats seem to have spurred new corporate-level maneuvers this year to secure computer controls that run energy facilities, said Barak Perelman, chief executive of Israeli cyber security firm Indegy. At some oil companies, he said, chief information security officers now spend a quarter of their monthly security committee meetings discussing so-called industrial control systems, the devices that control oil and gas equipment.

    “They’re being given budgets for industrial cyber security,” Perelman said on Friday. “In all my conversations, nobody has said ‘yes, but oil prices.’ I heard that a lot last year.”

    Related: Energy industry’s controls provide alluring target for cyberattacks

    Perelman, who moved from Israel to New York this year because of increasing demand for industrial cyber security in the United States, said he spends most of his time teaching IT professionals how to tackle the security of devices manufactured by Siemens, Honeywell and Emerson – so different from the Microsoft and Apple computers they know well.

    Before 2017, “when we talked to oil companies in Texas, we were mainly talking with control systems engineers who understood the ins and outs of everything, but they didn’t care much about security,” Perelman said. “They didn’t have the budgets for it. It wasn’t their role. In the last few months, we’ve seen more IT corporate security get demands for proof the facilities are protected.”
    MGL Comment
    Is there an NVDA in cybersecurity? Not our field, but you feel the demand. 
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    Alternative Energy

    Gansu's active wind power capacity hits new high

    Active power generation capacity at wind farms in northwestern China's Gansu province hit a new high of 6.09 GW at 6:17 a.m. (GMT+8) May 5, sources reported.

    That accounted for 38.8% of the province's total on-grid power generation capacity and 59.95% of the grid's power load, according to China Electric Power News.

    By the end of last year, installed wind and photoelectric power capacity amounted to 19.6 GW, accounting for 41% of the province's total capacity, which surpassed the share of thermal power capacity.

    Owing to a lack of indigenous demand and difficulties in outbound transmission, Gansu has been idling lots of its wind and photoelectric power capacity.

    The Jiuquan wind base has more than 10 GW of power capacity.

    Gansu saw its power transmission capacity improving, thanks to the commissioning of a ±800 KV ultra-high voltage project in Jiuquan, which has transmitted over 31 GWh clean power to Hunan province in central China.
    MGL Comment
    Gansu is the second province to be able to report that it's Wind farms appear to have near full connection to somewhere useful. 
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    Base Metals

    U.S. EPA paves way for stalled copper and gold mine in Alaska

    U.S. environmental regulators have cleared the path for a stalled copper and gold mine in Alaska by agreeing to settle current lawsuits and other issues over the project, which had drawn environmental concerns over its potential impact on the world's largest sockeye salmon fishery.

    U.S. Environmental Protection Agency, in a statement on Friday, said the settlement does not guarantee the proposed mining project in southwest Alaska's Bristol Bay region would ultimately win approval but that its review would now be carried out "in a fair, transparent, deliberate, and regular way."

    The Pebble Limited Partnership mining company had filed a lawsuit against the EPA under the previous administration of Democratic president Barack Obama, which had sought to block it.

    Backers of the project had been hopeful that Obama's Republican successor, Donald Trump would allow it to proceed. Shares of Northern Dynasty Minerals, which owns the massive Pebble deposit, have surged since Trump won the U.S. election back in November. Trump took office Jan. 20.

    In February 2014, the EPA took the unusual action of blocking a mine before the project owner applied for a development permit.

    Opponents of the mine include environmental groups as well as many native residents who rely on the fish from the Bristol Bay watershed, which EPA has said supports the world's largest fishery of sockeye salmon. Many commercial fishermen and sport fishermen are oppose it.

    In the settlement reached on Thursday, Pebble Limited Partnership can now apply for a Clean Water Act permit from the U.S. Army Corps of Engineers, the EPA said in its statement released on Friday.

