Mark Latham Commodity Equity Intelligence Service

Friday 10th April 2015
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China Mar PPI down 4.6 pct on yr

China's Producer Price Index (PPI), which measures inflation at wholesale level, dropped 4.6% year on year and down 0.1% month on month in March, the National Bureau of Statistics (NBS) said on April 10.

It was the 37th straight year-on-year decline, due to persisting sluggish demand from downstream sectors.

Factory prices of production materials declined 5.9% from the previous year, contributing 4.6 percentage points to the PPI drop, the NBS said.

The price of oil and natural gas mining industry posted a huge decline of 39.3% on year; the price of coal mining and washing industry dropped 13.0% on year and down 1.9% on month. Besides, prices of ferrous and non-ferrous metal industries remained on a losing track, data showed.

The data came along with the release of the Consumer Price Index (CPI), which rose 1.4% year on year but down 0.5% from the month before in March.
MGL: CPI massacring PPI. You need to hug the consumer in this economy.

China Money Rate in Longest Slide Since 2009 as Funding Cost Cut

China’s benchmark money-market rate was set to drop for a sixth week, the longest run of declines since 2009, as the central bank guided funding costs lower.

The People’s Bank of China cut the yield in its reverse-repurchase operations by 10 basis points this week, the fourth reduction since early March. Consumer prices gained 1.4 percent last month from a year earlier, data from the statistics bureau showed Friday, trailing the government’s 3 percent inflation target this year.

The seven-day repurchase rate, a gauge of interbank funding availability, slid 54 basis points, or 0.54 percentage point, this week to 2.86 percent as of 10:25 a.m. in Shanghai, a weighted average compiled by the National Interbank Funding Center shows. It dropped 16 basis points Friday.

Inflation “remains low, suggesting there’s little change in a tepid economy and weak demand,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shanghai. “It’s still necessary to roll out measures to stabilize growth, and loosen monetary policy.”

The PBOC lowered the interest rate in the seven-day reverse-repo operations to 3.45 percent this week, compared with 3.85 percent in January. The central bank drained a net 15 billion yuan ($2.4 billion) in the last three days, after injecting funds for two consecutive weeks, data compiled by Bloomberg show.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, dropped 16 basis points this week and was steady Friday at 3.09 percent, data compiled by Bloomberg show.
MGL: Image title

Here's Shenzhen.

The stockmarket loves what Beijing is doing. 

Part of me is scratching my head, but there's a sneaky little devil inside that is suggesting that Beijing, perhaps along with India, are the only two big countries 'heading in the right direction'.

China's city and infrastructure boom was always marvellous neo-Keynesian economics, but it wasnt good for returns, or investors. Beijing's new focus on clean growth, no corruption, law and order and markets is so much more healthy than many other emerging policy mixes.

Its almost as if its the first Asian country to realise deep in its policymaking bowels that GNP growth  for growths sake is not the great palliative the textbook claims. And, anyway, they always say its growing 7% anyway, so who cares? Image title

Here's China H shares, which have just woken up and decided to catch their Shenzen brethren. 

Small observation: if you are sitting in HK, you are likely listening to the 'wrong' faction. HK, Guandong and Shanghai are dominated by cohorts of Jiang Zemen placemen. 

The problem for us poor resource types is that we just lost our biggest client. All this bull-bull in Shenzhen is at least partly a realisation that if the companies STOP spending on capex, free cashflow starts appearing at the big SOE's. You could also suggest its a big Marshallian K plot. (economy weak, central bank easing= gobs of free liquidity).

The Chinese stockmarket is remarkably like Japan's. Its conceptual, thematic and idea driven. Value investors, just as in Japan's great bull market, will find themselves owning Sony at 6x eps, and missing Nintendo on several 100x eps. 


OECD leading indicators point to slowdowns

Economic growth is set to slow in some of the world's largest economies, although the eurozone is set for a pick-up, according to leading indicators released on Thursday by the Organisation for Economic Cooperation and Development.

The Paris-based research body said its gauges of future economic activity -- which are based on information available for February -- point to slowdowns in Canada, China, Brazil and Russia.

By contrast, the leading indicators pointed to a return to growth in France and Italy, and a pickup in the eurozone as a whole. For most of the world's other large economies --including the US, Japan and the UK-- the gauges indicated growth will remain at current rates over coming months.

The leading indicators suggest the global economy once again faces a patchy, and therefore relatively weak, recovery in 2015. While in some previous years large developing economies grew rapidly while developed economies floundered, slowdowns in China and elsewhere would leave developed economies at the vanguard in driving global growth, with India the main exception, since the leading indicators continue to point to a pick-up in growth in that economy.

The leading indicators also suggest that a wave of central bank easing in late 2014 and early 2015 has had only a modest impact on global growth prospects. That may have implications for US rate setters, who are counting on a revival in growth in other parts of the world to limit the impact of a stronger US dollar on exports.

The OECD's composite leading indicators are designed to provide early signals of turning points between the expansion and slowdown of economic activity, and are based on a wide variety of data series that have a history of signalling changes in economic activity.
MGL: Plat/Gold gave us a recession read on January 15 this year. Please note, this is not necessarily an entire economy read, its more a measure of commodity demand, and as we noted yesterday this internet boom does NOTHING for commodity demand. 

OECD sort of confirms our read on April 10th. Commodity markets would seem to have a three month lead on the data which the scribblers use. Image title
Plat/Gold today still says recession, but no longer deteriorating.

Iran's Khamenei says neither rejects, accepts nuclear deal, details key

Iranian Supreme Leader Ayatollah Ali Khamenei said on Thursday he neither backed nor rejected an interim accord with six world powers on Tehran's disputed nuclear programme but demanded all sanctions be lifted immediately a final agreement was concluded.

He added in a televised speech that the details of the accord would be decisive, and the publication of a U.S. fact sheet showing terms that were at variance with the Iranian view of the agreement showed "devilish" U.S. intentions.

"I neither support nor oppose it," he said. "Everything is in the details; it may be that the deceptive other side wants to restrict us in the details."
MGL: It's quite dovish by Ayatollah standards.

China's first-tier home sales surge by over 50%

Housing sales in the first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen have surged 51.4 per cent compared to the previous week, according to new data from China Index Academy, a housing price consultancy.

Property transactions in 38 major cities also soared 19.5 per cent over the same period.

The Academy believes the latest surge in housing transactions is due to recent government policy announcements aimed at boosting the housing sector.

The policies include lowering the down payment requirement for second-home buyers as well as for consumers that are looking to upgrade.
MGL: Chinese sources reports queues outside vendors for the first time since 2009. This is a big deal, and may stop the economic rot.

We should expect an economic 'upswing', and it may lift the base metals.

China cuts resources tax, power prices to boost economy

China's State Council, or cabinet, said on Wednesday the government will lower power prices and the resource tax on iron ore to reduce business costs and support the economy.

Coal-based on-grid power prices will be reduced by an average of about 0.02 yuan ($US0.003) a kilowatt hour, the cabinet said in a statement on the main government website.

China will also cut power prices for industrial and commercial users by an average of about 0.018 yuan a kilowatt hour, according to the cabinet.

Starting next month, the government will reduce the existing resource tax on iron ore by 40 per cent, it said, without giving further details.
MGL: China is back in economy friendly policy making mode. Tax cuts are good. No subsidies here which is good. 

We're smelling a distinct change in flavour of Beijing announcements in the past week. The 'big stick' has been put away, for the moment, and we're seeing some actions to support the economy. 

That's potentially bullish the miners. 

China Aims to Soothe Labour Unrest

As slowing growth fuels labor unrest in the world’s second-largest economy, China’s top leadership is pushing for greater efforts to foster harmony across its increasingly agitated workforce. As the WSJ’s Chun Han Wong reports;

In a recent directive, top Communist Party and government officials called on party cadres and bureaucrats across the country to “make the construction of harmonious labor relations an urgent task,” to ensure “healthy economic development” and to consolidate the party’s “governing status.”

With China “currently in a period of economic and social transition,” labor relations have become “increasingly pluralistic, labor tensions have entered a period of increased prominence and frequency, and the incidence of labor disputes remains high,” the paper said, according to a copy reviewed by The Wall Street Journal. It cited problems including unpaid wages to China’s legions of migrant workers, growing protests and other issues.

Labor scholars say the paper—titled “the Communist Party Central Committee and the State Council’s opinion on the construction of harmonious labor relations”—marks a rare move by Beijing to formally outline policy priorities for tackling worker unrest. It also comes after Premier Li Keqiang pledged in early March, during an annual policy speech, to curb unpaid wages for migrant workers.

“The government is acknowledging the reality of rising worker unrest and wants to make this a bigger priority,” said Wang Jiangsong, a professor at the China Institute of Industrial Relations in Beijing. “But it also lacks specifics on implementation—it remains to be seen how this would work on the ground.”
MGL: Chinese stocks are in a 'blowoff' bull market. We pointed out in our quarterly presentation that Chinese resource companies have largely completed capex, and thus are beginning to show substantial free cash flow. We're certainly not making the case that they are great companies, just that they were terrible, and are now merely bad. Most Chinese resource stocks we look at have low single digit returns on assets. Stopping the silly capex likely nudges those low numbers a touch higher.

Image title'A' shares are at huge discounts to the 'H' shares in Shenzen, and recent moves to improve the liquidity and availabilty of cross border stock flow has provoked the HK names into a wild ascent as they close those enormous discounts. 

The Chinese equity bull story is that Beijing is finally starting to pursue a sensible economic agenda which involves curtailling excess capex, improving quality, incentivising entrepreneurs, reforming the SOE's and improving the law on property ownership. Its a Chinese version of the UK economy in the 1980's, and if this thesis pans out, yes that makes me a buyer of these stocks!

Sad to say, its the best resource equity story in town. We switch Baoshan 'H' to Angang 'A' in our buy list.

Mind your eye, though, Shanghai margin debt is soaring:
Image title“Margin purchases are now accounting for almost 20% of equities daily turnover which itself has soared to wholly unprecedented levels in another sign of self-feeding speculative frenzy. What happens next is clearly an ‘unknown-unknown’. By definition detached from fundamentals, speculative bubbles are inherently re-enforcing in the short-term and frequently last longer than expected. The longer they continue, however, the larger the eventual bursting.”

So we exit Baoshan.


Devil is in the detail of deal shrinking Iran's nuclear programme

Tehran's nuclear programme will shrink significantly under a framework deal to make Iranian moves towards building an atom bomb virtually impossible for years - but the devil is in the detail.

Iran has agreed with six world powers to curb its nuclear activity in three main areas: the size and grade of its uranium stockpile, the number of centrifuges that enrich uranium, and the maximum fissile purity of the product of these machines.

"The approach outlined will effectively prevent Iran from building a nuclear bomb for an extended period of time," said Robert Einhorn, senior fellow at the U.S.-based Brookings institution.

Still, some details have yet to be determined and the pact will take effect only if a final deal is agreed by June 30, a big "if" which can still scupper an agreement.
MGL: The deal as described in French documentation is effectively a 'stop' for ten years. It doesn't degrade Iran's existing capacity, nor does it prevent Iran from resuming its program if the west steps away from its commitments to gradually end restrictions.

Does it mean we see 1mbd of Iranian crude hit markets from June? Image titleThe futures market in the last week displayed a curious reaction. It marked up spot, but took the 5 year futures on crude down a peg or two. 


Deals to soon yield $8 bln in investments for Mongolia -PM

Mongolia will soon finalise negotiations that will free up $8 billion for expansions at the country's largest coal and copper mines, its prime minister said in a national address on Sunday.

Talks between the government and investors are progressing towards the close of deals on Mongolia's multi-billion dollar Oyu Tolgoi copper mine and Tavan Tolgoi coking coal mine, Prime Minister Chimed Saikhanbileg's said late on Sunday.

Mongolia is desperate for a revival in foreign investment after it fell 74 percent last year amid disputes with foreign investors such as global miner Rio Tinto .

"Now the parties are finalising their respective internal processes and we will soon officially announce results," Saikhanbileg said about the expansion project for the Oyu Tolgoi copper mine, according to an unofficial translation of his televised speech.

A spokesman for Rio Tinto, holder of a 66 percent stake in the copper mine, could not be reached for comment.

Disputes over the rising costs at Oyu Tolgoi and taxes have delayed construction of the second underground phase at the $6.5 billion mine since August 2013.

Rio Tinto must resolve the disputes before banks can release more than $4 billion in financing to fund the expansion.

The government is also in the final stages of forging a deal to hand over management of state-owned Erdenes Tavan Tolgoi coal mine to China's Shenhua Energy, Japan's Sumitomo Corp and Mongolian Mining Corp subsidiary Energy Resources.

Mongolia has asked the partners to spend $4 billion to expand the Tavan Tolgoi mine's capacity.

Both mines are located less than 250 kilometres from the Chinese border.

Mongolia's mineral riches and strategic location drove peak economic growth of 17.5 percent in 2011, but disputes with investors have recently soured investment appetite.

The Asian Development Bank has estimated the average economic growth rate for 2015 and 2016 could slow to as little as 4 percent, without a strong recovery in foreign investment.

Saikhanbileg, who entered office last November to kick-start the economy again, blamed the disputes with mining investors on the political posturing by the country's 76 lawmakers.

Mongolia is also planning to announce a final deal this month for the long awaited Combined Heat and Power Plant 5 project led by GDF Suez, Japan's Sojitz Corp. Korea's POSCO and Mongolia's Newcom Group, he said.

The consortium in 2014 signed an initial 25-year power purchase agreement for the 415 megawatt coal-fired facility.
MGL: Turquoise Hill rallied 10% on this news, and so it should. Perhaps a braver commentator might have put buy on this last week, but we've repeatedly seen hopes dashed in these grueling talks between the Mongolian Gov't and RTZ. The current EV of TRQ is almost identical to the NPV of the expansion, despite the stock being 1/10 of its value 5 years ago. 

Obviously there's upside from the copper and gold price, but its worth noting the sheer scale of the lands controlled by TRQ, and that intriguing Ulaan Kul discovery to the north.Image title
"In early 2011, Ivanhoe and BHP Billiton Ltd. discovered a new zone of shallow copper-molybdenum-gold mineralization approximately 10 kilometres north of the Ivanhoe Mines Oyu Tolgoi copper-gold mining complex currently under construction in southern Mongolia. The discovery, known as Ulaan Khud North, extends the known strike length of the Oyu Tolgoi mineralized system by an additional three kilometres to the north, to more than 23 kilometres."

Turquoise Hill must be high on our list of prospective copper gold midcaps, it is one of the best copper-gold discoveries in decades, and one of the few quoted coppers exiting from some kind of political blight (cf Zambia or Peru).


Oil and Gas

YPF: Argentina's Vaca Muerta Shale Output Rises To 45,000 Bpd

Argentina's shale oil output from the vast but barely tapped Vaca Muerta formation has increased, but low world oil prices and high drilling costs threaten profitability, the chief executive of state-run YPF said on Thursday.

YPF has said the slump in international oil prices over the last year has had no impact on the company's exploration plans, defying the industry trend of multinational giants announcing multibillion-dollar spending cuts.

The South American country wants to ramp up its exploitation of Vaca Muerta, which lies beneath the windswept plains of Patagonia, to reverse an energy deficit.

Government controls on the economy and high costs, however, have deterred foreign investors.

As the fall in world oil prices has forced energy companies to recalculate their plans, uncertainty has been heightened in Vaca Muerta, where production is in its infancy and engineers are still deciding at what angles to drill in order to optimize output.

"It is still early to talk about the profitability of non- conventional energy. It depends on a lot of factors," YPF Chief Executive Officer Miguel Galuccio told an industry conference in Uruguay.

"It is not profitable with an $11 million well and prices at $50 per barrel. We drilled our vertical wells with the expectation that they would be profitable at $84 per barrel and with wells that cost between $6.5 or $7 million," he added.

Brent crude futures settled at $56.57 per barrel on Thursday, having plummeted from more than $115 per barrel in June.

"The horizontal wells are demonstrating a much more positive range in terms of productivity, but we are talking about wells that have been producing for less than one year," Galuccio said.

"Today the Loma Campana field is producing 44,000-45,000 barrels per day equivalent," Galuccio said.

- See more at:
MGL: YPF has been protected, so far, by the world's highest retail prices ex tax at the pump. That situation is always going to be temporary. There are boatloads of gasoline and diesel everywhere gagging for a market. Galicio acknowledges that situation, and admits even the Vaca Muerta, with its superb economics is threatened.

We've had this stock on our hiding places list, and its held in there well. At last nights close, it is the same price as it was last year, and that in the Oil patch is a considerable achievement.

Halcon Resources Bonds Rise as Franklin Equity Swap Trims Debt

Halcon Resources Corp. bonds rallied by the most in two months after the energy company said the largest publicly disclosed holder of the notes agreed to a debt-for-equity swap.

Two funds headed by Franklin Resources Inc. agreed on Tuesday to exchange $116.5 million in principal of the 9.75 percent bonds maturing in 2020 for 66.5 million shares of Halcon stock, according to a company filing. The notes rose as much as 3.75 cents on the dollar to yield 15.4 percent Thursday in the second-highest daily trade volume ever, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Shares of the exploration and production company have tumbled 76 percent since July amid a commodity slump that’s cut the price of oil to about half of what it was last summer. The exchange, which will reduce the company’s debt, is expected to close this month, and comes after Halcon in March announced a $150 million equity offering.

“With any sort of distressed-debt scenario, you start to see lots of discussions around bondholders exchanging bonds” for other debt or equity, Spencer Cutter, an analyst with Bloomberg Intelligence, said by telephone Thursday. “Maybe Franklin’s got a view on Halcon and their ability to weather this storm. This is an easier way for them to trade out of the debt without impacting the market price for it and buy the equity also.”

The swap will give Franklin the second-largest publicly disclosed stake in Halcon shares, according to data compiled by Bloomberg. The investor is among the largest publicly disclosed holder of bonds for offshore drilling companies including Hercules Offshore to Vantage Drilling, Bloomberg data show.
MGL: Image title
Halcon's equity just rose 15% for 3% decline in debt outstanding. Given Halcon bonds all trade around 75c on the dollar, Franklin just received a 33% uplift in value for surrendering their seniority on the balance sheet. Surely other bondholders have to be offered the same deal?

Halcon equity just assumed confetti like properties. 

In all honesty what is Halcon doing with gazillions of acres of non producing shale financed by $3.7bn of debt? 

Mark to market EV: $2.7bn
Standardised value (PV10 with taxes) $3.2bn at $95 oil $3 gas. 

The bonds are the value here, if there is any value at all.

OPEC's no-cut strategy is not working, Iran says

OPEC's strategy of holding output steady is not working and the group's members should discuss production levels before its next meeting in June, Iran's oil minister said, a sign of the pain lower prices are causing OPEC's less wealthy producers.

However, Bijan Zanganeh also told Reuters it was up to other members of the Organization of Petroleum Exporting Countries (OPEC) to make way for any extra Iranian crude that reaches world markets if Western sanctions on Tehran are lifted.

"It seems [OPEC's strategy of not cutting output] does not work well, because prices are coming down," Zanganeh told Reuters on Thursday during a visit to Beijing. "We haven't witnessed stable situations on the market."

Iran was among the OPEC members which wanted an output cut at OPEC's last meeting, in November. But the Gulf OPEC members, who account for more than half of the group's output, refused to cut without the participation of non-OPEC producers.

Brent crude oil hit a near six-year low close to $45 in January. It was trading around $57 on Thursday, down from its 2015 high of $63.

OPEC, which pumps one third of the world's oil, may soon have to deal with an increase in supply from Iran if Western sanctions over its nuclear programme are lifted.
MGL: Right, so the Saudi's are really going to welcome you back Iran.

"Yes, yes we'll cut 1.5mbpd off production to allow Iranian production back"

Can you really imagine Al Naimi saying this?



US NatGas Inventories

Working gas in storage was 1,476 Bcf as of Friday, April 3, 2015, according to EIA estimates. This represents a net increase of 15 Bcf from the previous week. Stocks were 651 Bcf higher than last year at this time and 173 Bcf below the 5-year average of 1,649 Bcf. In the East Region, stocks were 180 Bcf below the 5-year average following net withdrawals of 18 Bcf. Stocks in the Producing Region were 77 Bcf below the 5-year average of 694 Bcf after a net injection of 26 Bcf. Stocks in the West Region were 83 Bcf above the 5-year average after a net addition of 7 Bcf. At 1,476 Bcf, total working gas is within the 5-year historical range.

Working Gas in Underground Storage Compared with 5-Year Range
MGL: What did we learn this Winter?

Despite a very normal winter, NOAA data puts this last winter almost smack on the ten year average:Image title
We never tested the system, never saw gas supply really challenged. (OK, so if you live in Boston, its a bit different, shout at your local utility, the NY greens, and the politicos for laggardly pipeline build, dont ring me!).

Its that darn Marcellus again. 

Here's supply:
Image title
And here is demand:
Image title

In the good old days, when gas was $10 an mmcf supply came from the SW and had to head NE to the big metropolitan areas around Chicago, New York and Florida (ahem, thats not NE, - Ed). California doesn't matter much seasonally. 

Today we have this supergiant called the Marcellus sitting smack outside New York, and extending all the the way to the Ohio valley, almost into the Chicago metropolitan area. The logistics chain is just simply an order of magnitude smaller. That means storage requirements are smaller.

Its just depressing. Maybe we should go do biotech or internet stocks for a living.