    The EPA and Pebble Limited Partnership also agreed to ask the U.S. District Court for the District of Alaska to dismiss related cases and lift a court-ordered preliminary injunction, according to the statement.
    MGL Comment
    Northern Dynasty flew on the much expected announcement. $550m for one of the 10 largest undeveloped copper gold deposits in the world. 
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    Rusal boosts first-quarter profit, to restart aluminium smelter project

    Russian aluminium giant Rusal  posted higher first-quarter recurring net profit on Friday amid stronger aluminium prices and said it was preparing to resume construction of its aluminium smelter in Siberia.

    Russian tycoon Oleg Deripaska controls 48 percent of Rusal through his En+ Group, which also manages his hydro power businesses. En+ may raise $2 billion in IPO in London and Moscow in June, sources familiar with the deal have said.

    Hong Kong-listed Rusal, the world's second largest aluminium producer, reported first quarter recurring net profit of $434 million, up from $149 million a year earlier, thanks to higher prices and volumes of sales.

    Global demand for aluminium continued to grow in the first quarter of 2017, led by the transportation sector, while supply is expected to tighten in the second half, it added.

    In a separate statement on Friday, Rusal announced that it had proposed the resumption of construction of its long-standing Taishet aluminium smelter.

    Its board of directors has already approved the $38.5-million financing of works at the smelter in 2017, it added.

    "While the funding is relatively small, the capacity is unlikely to come on stream in the near term," analysts at Citi said in a note.

    Rusal, which started building this smelter in 2007 but then delayed it when aluminium prices fell, told Reuters that it was still in talks with banks and its partner Russian power generator Rushydro to organize the financing for Taishet.

    In 2016, Rusal said it was negotiating the $800-million of the project financing and to build 430,000 tonnes of annual capacity there by the end of 2018.

    A source who attended meetings between En+ management and analysts previously told Reuters that En+ hopes that Rusal's two brownfield projects - Taishet and another Boguchansk smelter in Siberia - would raise their capacity by one million tonnes of aluminium in 3-5 years, boosting En+'s EBITDA.

    En+'s 2016 EBITDA (adjusted earnings before interest, taxation, depreciation and amortization) reached $2.3 billion. Rusal accounted for $1.5 billion of that sum, and EN+'s other businesses - power operations, coal mining and logistics - accounted for $822 million.

    Rusal's shares rose 1.6 percent in Hong Kong on Friday, against a 0.1-percent growth in benchmark index.

    Rusal estimated demand grew 5.5 percent year on year to 15 million tonnes in the first quarter. Over the same period, global supply was up 7.8 percent to 14.9 mln tonnes, signaling a market roughly in balance, according to the company.

    Attached Files
    MGL Comment
    More soft Aluminium capacity at $1900 Aluminium. We foolishly thought it might be something more like $2500 before we saw partially completed, and mothballed capacity come back online. 
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    Swedish engineering group Sandvik says hit in cyber attack

    Swedish engineering firm Sandvik said on Saturday it had been hit in the cyber attack that has affected public authorities and companies around the world.

    Sandvik said computers handling both administration and production were hit in a number of countries where the company operates, with some production forced to stop.

    "In some cases the effects were small, in others they were a little larger," Head of External Communications Par Altan said.

    "In some cases, certain production has been affected. Certain, but far from all of it."

    Altan would not say which countries had been affected or give further details on the impact on production.

    He said Sandvik was now assessing the situation.
    MGL Comment
    So the big watercooler conversation over the weekend was whether this huge hack was good for blockchain or bad. Not unsurprisingly the quill and ink brigade were 'death to bitcoin', but the cooler heads were pointing at Ripple's rapid ascension in the central banks space in response to the Bank of Bangladesh hack. 
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    Steel, Iron Ore and Coal

    Beijing's battle against pollution takes toll on truck drivers at coal port

    On a recent visit to the area around Tianjin Port Co Ltd, there were more than one hundred empty trucks parked at the coal storage center run by Ningdong Logistic Co, Reuters reported.