The oil industry’s $26 billion life raft

For U.S. shale drillers, the crash in oil prices came with a $26 billion safety net. That’s how much they stand to get paid on insurance they bought to protect themselves against a bear market — as long as prices stay low.

The flipside is that those who sold the price hedges now have to make good. At the top of the list are the same Wall Street banks that financed the biggest energy boom in U.S. history, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.

While it’s standard practice for them to sell some of that risk to third parties, it’s nearly impossible to identify who exactly is on the hook because there are no rules requiring disclosure of all transactions. The buyers come from groups like hedge funds, airlines, refiners and utilities.

“The folks who were willing to sell it were left holding the bag when prices moved,” said John Kilduff, partner at Again Capital LLC, an energy hedge fund in New York.

Other companies purchased insurance. The fair value of hedges held by 57 U.S. companies in the Bloomberg Intelligence North America Independent Explorers and Producers index rose to $26 billion as of Dec. 31, a fivefold increase from the end of September, according to data compiled by Bloomberg.

Though it’s difficult to determine who will ultimately lose money on the trades and how much, a handful of drillers do reveal the names of their counterparties, offering a glimpse of how the risk of falling oil prices moved through the financial system. More than a dozen energy companies say they buy hedges from their lenders, including JPMorgan, Wells Fargo, Citigroup and Bank of America.
MGL: $26bn is a small hole in the QE soaked world these days.  Is it really big enough to do more than dent someone's quarterly earnings?  Most of the named mega-banks likely sold it on to some poor unsuspecting Airline/Utility with a 'natural' desire for crude. Its just not as big as we feared.

‘Nowhere to Hide Except the Permian’

The Permian Basin in West Texas is the most active hydrocarbon-producing area in North America, and, even in a low-price environment, it remains among the most favorable areas on the continent to drill of oil, natural gas liquids (NGL) and natural gas, according to the latest report issued by Bentek Energy, a unit of energy and commodities information provider Platts.

In the last three years, oil production in the Permian, which straddles Texas and New Mexico, has jumped 50%, while natural gas production has climbed 30% and NGL output has increased 61%, the report states. Horizontal drilling, new exploration and production techniques, and a multitude of unconventional producing formations have led to a major Permian renaissance.

The Permian also is showing greater resilience during the recent drop in drilling in response to falling crude oil, NGL, and natural gas prices. Permian rig count declines have been mainly vertical rigs, rather than horizontal rigs.

"Unlike other US producing basins, the Permian Basin is less exposed to adverse market conditions because of its more favorable production economics as well as its close proximity to major markets," said Ross Wyeno, senior energy analyst at Bentek Energy.  

"Nowhere to Hide Except the Permian" provides an overview of the characteristics that make the Permian Basin such an attractive location for producers even in a low-price environment. The report includes information on the the Permian crude oil market; NGL infrastructure and natural gas market dynamics in the Permian and surrounding regions; a forecast of Permian crude oil, NGL, and natural gas production over the next five years; and a review of major challenges and risks ahead for Permian producers.

"Bentek currently expects Permian oil production to increase 40% over the next five years," Wyeno said. "However, the Permian is not immune to adverse market conditions. If crude prices fall to less than $40 per barrel for a sustained period, Permian production would be at risk."
MGL: Scratching our heads on this one.

Permian is big, we grant you. Productivity is sharply improving, yes (+20% Oil per rig on last months data alone), but the best of the Permian is not yet as good as the core of the Eagle Ford, Bakken or Niobrara.

Here's the EIA data (rig based)

Image title
Apparently production is rising.

Heres the RRC production numbers for Martin county, which is slap bang in the centre of the core, and has some of the best Geology:

Image title-15%
Now just to be fair, and in a nod to EOG and Concho, who assert that the Delaware is better, here's Loving county on the eastern flank:
Image title
Now to be mean, here's the data from a marginal county with horrible shale:
Image title
So the Permian is not immune to low oil prices.

We think the EIA productivity report is a pretty piece of paper in this environment. 


Canadian Oil Company to Liquidate Due to Crisis in Yemen

Canadian oil and gas producer Calvalley Petroleum Inc said it would liquidate due to the political crisis in Yemen, where it has almost all of its operations.

Calvalley shareholders will have the option to get 80.7 cents per share or shares of the company's unlisted unit, Calvalley Energy Ltd, or a combination of both, the company said.

The company said on Thursday its efforts to diversify out of Yemen, or sell itself or its assets, had not resulted in "compelling" opportunities.

The company has a 50 percent working interest in an oil and gas block owned by Yemen.

It also has a small working interest in a property in Saskatchewan, Canada.

- See more at:
MGL: Another one bites the dust!

Russian Oil Floods Export Market as Teapot Refiners Lose Money

Crude oil exports from Russia, the world’s biggest producer, grew about seven times faster than output in the first quarter as the country processed less fuel at home.

Shipments from the country increased 7.4 percent from a year earlier between January and March, the biggest gain in at least nine years and outstripping a 1.1 percent rise in production, according to Energy Ministry data. Domestic crude deliveries to refineries fell 1.9 percent as OAO Rosneft said simple plants, known as teapots, were not profitable to run after prices plunged last year.

“Simple refining is struggling in Russia, freeing up crude for export,” Ehsan Ul-Haq, senior analyst at KBC Energy Economics in London, said by phone Wednesday. “Domestic demand is also very weak due to the economic situation. It takes time for low prices to impact crude output, so it may not be until the end of the year that Russian supplies start to slip.”

Rising shipments from Russia are adding to the pressure on crude prices, already down about 50 percent from last year as global inventories swell. Members of OPEC, who pump about 40 percent of the world’s oil, say they will not cut output unless other producers do the same. The U.S. is on track this year to produce the most oil since 1972.

The oil price slump, combined with U.S. and European Union sanctions in response to Russia’s role in the Ukraine conflict, has so far failed to reduce oil production, which grew to a post-Soviet record of 10.7 million barrels a day between January and March. The country’s crude exports in the first quarter expanded to 5.29 million barrels a day, compared with 4.92 million a day a year earlier, Energy Ministry data show.

A weaker economic outlook will curb the country’s oil-demand growth, according to the International Energy Agency. The Paris-based adviser on energy policy to 29 nations forecast last month that Russia would consume 3.44 million barrels a day of oil in 2015, a cut of 180,000 barrels a day since November.

The country’s economy may shrink 3.5 to 4 percent this year, Bank of Russia Governor Elvira Nabiullina said April 7. Car sales plummeted 43 percent in March compared to a year earlier, according to the Association of European Businesses in Russia. Consumer confidence fell to the lowest level since 2009 in the first quarter, the Federal Statistics Service said by e-mail Wednesday.
MGL: So if you send Russia into recession, tax its refineries and depreciate the currency, Oil exports rise. 

That's just not helpful!

~700kbpd add to the surplus?

The Fracklog.

Companies delaying the completion of wells that have been drilled are keeping 373,000 barrels a day of oil out of the market, energy intelligence firm Genscape Inc. said.

Six companies announced plans to defer completing a total of 845 drilled wells this year, Genscape said in a report Wednesday.

Some oil producers have responded to the 50 percent drop in crude prices since June by delaying the hydraulic fracturing of wells. This backlog of unfracked wells, known as a fracklog, can then be completed and brought online when prices have rebounded.

“The crude oil contango market in the U.S. has created a massive incentive to store oil, and while traditional storage hubs reach record high levels, operators look to their own wells as an avenue to store until commodity market conditions improve,” Randall Collum, managing director of supply side analytics at Louisville, Kentucky-based Genscape, said in the report. “Deferring the completion of wells makes economic sense by allowing capital conservation while banking on the forward curve.”

West Texas Intermediate crude for May delivery settled at $50.42 a barrel Wednesday on the New York Mercantile Exchange. The May 2016 contract was more than $7 higher, at $57.74.

Genscape analyzed the fracklogs of Cabot Oil & Gas Corp., Chesapeake Energy Corp., EOG Resources Inc., SM Energy Co., Apache Corp., and Anadarko Petroleum Corp. In addition to the oil supply, the delays are keeping 528 MMcfd of natural gas off the market.

Apache said in an e-mailed statement April 1 that it was no longer deferring completions and, with service costs falling, “all wells we are drilling today, we are completing.”

There are about 3,000 drilled but uncompleted wells across the U.S., James West, senior managing director at Evercore ISI in New York, said in a March 30 report.

Hess Corp., the biggest spender in North Dakota’s Bakken region, is doing the exact opposite of some of its rivals. The company is working this year to shrink its fracklog to 30 wells, down from the 60 that it had going into 2015, Chief Operating Officer Gregory Hill said at a Hart Energy oil conference in Denver April 1.

“I hear the guys that are saying they’re drilling these wells and not completing them, and that makes no sense,” Hill said. “The one thing I know in this industry is we can’t even predict long-term pricing. How are we going to predict short-term pricing? While you wait to complete that well, the return is steadily declining. You’re getting no revenue and you got all this sunk capital in the drilling part.”

MGL: So we've seen estimates of the Fracklog up to 3mbpd, which was blatantly absurd; now we have an estimate down at 373kbpd per day, plus 0.5bcf pper day of gas. Thats feels low, but in the ball park, if you take my meaning!

So where is the reality?

Here's the Texas RRC version of the data, based on ROYALTY payment ESTIMATES:

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You can clearly see a very sharp fall between December and January. Its about 10% month on month across the board. Note the casinghead gas column, which is associated gas from mainly shale wells, that's showing a 15% fall in production.

Here's the raw EIA data based, we think, on rig productivity:

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The EIA data shows a RISE in Oil production.

We think the difference is the Fracklog.

The raw data on a direct comparison implies the Texas Fracklog is around ~400kbpd, and that would imply a number for the US of around ~900kbpd, which implies a March fracklog at the upper end of our 'ball park' guidelines. (1.5mbpd).

Now on the one hand I would be careful of this data, EIA bureaucrats and Texas bureaucrats use different methodologies, and we may be comparing apples to pears. Never0theless the direction is anomalous, and this chart amply demonstrates that the two sets of data have been divergent most of last year:Image title
It is likely that the difference through July is mainly the contribution of offshore wells which the RRC does not measure.

We do not think the market looks at this data in any detail, but the market does react to EIA revisions of production, and these revisions are starting to be negative. It makes the traders reflexively bullish Oil, and periodically drives large rallies in WTI. The most recent EIA revision reduced January output by 480kbpd, so we might be half way there!

Let us for a moment, take this data at face value, and assume that total US shale production is now actually falling. (Fracklog increased between January and March). Yet inventory throughout the first quarter and in April continued its relentless rise.

That to us, strongly implies, that a surge in Canadian crude volumes (+600kbpd y-o-y) moving down newly completed pipeline infrastructure is likely responsible for the inventory gain. It further implies that a fall in US shale production, though helpful, is NOT ENOUGH TO BALANCE THE OIL MARKET.

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Meanwhile retail continues to bull Oil and accumulate the likes of the XOP etf, which is small cap E&P equity.


America is still brimming with oil.

Last week, crude oil inventories rose by 10.9 million barrels from the previous week, according to the Energy Information Administration's weekly data release. That brings the total to 482.4 million barrels, the highest level for this time of year in at least 80 years.


Read more:
MGL: Since September US oil inventory has risen 100m barrels in a near straight line. Thats roughly 0.5mbpd, or the increase in Canada export capacity via pipeline south of the border. Its the Canadians, not the shale!

SBM Denies $1.7B Settlement with Brazil over Bribery Scandal

Dutch floating production vessel provider SBM Offshore refuted Wednesday an article in a Brazilian daily newspaper that it has agreed a $1.7-billion settlement with Brazilian authorities in connection to a bribery scandal in the country. SBM said that discussions with the Brazilian authorities remain at an early stage and no numbers have been agreed upon.

Last month, SBM and Brazil's comptroller general said they had agreed on a framework for a mutually-acceptable settlement over the scandal, which is also linked to Brazil's state-run oil firm Petrobras.

In November, SBM agreed to pay $240 million to settle the case with Dutch authorities. The firm also stated that the US Department of Justice had informed SBM that it had closed its inquiry into the matter. But individuals involved in the case could still face criminal charges in other countries.

- See more at:
MGL: WSJ article last week had $700m total of Petrobras bribes, we think this figure is likely the settled figure the investigators have so far completed to litigation. We know SBM is $240m, we know the lead witness has been found with $300m in his various bank accounts, so $700m feels like a likely number for completed testimony. The chief Justice in the case is quoted in the press as saying "in excess of $30bn" for the  entire scandal, and that number approximates to 3% of Petrobras's expenditure over the last decade. 

Al Naimi Speaks

The experience of the first half of the 1980s was still in our minds. At the time, we cut our production several times. Some OPEC countries followed our lead, and the aim was to reach a specific price that we thought was achievable. It didn't work. In the end, we lost our customers and the price. The Kingdom's production dwindled from over 10 MMBD in 1980 to less than 3 MMBD in 1985. The price fell from over $40 per barrel to less than $10. We are not willing to make the same mistake again.

That said, I would like to be absolutely clear. The Kingdom remains willing to participate in restoring market stability and improving prices in a reasonable and acceptable manner. But this can only be with participation from major oil producing and exporting countries. And it must be transparent. The burden cannot be borne by the Saudi Arabia, the GCC countries, or OPEC countries, alone.

I would also like to clarify, conclusively, that the Kingdom of Saudi Arabia does not use oil for political purposes against any country, and it is not in a competition with shale or other high-cost oils. On the contrary, we welcome all new energy sources which add depth and stability to the market and that will help meet growing oil demand in the years to come.
MGL: Al Naimi is talking about burden sharing once again. It, I think is a hint to the Russian, Norwegians, and Mexicans, that they have to join OPEC if they want the price back to its former glory.

Market price expectations of $80+ remain extremely resilient.  We hear a steady chant by Oil analysts and fund managers quoted in the press and on TV saying that Oil will recover by year end. Its a palpable consensus.  Shell just paid $35bn premium for BG, and the only possible economic justification for that bid is that Shell, and its legion of analysts, consultants and advisers believes that LNG and Oil prices will approximately double from here.  The price of Schlumberger, which we've noted in the past tracks Oil expectations beautifully, is $86. 

Capex is declining, Oil shale production has likely peaked.  Thats true, and fair, but all it means is that the industry is moving away from peak supply add, and in 2014 the industry added roughly 2x as much production as demand. For the last six months we've been showing you, with examples from all the big commodities, that supply follows capex, it is not coincident. It will take at least another year before capex cuts begin to slow supply growth outside the shales. 
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Our core thesis is that Saudi is increasing its core export capacity by replacing Oil consumed in electric power plant with gas. Here's Al Naimi again:

"Although the Saudi Energy Efficiency Program only started three years ago, it has achieved distinguished results. It will achieve more in the future, saving for the Kingdom approximately 20% of the expected energy consumption by 2030. This is the equivalent of 1.5 MMBD. Here, I must praise the marvelous role of HRH Prince Abdulaziz ibn Salman in the success of this program."


"The Kingdom of Saudi Arabia has huge oil and gas resources. With today's technology, our proven recoverable reserves stand at 267 billion barrels. Our proven natural gas reserves are 300 trillion cubic feet. Annual production is compensated with new discoveries. Upstream technology is advancing, and Saudi Aramco is a leader in this area.

We are also one of the most active countries in terms of exploring for shale oil and gas and detecting their reservoirs and volumes. We know that we have huge volumes in several places."

We've shown you the large gas midstream contracts, the surge in LPG exports and the adverts in Texas for experienced fracking crews. 

We've shown you the repeated references to $60 in Saudi official PR: from Al Naimi, from various ambassadors, and from the Saudi budget assumptions.

The only question that you must answer is whether you believe that Saudi has the power to sustain export growth, and for how long. Our analysis suggests they want to export 10mbpd of crude and products by late 2017. Thats an increase in 2.5mbpd from todays levels.

Here's the IEA on Oil Demand growth:

"Having bottomed-out in 2Q14, global oil demand growth has since steadily risen,with year-on-year gains estimated at around 0.9 mb/d for 4Q14 and 1.0 mb/d for 1Q15. The forecast of demand growth for 2015 as a whole has been raised by 75 kb/d to 1.0 mb/d, bringing global demand to an average 93.5 mb/d."

So on face value (let's ignore, for a second, the substantial storage build thats ongoing) Saudi has the capacity to fully satisfy Oil demand growth for 2.5 years. 

This is a generous read of the market balance, it could easily be argued that half the IEA's forecast growth in demand is going into inventory build. We still have strong non-OPEC supply growth. So parsing the numbers, it could be 5 years before we can once again be bullish of Oil.

To be bullish Oil now you need to believe that Norway, Russia and the Mexicans accept the implicit Saudi offer, and agree to curtail production. That's a reach. 


EIA Changes Tack On Latest Oil Crisis

As previously reported the EIA, the IEA and the media have been understating demand and overstating “estimated” production. Today the EIA capitulated, finally exposing the game that has been occurring for 6 months now. They lowered 2015/2016 crude oil production growth to 550,000 B/D and 80,000 B/D respectively from 700,000 B/D and 140,000 B/D. This is a whopping reduction of 21% and 42% respectively when investors were led to believe that Cushing was filling fast and the glut would continue ad infinitum!

On the flip side the EIA has now “created” the overhang issue tied to Iran in 2016 saying that Brent prices may get reduced $5-$15 in 2016 if sanctions are lifted. To reiterate even if Iraq increases exports by 1M barrels demand will and has increased 1 million B/D. How many negatives to do we have to hear only to get dispelled and lose faith in the institutions that are supposedly providing unbiased research?
MGL: Typical blog entry right now.

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Here's US gasoline sales. You can see the big lift as prices tumble and that $50 credit card  fill at the pump buys 30% more volume. Then it starts to fade. Your tank is full, you cant buy more!

We simply dont know yet what core real end demand is actually doing, and we wont for some considerable time. There's likely a lift, yes, but we doubt its that large. Its certainly not the near 30% lift implied in this data!

Nevertheless, the data is coming down, and the market wants to open the champagne.

Halliburton to put drilling business units up for sale

Halliburton says it plans to hawk three business units as it works to persuade antitrust regulators to clear its $34.6 billion deal to buy smaller rival Baker Hughes.

The Houston oil field services firm said Tuesday it is putting its fixed cutter bits and roller cone drill bits, directional drilling, and logging-while-drilling and measurement-while-drilling businesses on the auction block in separate deals.

The transactions are expected to be finalized after federal trustbusters approve the Baker Hughes deal, which will tie up the world’s second and third-largest oil equipment suppliers, likely in the second half of 2015.

“We believe the value inherent in these businesses will be recognized by prospective buyers,” Halliburton CEO Dave Lesar said in a written statement, noting the firm “would prefer to retain these assets” if it wasn’t required by regulators to divest assets in certain oil tool markets.
MGL: Obvious buyers: GE and Varco. There are plenty of other likely names too, sentiment is such right now that buyers reflexively beleive they are buying "the bottom".

Shell in £47bn bid for BG Group

Royal Dutch Shell says it has agreed to buy oil and gas exploration firm BG Group in a deal that values the business at £47bn.

The two firms say they have reached agreement on a cash and shares offer which gives investors a 50% premium on BG Group's share price on 7 April.

The deal could be one of the biggest of 2015 and is also the first big merger between energy companies in a decade.

It could produce a company with value of more than £200bn ($296bn).

Shell's £177bn market capitalisation dwarfs that of BG, which now stands at £31bn after a 20% fall in its share price over the past year.

BG Group is the UK's third largest energy company. It was created in 1997 when British Gas demerged into two separate companies: BG Group and Centrica.

Shell said BG Group shareholders would enjoy higher dividends, as it confirmed its intention to pay its existing shareholders $1.88 per ordinary share this year.

The oil giant also said it expected to commence a share buyback programme in 2017 of at least $25bn.

The deal comes at a time of uncertainty for oil and gas companies. In the past six months the price of oil has fallen by about 50%. Meanwhile, analysts have warned that investment in North Sea oil exploration has all but dried up, threatening the entire industry.
MGL: Takeout is at 46x eps, 12x ev/ebitda. Its nearly 3x the NPV at $95 Oil/$3 gas.  Equates to $18 a reserve boee. What is Shell thinking?

Obvious: Shell bulks up and consolidates LNG industry. Secures an outlet for its large Australian gas supply that is currently lacking an LNG port. Can cut a bevy of costs, and presumably secure bigger discounts for its capex projects. Secures some nice equity in Brazilian sub-salt at a time when the entire Petrobras scandal may actually lead to some positive change in Brazilian Oil politics. 

Not so obvious: Does Shell gain a CEO candidate with serious credentials? Helge Lund did by far the best job of the EU majors in the shale. He knows the offshore intimately.  Shell needs a vigorous outsider to shake up its internal bureaucracy to the core. If Helge Lund stays at Shell, we may have to seriously rethink our disparaging remarks towards the group. 

At the end of the day, Shell is buying what it failed miserably to find. A decent size pot of discoveries. 

Moody's: Liquefied natural gas projects nixed amid lower oil prices

Liquefied natural gas (LNG) suppliers are curtailing their capital budgets, amid low oil prices and a coming glut of new LNG supply from Australia and the US, Moody's Investors Service says in a new report, "Lower Oil Prices Cause Suppliers of Liquefied Natural Gas to Nix Projects."

Moody's says low LNG prices will result in the cancellation of the vast majority of the nearly 30 liquefaction projects currently proposed in the US, 18 in western Canada, and four in eastern Canada.

"The drop in international oil prices relative to US natural gas prices has wiped out the price advantage US LNG projects, reversing the wide differentials of the past four years that led Asian buyers to demand more Henry Hub-linked contracts for their LNG portfolios," says Moody's Senior Vice President Mihoko Manabe.