    Once one of the busiest places close to Tianjin's sprawling port, the storage facility was now silent as activity had ground to a halt after the port operator last month announced a ban on trucking in coal or storing it there. The announcement was sooner than expected.

    It is a sign that Beijing's years-long war on pollution is disrupting the logistics of the market for coal - one of China's crucial commodities - as well as the lives of what trucking industry insiders estimate are 60,000 drivers who carry coal to and from the port.

    The central government has said it may extend the measure to ports in heavily industrialized Hebei province by September as it tries to combat choking pollution that often blankets the north of the country, including nearby Beijing.

    "I was sending coal from Inner Mongolia to the port and carrying imported iron ore from the port to other places. The government has completely cut my livelihood," said Wang Fangyuan, who was based in Tianjin but has left with a fleet of 40 trucks and their drivers to ply the trade in Erdos, 800 miles to the northwest in Inner Mongolia.

    Cleaner air

    Until now, Beijing's efforts to cut overcapacity and pollution had little impact on the output of the country's favorite fuel. Outdated, inefficient mines were shut, only to be replaced with production from leaner, cleaner ones. The ban has helped knock about 20% off Tianjin Port's shares but had its desired effect on air quality, at least locally.

    Tianjin Port, which last year handled about 110 million tonnes of coal arriving by truck and rail, has said it is taking measures to increase rail freight to help offset the loss of trucked coal.

    The ban, aimed at reducing pollution from trucking coal, has put Tianjin port at a disadvantage to other ports such as Tangshan and Caofeidian.

    It has also created traffic jams at nearby Huanghua port in Hebei province, and threatens to increase the cost of moving coal as traders shift to rail, which is more expensive.

    Inside the port's own coal storage area, around 600,000 tonnes of coking coal is covered in green plastic webbing since the start of May to reduce dust. Sprinklers are used to keep the dust down.
    MGL Comment
    Tianjin is inside the main focus of the coal control plan from last year. This year the plan adds 3 further provinces and 26 cities. So what has happened here will likely spread to other ports. 
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    China April coal output up 9.9 percent year-on-year at 294.5 million tons: stats bureau

    China's coal output rose 9.9 percent in April from a year earlier to 294.5 million tonnes, the National Bureau of Statistics said on Monday.

    It is the second straight month that output has registered a year-on-year increase as mines have scrambled to reverse the government-enforced cuts last year to take advantage of soaring prices.

    The most-active futures hit record highs of 566 yuan per ton in early April, but have fallen 10 percent as supplies have increased and demand has waned.

    For the first four months of the year, coal production rose 2.5 percent to 1.11 billion tonnes, data showed.
    MGL Comment
    We're still at over $87 delivered to Qingdao.
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    Coal workers at India's CIL, SCCL to go on three-day strike from June 19

    Workers at state-owned Coal India Limited and Singareni Collieries Company Ltd. will go on strike from June 19 to protest the delay in wage revision and other issues, sources said Thursday.

    Five trade unions representing around 500,000 workers of CIL and SCCL had decided to go on strike from June 19-23, SK Pandey, representative of one of the trade unions, the Bharatiya Mazdoor Sangh, said.

    The trade unions have already served notice to CIL, SCCL and coal ministry, Pandey added.

    The other trade unions involved in the protest are the All India Trade Union Congress (AITUC), the Centre for Indian Trade Unions, the Hind Mazdoor Sabha, and the Indian National Trade Union Congress.

    Talks between the unions and the government on wage revision and pension schemes fell through this week resulting in the decision to go on strike, Pandey said.

    Industry sources put the output loss from a three-day strike at 4.5 million mt for CIL and around 537,000 mt for SCCL.