However, projects already under construction will continue as planned, which will lead to excess liquefaction capacity over the rest of this decade. Notably, through 2017, Australia will see new capacity come online from roughly $180 billion in investments, which will result in a 25% increase in global liquefaction capacity. Likewise, the US is poised to become a net LNG exporter after the Sabine Pass Liquefaction LLC (Ba3 stable) project goes into service in the fourth quarter of 2015.

Moody's expects Cheniere Energy's Corpus Christi project will be the likeliest project to move forward this year, since it is among the very few projects in advanced development that have secured sufficient commercial or financial backing to begin construction.

Lower oil prices will result in the deferral or cancellation of most other projects, especially this year. While some companies like Exxon Mobil Corp. (Aaa stable) can afford to be patient and wait several years until markets are more favorable, most other LNG sponsors have far less financial wherewithal, and some may be more eager to capitalize on the billions of dollars of upfront investments they have made already, sooner rather than later.
MGL: I wish it were so clear. 

There's substantial inertia involved in many of these projects. They are still low cost, still profitable and still eminently financeable for the mainly utility owners.  Strategic buyers like the EU utilities, and Japanese utilities still want a source of secure, low risk supply. 

Nevertheless, we agree, that much of the announced capacity will simply die before FID. 

Saudi pumps up oil production to record high 10.3 million bpd

Saudi Arabia has revved up crude production to its highest rate on record, feeding unexpectedly strong demand from foreign refiners and increased capacity at home.

Oil Minister Ali al-Naimi told reporters late on Tuesday that the Kingdom produced some 10.3 million barrels per day (bpd) of crude in March, a figure that would eclipse its previous recent peak of 10.2 million bpd in August 2013, according to records going back to the early 1980s.

Just a few weeks earlier, Naimi had pegged production at around 10 million bdp, some 350,000 bpd above what Saudi Arabia said it pumped in February. The Kingdom produces more than 10 percent of the world's crude.

Oil prices rallied on Tuesday on separate Naimi comments about working with other big producers to stabilize the market - something most analysts see as unlikely in the near future - but it was the production figure that raised eyebrows.

"While April and May could see a small pullback, overall it is clear that Saudi Arabia has reacted to stronger demand for their crude, despite being in an oversupplied market," Energy Aspects chief analyst Amrita Sen wrote in a note.

Demand was stoked in part by deep discounts on Saudi exports in March as the Kingdom offered Asian customers the deepest discounts on its flagship Arab Light crude in at least 12 years, according to Reuters data. ARL-OSP-A Saudi Aramco has raised its prices for the following two months, putting May at the highest level since last year.

U.S. imports of Saudi crude rose to more than 950,000 bpd over the four weeks to March 27, the highest since last September, U.S. data show.

The Saudi production figure also likely reflects some additional domestic refinery demand.

The 400,000 bpd Yanbu Aramco Sinopec Refining Co (Yasref) refinery, a joint venture between state oil firm Saudi Aramco and China's Sinopec, has been steadily ramping up production this year and was due to reach full capacity by mid-February. A venture with Total started up in late 2013.

"Production is always going to grab the headlines, but exports will be more important than ever to focus on," said Mike Wittner, Global Head of Oil Research at Societe Generale.

Saudi Arabia also burns more crude to generate power heading into the summer months. Direct use of crude last year rose from around 350,000 bpd in March to nearly 900,000 bpd in July, according to the JODI data.
MGL: The Societe General analyst is correct, its exports that really matter, but nonetheless we can infer that exports must be in the order of 7.5-8mbpd on this output data. Now much of this production appears to have headed directly into storage. There's precious little evidence we've seen so far of a MEANINGFUL rise in end demand. Yes its up some, but nowhere near the levels the market seem to be inferring. 

Again, and we must reiterate, the market seems to have entirely missed the consequences of the Saudi dash for gas, which is adding 15bcf per day of production over two years, and will entirely replace domestic oil use for electricity, as well as generating a substantial stream of LPG and condensate from the 'wet' titre of production.  Please note that ARAMCO has ceased to publish the light production data entirely, but just because we don't have the numbers does not mean it is not there!

US oil output is falling! Or maybe not - market's data quandary

The immediate outlook for U.S. oil production has rarely been more important for the financial world, with traders scrutinizing every scrap of data for signs of a sustained pull-back in output. It has also rarely been harder to predict.

Until late last year, a handful of energy analytics firms had honed the art of real-time oil production forecasts to a near science, running reams of information through complex models that account for everything from a well's production curve to weather patterns. With the price slump, however, these firms are struggling to keep up with the rapid pace of change.

"Things were much more straightforward at $100," says Bentek Energy analysis manager Anthony Starkey, whose Colorado-based firm publishes end-of-month production data, one of several closely monitored private reports.

Last week's U.S. government data showing a marginal drop in weekly output was a case in point. Some thought it marked a turning point and crude prices rallied more than $1 right after the data, despite an otherwise bearish rise in crude stocks.

The problem is the figure is not what it might seem to be. Rather than a survey-based data like most other weekly government statistics, the number is an estimate based on weekly production in Alaska and U.S. Energy Information Agency's month-old forecasts, according to the agency's methodology.

A comparison of EIA's weekly production figures for December and the monthly figure based on state data published two months later, underscores the risk of taking the weekly numbers at face value.

While the weekly numbers never exceeded 9.13 million barrels per day, the monthly number came in at 9.3 million. The latest weekly estimate is due on April 8.

State well production statistics are the industry standard, but they vary widely in terms of timeliness and detail. Some states such as North Dakota and Texas release the information within about two months, others, such as Ohio do so once a year.

Energy analytics firms are deploying cameras on pipelines, using natural gas flows to help predict crude output and relying on new algorithms that take into account production potential.

The techniques can work remarkably well when producers follow established patterns. Things get tricky though, when they scramble to keep up with tumbling crude prices that have fallen about 60 percent since June 2014.

Drillinginfo Inc., of Austin, Texas, for example, has recently began producing its own monthly index for "new production capacity," representing the likely future output and based on a model that uses everything from daily rig information to well types and production curve data.

Given that most shale wells begin pumping only about five months after they were drilled, the index has effectively served as a pretty accurate five-month leading indicator, according to co-founder and chief executive Allen Gilmer.

"If you did a backward comparison, the index is within a percent," he said.

But that time lag is getting longer and much less predictable, as more oil companies opt to leave new wells idle to await a recovery in prices, making calculating output harder. The share of wells that start pumping oil within five months has fallen to 72 percent from 78 percent a year ago, Gilmer says.

Gilmer says their suggests U.S. production will peak in May and then enter a five-month decline.
MGL: The fracklog is throwing every 'normal' number to the wind. EIA, for example, uses rig data to estimate output, and must be thinking some now about completions, or the lack of them. State well completion data that we've seen suggests the fracklog is now sizeable, we threw a 1mbpd number at you for 'fun', but frankly it could be anywhere between 500kbpd and 1.5mbpd. 

December data just begins our confusion, December was the first month we saw some delayed completion activity, by March the anecdotal number was '85%' of well completions. Canadian pipeline completions add to the headache, bringing 600kbpd of heavy oil down to PADD3 for the first time, and last year almost no Canadian crude made it to Houston. 

The market will likely react to the EIA data, its official, its easy to understand, and implicitly contains the fracklog.  

We think the reality is as follows:

1> US Oil production likely peaked in q1, but you have to respect that enormous overhang from the fracklog. Knowing the companies, they wont want to liquidate that Fracklog under $80, because thats the price at which current sunk costs are recovered with return.

2> There's still too much oil even if you assume US output has peaked. Inventory gains almost every week tell their own story.

3> The market is gagging for good news, investors of every stripe are just dying for an excuse to buy the equity. There is so little commentary on the Saudi ''line in the sand'' at $60, it is almost frightening. This oil investment crowd behaviour looks simply delusional.

If Oil follows the pattern of the iron ore, and coal bear markets it is not going to be easy to dissipate this bullish behaviour in the face of horrible news flows. Shell's purchase of BG this am will cause some frothing at the mouth too, but the fact remains Shell is buying BG at a price equal to where BG traded 1 year ago. 


Petrobras to halt 5 drill rigs under contract with Schahin

Brazil's state-run oil company Petroleo Brasileiro SA said on Monday it would halt five drilling rigs under contract with Schahin.

Petrobras, as the company is known, said it was informed by Schahin on April 2 that the financially strapped oil services company was planning a controlled shutdown of drilling activities at five of its rigs.

Schahin debt has come under pressure after unconfirmed media reports said the company was close to filing for bankruptcy protection and that it was being sued by its creditors for unpaid notes.
MGL: Schahin, a local Brazilian driller, is private but has debt  last quoted at 40c on the dollar.  

Rosneft’s Far East LNG project facing delays

The drop in oil prices and the sanctions on Russia could be taking its first victim.

According to sources, Russian company Rosneft could be forced to delay the development of its Far East LNG plant on Sakhalin island for two years at least, Reuters reports.

Rosneft’s Sakhalin plant was scheduled to start production in 2018, with an output of 5 mtpa, after it signed the agreement with ExxonMobil in 2013.

As an unnamed source revealed, the project could be delayed for three to five years due to falling oil price and lack of funds, although the company’s spokesman said no changes have been made to the project’s timeline.
MGL: Is it not also possible the recent Japanese political overture to source Sakhalin gas via a pipeline for domestic consumption has made this project unnecessary?

Merged Tepco/Chubu Worlds largest LNG buyer

Embedded image permalink

Wood Mackenzie ‏@WoodMackenzie
MGL: 'Newco' will, like KOGAS, have about a 10% market share as buyer.  It seems we have mass consolidation both of buyers and sellers in the collapsed LNG market. 

Spot LNG trades over the last 16 months

Spot LNG trades over the last 16 months

spot trades sourced by ICIS over the last 16 months compared to our East Asia Index

Ed Cox ‏@icislng
MGL: Everybody is obsessed with Oil, but the LNG market is where the big disaster has hit, and hard.  Shell buys BG this am, and 'doubles down' on its already enormous LNG portfolio.

Oil Exploration ETF bullish too.

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Long-beleaguered energy stock bulls got a boost from Monday’s surge in crude oil prices, sending oil-related shares sharply higher. For chart watchers, today’s move is less of a surprise: Green shoots have been popping up in the sector for weeks. Specifically, oil and gas exploration and production stocks have built nice bases on the charts and some sport actual technical breakouts.

To be sure, this is a far cry from a bull market. That said, every bull market has to start somewhere, and there are plenty of technical signs to argue at least that the bear is over.

The SPDR Oil & Gas Exploration & Production exchange-traded fund (ticker: XOP ) set its low-water mark in December, and since then has formed a series of higher highs and higher lows (see Chart 1).

MGL: Struggling here to buy this breakout. Maybe we're obsessed with Saudi, but we just don't see that big V in Oil. Without Oil prices at $70+ or a radical transformation in the shale economics, ie service costs down 50% or more, this is a hope move, and not investable. 

Iran Oil Officials in Beijing to Discuss Oil Supplies, Projects

An Iranian delegation is in Beijing this week to push for more oil sales and discuss Chinese oil and gas investments in Iran, just days after Tehran and world powers reached a framework nuclear deal, Iranian oil officials told Reuters.

China is Iran's largest trade partner and oil client, having bought roughly half of Iran's total crude exports since 2012, when sanctions against Iran were tightened.

Amir-Hossein Zamaninia, Iran's deputy oil minister for commerce and international affairs said he and his colleagues would discuss China's oil and gas projects in Iran, while officials from state-run National Iranian Oil Company (NIOC) will meet with China's biggest crude buyers.

The NIOC and other officials are expected to meet with regular customers Unipec, the trading arm of top Asian refiner Sinopec Corp, and state trader Zhuhai Zhenrong Corp, which started taking Iranian crude in the mid-1990's when Tehran sought to repay arms purchases with oil.

- See more at:
MGL: Iran wastes no time in reaching out for investment partners. Pre sanctions they managed just over 2.4mbpd. Right now production is around 1mbpd. Storage is rumoured to contain some 7m barrels. 

Parex: Q1 Production 26,700 bopd Drilling Activity Increase in 2015

Parex Resources Inc., provides an operational update that confirms Q1 2015 production of 26,700 bopd and announces the start of its 2015 exploration program. All amounts herein are in United States dollars (USD).

Exploration & Production Update:

Oil production for Q1 2015 averaged approximately 26,700 barrels of oil per day, exceeding our original 2015 fully year production guidance of 26,500 bopd.
Block LLA-34 Tilo-1: On March 28, 2015 Tilo-1 commenced a long-term test and current production is approximately 850 bopd.
Commencement of 2015 Exploration Program: Block LLA-26 Rumba-1 exploration well was spud on March 25, 2015. The well is targeted to drill to a total depth of approximately 13,800 feet to test the Mirador and Une formations.
Plan to increase the 2015 exploration drilling program by 2 additional exploration wells on Block LLA-32 and 1 contingent appraisal well for a total of 11 wells in 2015.

2015 Capital Plans: Brent Oil Price Scenario $50-$60 per barrel

Parex has a robust asset portfolio that provides capital allocation flexibility together with capital preservation. Within a Brent oil price scenario of $50-$60 per barrel, our current 2015 capital and production guidance is as follows:

Base Production (excluding 2015 Exploration): 26,500-26,700 bopd
Base + Exploration Capital: $145-$155 million

Supported by sustained production and an improving cost structure, Parex is seeking partner and regulatory approval to drill up to 3 additional wells on Block LLA-32 in 2015, in addition to our existing 8 exploratory commitment wells on 7 blocks for a total of 11 exploration and appraisal wells.

Further, as a result of a 15-20% reduction in capital costs over 2014, Parex expects to increase its exploration drilling program by the 3 wells while maintaining its original capital budget range of $145-$155 million. Dependant on exploration results, Parex will evaluate deploying additional non-budgeted capital to increase 2015 production.

MGL: Parex is a great comapany, and they show they're stripes here. Not only is the price deck realistic, but the company runs positive cashflow, and has net cash on the balance sheet.  PV10 at $95 Oil is $1.1bn, EV is $1.2bn. Realistic PV10 is $400m? Like all Oil equity it is too pricey.

Record gasoline output to curb biggest U.S. oil glut in 85 years

Refiners are poised to make gasoline at a record pace this year, keeping the biggest U.S. crude glut in more than 80 years from overflowing storage.

They’re enjoying the best margins in two years as they finish seasonal maintenance of their plants before the summer driving season. They’ll increase output to meet consumer demand and they’ve added more than 100,000 barrels a day of capacity since last summer, when they processed the most oil on record.

Booming crude production expanded inventories this year by 86 million barrels to 471 million, the highest level since 1930. Analysts from Bank of America Corp. to Goldman Sachs Group Inc. have said storage space may run out. What looks like an oversupply is turning into an all-you-can-eat buffet for those making gasoline and diesel fuel.

 “A lot of the excess crude we’ve been sitting on is going to get chewed up quickly,” Sam Davis, an analyst for energy consulting company Wood Mackenzie Ltd., said in Houston April 2. “We’re going to move from a stock build to a stock draw.”

Refining margins in March have averaged $28.09 a barrel, the most since March 2013.

Refiners typically schedule maintenance shutdowns in the spring and fall, reducing oil demand during that time. U.S. refiners increased crude runs by an average 1.1 million barrels a day in April through July over the past five years. During that period, U.S. crude inventories have fallen an average of 24.7 million barrels from the end of May through September.

WTI is in a contango market structure, with futures contracts for April 2016 selling for $10.84 a barrel more than April 2015 when that contract expired on March 20. That encourages traders to keep crude in Cushing to profit on the trade, Lipow said.“There’s an incentive to fill up Cushing and hold it there,” he said.
MGL: All perhaps true. But doesn't that move the Oil glut into a product glut? Doesn't it move the pressure from WTI to Brent via the exports of product? 

Since late february WTI has been closing in on Brent. So it does appear that this trend is well underway.Image title

Eni looks for Mozambique FLNG decision later this year

In its annual report, Eni said it anticipates reaching a final investment decision (FID) regarding its potential offshore Mozambique FLNG project in the second half of this year.

The company said until then it will work to finalize gas contracts and production licenses leading to the FID.

Eni said the award of the relevant engineering, procurement, construction, installation, and commissioning contracts for the FLNG unit is expected by the end of 2015.

Production start-up is expected for the end of 2019.

The gas discovery, which Eni has said is “the greatest discovery in its exploration history” with a 2.5 tcm (88.3 tcf) potential, is in Mozambique’s Rovuma basin.
MGL: FLNG now? All the documentation we've so far seen suggested a port complex and associated infrastructure. It looks suspiciously like ENI is configuring a minimal size FLNG facility to develop the asset and put it into some kind of slow production mode whilst LNG prices are in the tank. Thinking must surely be that they can 'gear up' production when market prices allow the project economic returns. 

Libya's official government in new bid for oil cash

Libya's Prime Minister Abdullah al-Thinni has said his government would run its own oil sales and deposit revenues abroad in a bid to divert proceeds away from a rival self-declared administration in Tripoli.

Crude revenues are at the heart of a battle for control of the North African OPEC producer that has pitted the two rival governments against each other in a growing conflict, four years after the civil war ousted strongman Muammar Gaddafi.

On Sunday, a suicide bomber struck at a checkpoint near the Tripoli-allied town of Misrata, killing at least six people and wounding 40 more, according to a local news agency.

Thinni, based in the eastern city of Al-Bayda, announced late on Saturday he had authorised his internationally recognised government's oil corporation to open a separate bank account in the United Arab Emirates for oil revenues and to seek independent oil sales.

Until now oil sales and revenues have gone through Libya's central bank and National Oil Corporation in Tripoli, where a rival administration took over last summer. The Tripoli-based NOC has tried to stay out of the conflict between the rival governments.

Analysts say Thinni's government will struggle to convince international traders it is legally entitled to claim ownership of Libyan crude.
MGL: So this is the official gov't in the east of the country responding to their loss of control of the capital, and crucially the apparatus of managing the Libyan National Oil Corporation, which is controlled by the rebels, or the Petroleum National Guard (whoever they report to!).

Bullish output maybe?

Rig count stabilizes in Eagle Ford

After 14 weeks of declines, drilling activity is showing signs of stabilizing in the Eagle Ford shale region just south of San Antonio. This week's figures from theBaker Hughes Rig Count showed no declines in drilling activity for the Eagle Ford.

Although there were no gains, many oil industry observers have predicted that the market would reach an equilibrium point between drilling and production during the second quarter of 2015.
MGL: One week does not make a trend. 

But, looking inside the data, it is quite striking that there were no rig changes whatsoever across all the counties that comprise the Eagle Ford:

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US oil and natural gas rig count drops by 20 to 1,028

HOUSTON Oilfield services company Baker Hughes Inc. says the number of rigs exploring for oil and natural gas in the U.S. declined by 20 this week to 1,028 amid slumping oil prices.

Houston-based Baker Hughes said Thursday 802 rigs were seeking oil and 222 exploring for natural gas. Four were listed as miscellaneous. A year ago, 1,818 rigs were active.

Among major oil- and gas-producing states, Texas and North Dakota each dropped six rigs, Louisiana was off five and Oklahoma four. Arkansas, Kansas, Ohio and Pennsylvania declined one apiece.

California was up by two and Alaska and West Virginia added one rig each.

Colorado, New Mexico, Utah and Wyoming were unchanged.
MGL: We can deduce that the rig count is now about overhang, and completions are about production.

We have inferred from state vs federal data that production has already peaked, but that the fracklog now represents a very considerable backlog of production waiting for price.

Horizontal rig activity is still 2x the lows of 2009.Image title
We suspect Canadian production is responsible for most of the build in inventory, not US production. 

Absent the storage cliff, we have possibly reached a point of meta-stability in Oil markets. US shale production falls could easily wipe out the global capex inertia in output over the next 12 months.  That leaves us thinking that Oil trades $40-$60 for the moment.

Risks: storage cliff, Iran.

To make a bullish case you have to think that Iran-Saudi turns from a proxy war into an all out Muslim civil war. Thats not an outcome that anybody wants, but it is there on the table. Present Saudi policy mitigates against any Oil outcomes above $60 in our forecast.


Saudi Narrows Discount to Asia

“The drive for Aramco to raise prices is the improvement in the refining margin for gasoline and diesel,” Essam al-Marzouk, a Kuwait-based analyst and former vice president for Europe at Kuwait Petroleum International, said by e-mail Sunday. “The Saudis have established good market share in Asia and are less worried by competition from other producers than they used to be early in the year.”

Brent, a global oil benchmark, fell almost 50 percent in the past year amid increasing supply from areas including North America. Saudi output at near-record level is making up for sluggish sales from other OPEC members, as bad weather stunted Iraq’s exports and fighting in Libya kept some fields and ports shut. Iran may add supply if an interim agreement reached last week over its nuclear program leads to a final deal.

Brent for May settlement added as much as $1.95 a barrel, or 3.6 percent, and traded at $56.48 at 2:20 p.m. local time on the London-based ICE Futures Europe exchange.

Refining Margins

Saudi Aramco narrowed the discount for its Arab Light grade to Asia to the least since December, cutting it by 30 cents a barrel to 60 cents less than the regional benchmark, the company said in an e-mailed statement Sunday. Arab Medium will sell at a $2 discount in May, an increase of 20 cents a barrel from April, according to the statement.

MGL: WTI caught fire Monday on this story. Equities rallied some, but not as much. 