    CIL has targeted a production of 660 million mt coal in fiscal 2017-2018 running from April to March.
    MGL Comment
    Small add to Indian imports as CIL strikes?
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    Foresight Energy Q1 coal sales up 41% on stronger export volumes: company

    US coal producer Foresight Energy's sales volumes and cash costs both improved in the first quarter as it took advantage of stronger export markets and increased production, company executives said Thursday.

    The St. Louis-based company, which operates solely in the Illinois Basin, reported sales volumes of 5.3 million st, up 40.7% from the year-ago quarter, as Foresight shipped 24% of its coal into the export market. By comparison, the producer had shipped 14% of its coal into exports in the year-ago quarter, said Rob Moore, the company's president and CEO.

    "Most significant was our ability to access export markets due to substantial improvements in API2 prices compared with the prior-year quarter," Moore said.

    Related Commodities Spotlight podcast: Newly optimistic US coal industry focuses on flexibility, federal regulations

    Foresight, which did not take questions after its prepared remarks, noted production efficiencies at both Sugar Camp and Williamson mines, which ranked as the two most productive mines in the country in terms of clean tons per hours worked, Moore said.

    Foresight's cash costs averaged $22.80/st for the quarter, down from $23.86/st in the year-ago quarter, and down from $22.84/st in the prior quarter. Its coal sales averaged $43.12/st, down from $43.45/st in the year-ago quarter and down from $48.46/st in the prior quarter.

    The company generated coal sales revenues of $227.8 million during the quarter on sales of 5.3 million st, up from $163.1 million in the year-ago quarter on sales of 3.8 million st.

    "Our current cost structure is sustainable, and we anticipate improving costs over the remainder of the year," Moore said.

    For the remainder of 2017, Foresight has 18.6 million st contracted for delivery and anticipates an "active spot market," Moore said. Its contracted tonnage is 84%-91% of the company's projected production of 20.5 million-22 million st for the remainder of the year, he said.

    Moore also touched on the next steps for reopening its long-idled Deer Run longwall mine near Hillsboro in Montgomery County, Illinois.

    The company had submitted a formal application last month to the US Mine Safety and Health Administration to re-enter the mine. Moore said that MSHA had accepted its plan to evaluate the status of the underground mine, which has been idled for over two years due to elevated carbon monoxide levels.

    MSHA's acceptance of the plan did not include longwall systems or returning air shafts, but Moore called it "a step in the right direction in evaluating conditions of the mine."

    "In coming weeks, we plan to breach the seals that are restricting airflow into the mine and allow personnel into the mine," he said.

    Attached Files
    MGL Comment
    Strikingly bearish chart on the $600m pure play thermal coal producer:

    Image title

    It is notable that unlike most of its peer group Foresight has still not really managed to turn the P&L account around in a convincing fashion. It is still 70x this years eps, and 7x ev/ebitda. That's a marked premium over comparables. It looks to me that the market was speculating on more, and faster restart of mothballed operations. 
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    ArcelorMittal profit more than doubles as steel volumes rise

    ArcelorMittal reported first-quarter profit that more than doubled amid a rally in steel demand that’s seen prices recover across the globe. The shares slumped.

    Earnings before interest, taxes, depreciation and amortisation rose to $2.23 billion from $927 million a year earlier, the Luxembourg-based company said in a statement Friday. The figure beat the $2.01 billion average of seven analysts’ estimates compiled by Bloomberg.

    The stock retreated 5.2% to 6.85 euros as of 9:52am in Amsterdam. Earlier, the shares fell as much as 7.6%, the biggest intraday drop since June.

    Steelmakers have seen their earnings buoyed as prices for the metal trade at the highest in more than two years in key markets such as the US and Europe. The rally has been spurred by rising demand and a curb in record Chinese exports that had dented prices across the globe.

    “All parts of the business reported improved Ebitda as steel prices responded to higher raw-material costs and strong volume growth saw steel shipments increase by 5.1% compared with the fourth quarter,” chief executive officer Lakshmi Mittal said in the statement. “We expect market conditions to be broadly stable in the second quarter.”