No real change in our view. Saudi long term objective is $60. Price right now is below $60, so they are trying to steer the market higher, and keep their market share. Difficult high wire act.

WSJ on Petrobras Scandal

Prosecutors say around 230 businesses are being investigated, and a total of more than $700 million may have been stolen. A former Petrobras chief executive said earlier this year that write-downs of inflated values would probably total at least $1.2 billion, maybe much more.
MGL: Eyecatching article. This $700m is low compared to the various numbers we've seen floating around. 1997 as start date is also mentioned, thats some 7 years earlier than the earliest mention we've seen to date.

Oil Storage

Image titleImage titleImage title
MGL: These charts from a WSJ blog were worth reprinting, the argument, that there was plenty of storage available, we've explored before. 

Alternative Energy

China new energy car sales triple in March

Sales of renewable automobiles in China tripled in March an industry association said on Thursday.

Over 14,300 new energy cars were sold in March, three times the amount previously the China Association of Automobile Manufacturers (CAAM) announced yesterday.

Electric vehicle sales experienced the largest increase, with total sales of 9390 vehicles in March, up 3.5 times.

The Chinese government has extended incentives to promote the production and use of new energy vehicles. According to Beijing's industrial policy, the country aims to produce half a million renewable energy cars by the end of 2015 and expand that goal 5 million cars at the end of 2020.
MGL: More electric cars. 

Tesla just announced a new entry-level car

Tesla is replacing its lowest-priced Model S sedan with a new version, called the 70D.

In a statement, the car maker said that the new car will start "at $67,500 after Federal Tax Credit, Model S 70D includes dual motor all-wheel drive technology, an EPA-rated 240 miles of range, and a 0-60 time just north of five seconds."

The 70D replaces the previous, non-all-wheel-drive Model S, which delivered about 208 miles of range on a single charge.

Before tax credits, the Model S will cost $75,000.

Read more:
Image titleSome 25 years ago the Berlin wall fell. This was two years after Reagans famous speech:

It was four years after the last time Saudi collapsed the Oil price, and arguably bankrupted the Soviet Union.

There were two powerful investment responses to this epochal piece of history.

1> Emerging markets were born, and a the geographers had a field day creating an entire new asset class.
2> We saw the first indications of the true power of technology.

In 1992 Copper prices were $2200 a mt. Oil was $21. So  in 25 years of growth in commodity demand from the emerging world we have in fact roughly tripled the price level of inputs. The strategy of following resource demand growth has produced some return.

But in fact its the technology revolution that blazes bright in front of us.Image title

Since the wall fell we have put 100m PC's, 1bn Mobile phones and potentially 10bn internet enabled devices in front of the 3bn people worldwide who have access to this technology, some 40% of the worlds population.

There has been a simply astonishing continuous deflation in the cost of computing.Image title
That deflation must necessarily impact the economic state of play, and today we find ourselves with bond yields at generational lows.

We see the impact of this technology in all kinds of spin off technologies, here the time taken to sequence the human genome:
Image title
We use our expertise in commodities as a lens through which we watch the world, and the resource sector is a price driven sector, not a volume driven sector.

There has been no discernable impact of this technology on copper or oil consumption in the last 25 years:
Image titleOil Production
Here's the really nasty slide:

Image title
The total world mcap of equities is $57 trillion.  Of this $2tn is quoted in the US in companies started by entrepreneurs who left their homeland. This is a direct net transfer of $4tn into US equities. (US equity +2tn, International -2tn), thats 20% alpha directly moved from, primarily emerging equity, into the USA. 

Add that $2tn back to Emerging equity and its returns increase 50% over the period. 

We live in an Ayn Rand world. Property rights matter, and until we see the extension of core property rights into countries outside the US, alpha will 'leak' into the US. 

Elon Musk was born in South Africa.


New aluminium battery for smartphones can be charged in a minute

New aluminium battery for smartphones can be charged in a minute

U.S. scientists said they have invented a cheap, long-lasting and flexible battery made of aluminium for use in smartphones that can be charged in as little as one minute.

The researchers, who detailed their discovery in the journal Nature, said the new aluminium-ion battery has the potential to replace lithium-ion batteries, used in millions oflaptops and mobile phones.

Besides recharging much faster, the new aluminium battery is safer than existing lithium-ion batteries, which occasionally burst into flames, they added.

Researchers have long tried but failed to develop a battery made of aluminium, a lightweight and relatively inexpensive metal that has high charging capacity.

A team led by chemistry professor Hongjie Dai at Stanford University in California made a breakthrough by accidentally discovering that graphite made a good partner to aluminium, Stanford said in a statement.

In a prototype, aluminium was used to make the negatively-charged anode while graphite provided material for the positively charged cathode.

A prototype aluminium battery recharged in one minute, the scientists said.

"Lithium-ion batteries can be a fire hazard," said Dai. "Our new battery won't catch fire, even if you drill through it."

The new battery is also very durable and flexible, the scientists said.

While lithium-ion batteries last about 1,000 cycles, the new aluminium battery was able to continue after more than 7,500 cycles without loss of capacity. It also can be bent or folded.

Larger aluminium batteries could also be used to store renewable energy on the electrical grid, Dai said.
MGL: Its an Aluminium-Graphite battery suspended in a 'salt' solution. This battery, written up in Nature:

pretty much hits all the hot spots:
~fast recharge.
~high energy density. (seems to be 10x that of Li-ion)
~cheap easily obtainable materials. (Aluminium-Graphite)
~high durability.

Obviously, its miles from being commercial, but from what we've seen here, this is a big deal.



Fears over Roundup herbicide residues prompt private testing

U.S. consumer groups, scientists and food companies are testing substances ranging from breakfast cereal to breast milk for residues of the world's most widely used herbicide on rising concerns over its possible links to disease.

The focus is on glyphosate, the active ingredient in Roundup. Testing has increased in the last two years, but scientists say requests spiked after a World Health Organization research unit said last month it was classifying glyphosate as "probably carcinogenic to humans."

"The requests keep coming in," said Ben Winkler, laboratory manager at Microbe Inotech Laboratories in St. Louis. The commercial lab has received three to four requests a week to test foods and other substances for glyphosate residues. In prior years, it received only three to four requests annually, according to its records.

"Some people want to stay out in front of this. Nobody knows what it means yet, but a lot of people are testing," said Winkler.

Microbe has handled recent requests for glyphosate residue testing from small food companies, an advocacy group testing baby formula and a group of doctors who want to test patients' urine for glyphosate residues, said Winkler. The firms and doctors do not want their identities published.

Abraxis LLC, a Warminster, Pennsylvania-based diagnostics company, has also seen a "measurable increase" in glyphosate testing, said Abraxis partner Dave Deardorff.

Monsanto Co, the maker of Roundup, on April 1 posted a blog seeking to reassure consumers and others about glyphosate residues.

"According to physicians and other food safety experts, the mere presence of a chemical itself is not a human health hazard. It is the amount, or dose, that matters," Monsanto senior toxicologist Kimberly Hodge-Bell said in the blog. Trace amounts are not unsafe, she stated.

Tests by Abraxis found glyphosate residues in 41 of 69 honey samples and in 10 of 28 soy sauces; Microbe tests detected glyphosate in three of 18 breast milk samples and in six of 40 infant formula samples.

North Dakota State University agronomist Joel Ransom reported to the U.S. Wheat Quality Council in February that tests he ordered showed traces of glyphosate in several U.S. and Canadian flour samples.
MGL: Monsanto's PR department are likely having a bad hair day over this little kerfuffle. Glyphosate has a half life of 43 days in soil. 

Organic lettuce and electric cars rule ok. 

Pesticides could lead to shortage of crop pollinators - EU report

Evidence is mounting that widely-used pesticides harm moths, butterflies and birds as well as bees, adding to concerns crop production could be hit by a shortage of pollinators, according to a report drawn up for EU policymakers.

The European Commission, the EU executive, placed restrictions on three neonicotinoid pesticides from Dec. 1, 2013, citing worries about their impact on bees, but said it would review the situation within two years at most.

The makers most affected include Bayer CropScience and Syngenta.

When the restrictions were agreed, the European Academies' Science Advisory Council (EASAC), a network of EU science academies that seeks to inform EU policymakers, assembled 13 experts to assess the relevant science.

Its report published on Wednesday found there was "an increasing body of evidence" that neonicotinoids, used in more than 120 countries, have "severe negative effects on non-target organisms".

Bees are, generally speaking, the most important crop pollinators.

But the report said relying on one species was unwise and found the attention on bees had masked the impact on other pollinators such as moths and butterflies, as well as birds, which eat some pests.

Citing an increase in crops that require or benefit from pollination, the report noted "an emerging pollination deficit".

Proponents of neonicotinoids say they have a major economic benefit because they destroy pests and help to ensure abundant food for a growing world population.

But the report cited the monetary benefits of protecting pollinators and natural pest controllers.

Some 75 percent of crops traded on the global market depend on pollinators and the value of pollination in Europe is estimated at 14.6 billion euros ($15.9 billion).

Natural pest control, whereby insects, such as wasps and ladybirds, as well as birds consume enough pests to avoid the need for chemical treatment, is estimated to be worth $100 billion annually worldwide.

Neonicotinoids are synthetic chemicals that act systemically, meaning they are absorbed and spread through the plant's vascular system, which becomes toxic for insects sucking the circulating fluids or ingesting parts of it.

The European Crop Protection Association (ECPA), which represents the pesticide industry, said the new report was biased.

In a statement Jean-Charles Bocquet, ECPA Director General, said it reflected "a bias of the anti-neonicotinoid campaign toward highly theoretical laboratory tests rather than fully considering published field studies and other independent research that proves the safety of these pesticides".

The Commission welcomed the report and said it would start a review of new scientific information by the end of May.
MGL: Something is killing bees.

It could be Neonicitinoids, it could be other causes.

This is a much more serious problem than global warming. No bees= no pollinators= no flowering plants.


Uralkali Q1 output down 8 pct y/y

Russia's Uralkali, the world's largest potash producer by output, said on Tuesday its potash output for the first quarter of 2015 decreased by 8 percent year-on-year to 2.7 million tonnes.

The fall was because of a drop in Uralkali's production capacity following an accident at the Solikamsk-2 mine and weaker demand in key markets, the company said.

Uralkali may review its 2015 output target, which is set at 10.2 million tonnes of potash, it added in a statement.
MGL: Uralkali details the impact of the accident. It's neither a large enough number to tighten potash markets, nor really impact Uralkali's sales. 

NOAA: El Nino finally arrives

NOAA points out that this is a weak event and that it is likely to remain weak and that it is unlikely to have a significant impact on weather and climate.

The long awaited El Niño Pacific Ocean warming event has finally arrived, according to forecasters from the National Oceanic and Atmospheric Administration (NOAA) of the US.