    The outlook for steel has improved in recent months. Excluding China, the world’s top producer and user, global demand probably will rise 2.4% this year, compared with a 0.7% increase in 2016, according to the World Steel Association. There will be gains in big markets such the US and Europe, with bigger rebounds expected in key growth markets such as Brazil and Russia, after multiyear contractions, the industry group predicted.

    The US price of hot-rolled coil, a benchmark product, is near the highest in more than two years after rallying 62% in 2016. In Europe, prices jumped 82% last year.
    MGL Comment
    $2bn free cash flow this year begins to make a serious dent in debt here. 
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    Chongqing Steel warns of uncertainty in steel asset sales, shares still suspended

    Chinese steelmaker Chongqing Iron & Steel Co warned late on May 11 that its plans to sell off debt-ridden iron and steel assets faced "uncertainties" and might not go ahead, saying trading in its shares would remain suspended.

    It didn't say when it expected a restart in trading of shares that have been suspended since June last year, after it suffered net losses of almost 6 billion yuan ($872 million) in 2015. The firm has blamed its predicament on the downturn in the economy, severe industrial overcapacity, soaring labor costs and persistently low steel prices.

    The company warned in a notice posted to the Hong Kong Stock Exchange on May 11 that a proposed restructuring plan that would enable it to exit the steel industry entirely and shift to more lucrative sectors like finance might not satisfy regulatory requirements. Chongqing Iron & Steel had a market value of about $1.6 billion when shares last traded.

    The firm announced last August that it intended to sell all its steel assets to the Yufu Group, an entity run by the local Chongqing city government. It then hoped to acquire high-quality assets in the financial and industrial investment sectors from Yufu.

    But it said on May 9 that the steel assets "involve large scale of debt with numerous creditors and complex liabilities associated with litigations", adding that it was still unclear whether the proposed transactions would proceed.

    "There is also fairly great uncertainty in whether agreement can be reached with the main creditors on the intended disposal plan," it warned.
    MGL Comment
    Chongqing Steel's pain is accidentally giving us a look into the gov't complex cash for closure program.  As capacity is closed:

    ~A special gov't entity takes the assets.
    ~the liabilities are hypothecated across creditors, that is in many cases leading directly to debt for equity programs.

    It is likely adsorbing almost all of the banks' time and attention, and the local government too. It's still early days, and we have not quite seen the wrinkles squeezed out of the process.  

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    China April steel output hits record, second month to push peak higher: stats bureau

    China produced a record volume of steel in April, breaking the previous highest peak set in March, data showed, stoking worries about a growing glut of metal even as the government said most of this year's targeted capacity cuts have already been met.

    Chinese steelmakers churned out a highest-ever 72.78 million tonnes in April, up 4.9 percent, the National Statistics Bureau (NBS) data showed on Monday, surpassing March's monthly record of 72 million tonnes as mills in the world's top producer rushed to profit from rising prices even as demand remains flat.

    In a briefing after the data release, an NBS spokesman said the nation had already met 63.4 percent of this year's targeted cuts for steel and 46 percent of coal cuts.

    The ramp-up in steel output underscores the challenge for the government as it aims to slash 50 million tonnes of low-grade outdated capacity this year, on top of the 65 million removed last year. The government is targeting rebar, used in construction, in particular.

    But many of the plants that have been closed in recent years were already idled and output from still-open plants has continued to rise.

    "Driven by high profits, steel companies are raising their capacity, by using high-quality iron ore and increasing their use of steel scrap," said Bai Jing, analyst at Galaxy Futures.

    "Production might be at record high, but the steel production capacity is being reduced."

    In the first four months, production totalled 273.9 million tonnes, up 4.6 percent from the same period a year earlier, the data showed.
    MGL Comment
    As we've noted China's capacity cuts have entirely focussed on sinter and melt capacity, not on final output of rebar or rolled steel. 
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