NOAA has updated its alert status for the so called El Niño Southern Oscillation (ENSO) to El Niño Advisory which is issued when El Niño conditions are observed and expected to continue.

Pacific Ocean sea surface temperatures (SSTs) have been elevated for a year or so but the scale and nature of the warming has, until now, failed to achieve a sustainable El Niño - in particular the necessary interaction between the atmosphere and the ocean has been lacking.  

Earlier this week Australia's Bureau of Meteorology said that it thought the chances of an El Niño occurring had increased but it did not state that an event was in progress.

NOAA is basing its assessment that an El  Niño is happening on the persistent observations of above-average sea surface temperatures (SSTs) across the western and central equatorial Pacific Ocean and a consistent pattern of sea level pressure.
MGL: NOAA is like the boy who shouts "Wolf!"; the first time you here it, its interesting, but after the nth time the reaction is subdued. NOAA spent the entirety of last year saying El Nino was likely and it never happened.Image title
The advisory says "50-60%" chance, and the Australians are much more sanguine.  

Precious Metals

Debswana Diamond to cap output due to slow demand

Debswana Diamond Company, a joint venture between Botswana and diamond giant De Beers, will trim output as it waits for demand for the precious stone to recover, an executive said on Thursday. 

The company, which produced a peak of 34-million carats of diamonds in 2007, will produce between 23-million and 26-million carats a year in the medium to short term as the company tries to match demand, director Balisi Bonyongo told journalists. "We will produce to demand. We would rather keep our goods in the ground and wait for the market to recover," he said, adding that he expected the global rough diamond market to recover in the second half of 2015. 

Bonyongo said that from the last part of 2014 going into 2015, the global diamond market had slowed mainly due to liquidity constraints in India, the world largest cutting and polishing centre. In February, De Beers, a unit of mining company Anglo American, said it expected sales to rise by 3% to 4% in 2015 after a 4% climb last year. Botswana is the world's biggest diamond producer and early technical studies indicate that Debswana mines' lifespan will be extended from 2030 to 2050.
MGL: Here's an interesting snippet from the Botswana Diamond Association:

"GIA recently announced its entry into the race for a reliable method to detect synthetic diamonds with the DiamondCheck, a device priced at $24,000. This is considerably less than rumoured $25,000 per year lease for the De Beers Automated Melee Screening device (AMS) to be on the market later this year and only available to sightholders. DTC has the Diamond Sure at around $10,000 and the DiamondView for close to $50,000.

Other devices on the market include the HRD D-Screen for $3600 and the SSEF Diamond Spotter for $150. These two use Short Wave UltraViolet transparency to detect Type IIa diamonds. As of now virtually all synthetic diamonds are Type IIa although there are reports of new synthetic diamonds in the Type IaAB category. A new device using a laser, scheduled to debut in March, is reported to be able to detect Type IaAB as well.


All of these devices have one thing in common; they can only tell you if a diamond is natural or needs additional testing. Nothing more. As of now there is no single device that can tell you conclusively that a diamond is synthetic.
Reliable, affordable identification of synthetic diamonds is the Holy Grail of gemmological research. And like the Holy Grail of legend, this may never be found. If such a device can be developed it will always lag behind the technology for growing diamonds, rendering it obsolete before it hits the streets. Even then, it may already be too late. There are thousands of undisclosed synthetic diamonds in the market with more entering every day.

The development of these devices is important and necessary. But the problem extends far beyond the science of detection; it is now a matter of marketing and education. The diamond industry currently is wringing its collective hands and lamenting how this will hurt or possibly even destroy the diamond market. Increasingly stringent rules for top-level dealers within the diamond bourses and trade associations can only act as a band-aide and not a cure...because there will never be a cure. Synthetic diamonds are here to stay and most of them will hit the market without disclosure no matter what the big players do to prevent it. They will enter much farther down the supply chain where both education and ethics are rare.

The diamond industry must pull its head out of the sand and accept that the problem of synthetics will not go away and cannot be stopped. It needs to figure out a way to re-brand and reposition the public perception of diamonds to include undetected and undisclosed synthetics in harmony with natural stones for the use of common, commercial jewellery. Perhaps one possibility is marketing the importance of the physical characteristics of all diamonds to keep the desire for the material while promoting the rarity of fine natural gems for those that can afford them. They need to get going on this soon or it will be too late."

MGL: Or it could be parlous Chinese demand. 


Newmont says opening new Nevada gold district

Denver-based Newmont Mining Corp is going ahead with building the first phase of its Long Canyon gold mine in Nevada, some 100 miles from the company's existing operations in the state.

The first phase, which consists of an open pit mine and heap leach operation, is expected to produce between 100,000 ounces and 150,000 ounces of gold a year over a mine life of 8 years.

First commercial production is expected in the first half of 2017 and costs are some of the best in the industry with all-in sustaining costs of between $500 and $600 per ounce.

Thanks to a phased approach to developing Long Canyon, Newmont has kept the capital outlay to between $250 million and $300 million, according to a company statement.

Newmont acquired the Long Canyon gold deposit from Fronteer Gold in April 2011.

Newmont forecasts 2015 gold production roughly in line with last year at 4.6 million to 4.9 million ounces, with all-in sustaining costs of $960 – $1,020/oz. By 2017 output could top 5 million ounces as the Turf Vent Shaft in Nevada achieves production in late 2015 and the Merian project in Suriname come on stream late next year.

Newmont, worth $11 billion in New York is the only gold company that forms part of the S&P500 index and which has been publicly traded since 1940.

The company, the world's second largest public gold miner in terms of output, is having a strong 2015 so far, with just under 17% gains in market value this year.
MGL: Sounds good?

"Gold giant Newmont Mining Corp. (NYSE:NEM) is sticking close to home for future production growth by acquiring Nevada-focused explorer Fronteer Gold Inc. (AMEX:FRG) in a deal valued at $2.3-billion."

So the total cost to Newmont shareholders is closer to $2.6bn.

Meanwhile Fronteer managment formed Pilot Gold:

"Pilot Gold, the new company to be spun out of the Newmont-Fronteer deal, will hold Fronteer Gold’s exploration properties in Nevada, Turkey, and Peru. Newmont will provide $10-million in cash and will hold a 20-per-cent stake in Pilot, while Fronteer shareholders will hold the remaining 80 per cent."

Pilotgold is a $66m mcap, and has a very interesting asset:

Image title

The stock is on a five year low, but building a good base here:

Image title
So $66m ev buys you an asset worth $208m net to Pilot, there's some other assets in Pilot too.

Thats the kind of math we like to see. We add Pilotgold to the buylist.


Evolution Mining reduces debt

Australian gold miner Evolution Mining has repaid some A$35-million in debt during the March quarter, reducing its total debt by around 28%, to A$91.8-million. 

The miner told shareholders on Wednesday that cash balance at the end of the March quarter was reported at A$32.5-million, after accounting for the voluntary debt repayment, a A$5.6-million dividend payment and a A$1.2-million once-off debt refinance establishment fee. 

The debt was repaid on the back of continued strong cash generation, with Evolution producing some 103 305 oz of gold during the quarter. “This is an outstanding result with almost A$27-million dollars of free cash flow generated during the quarter, by far our best quarter to date,” said chairperson Jake Klein. “This has been achieved despite group gold production being around 9% lower than the previous quarter and is a great reflection of the successful inroads our staff continue to make in reducing costs and improving operational efficiency.” Klein noted that with gold now trading close to A$1 600/oz, Evolution was optimistic about the company’s future.
MGL: Cheap stock in, arguably, a new bull market following prolonged base pattern. 7x eps, 3x ev/ebitda, 2% yield.

Some production growth, lots of initiative to do stuff better. Aus dollar no doubt helps flatter the numbers.

There's many, many worse names in the sector.


Alrosa sees 2015 profit at 100 bln roubles

Russian diamond mining company Alrosa expects net income of 100 billion roubles ($1.82 billion) in 2015, the company said at its investor day on Tuesday.

Alrosa had a net loss of 16.8 billion roubles in 2014 due to the revaluation of the dollar-denominated part of its debt portfolio caused by a weaker rouble.
MGL: About 10% lower than expectations. 

Alrosa is quietly reporting a 16% decline in price per carat for gem quality. Alrosa's sales mix is reputed to be tilted towards small 1 carat - 2 carat gems. If so they are particularly exposed to the burgeoning industrial manufacture of gem quality stones that is now reaching the high street in some quantity.

Recently I took a diamond geologist to Oxford street and showed him the various retail offerings of gem quality stones. He inspected them at length, and first suggested to me that they could not be diamond, must be glass. He was visibly in shock, and peppered me with any number of questions, to which I frankly admit I did not have good answers. 

I think the low end of the diamond market is being hit with these stones, and producers like Alrosa may be feeling the pain.


Gold speculators run for cover

Large scale speculators in gold futures are scrambling to cover massive short positions – bets that prices will fall – as the price of gold continues to recover from near four-year lows hit last month.

On Monday gold for delivery in June – the most active futures contract – leaped $23.30 or nearly 2% from Thursday's closing price hitting $1,224.20 during lunchtime trade in New York before settling at $1,218.60, a six-week high.

Moday's strength is on the back of disappointing economic data released on Friday when markets were closed when the US Labor Department reported that the world's largest economy added just 126,000 new jobs in March against expectations of a 245,000 gain and the smallest increase since December 2013.

After eight straight weeks of increasingly bearish positioning on the gold market to levels last seen December 2013, large investors like hedge funds or so-called "managed money" last week added 44% to net longs – bets that price will rise.

In the week to March 31 according to the Commodity Futures Trading Commission's weeklyCommitment of Traders data, hedge funds slashed short positions by a fifth and at the same time added to long positions in gold.
MGL: GDXJ is the easiest way to play the Gold juniors, and this year we've only really written buy on a select few precious stocks. 

Base Metals

75% of Alcoa's Australian gas supply needs secured

Aluminium producer Alcoa has secured 12 years of gas supply for its Australian operations, ASX-listed Alumina reported on Thursday.

Alumina, which holds a 40% interest in the alumina alliance Alcoa World Alumina and Chemicals, said the latest agreement meant that nearly 75% of the AWAC gas had been secured to replace existing gas supply agreements that would expire at the end of the decade. 

The new supply agreement provides for 120 TJ/d of natural gas, starting in 2020, and secured the low-cost position of AWAC’s Australian alumina refining business. Alumina noted that the impact of the gas supply agreement on AWAC’s alumina production costs would not be material, relative to the costs incurred in 2014. “This secures the competitiveness of our low-cost Australian refining business into the next decade and is a very positive achievement given the current tightness in Western Australian energy markets,” said Alumina CEO Peter Wasow.

As part of the gas supply arrangements, Alcoa would make a $500-million prepayment against contracted supply. The prepayment would be payable in two installments, the first $300-million of which was due on the closing of the Apache asset sale, expected in May 2015. The second installment of $200-million was due in 2016. 

Alumina was not expected to contribute to funding the prepayment. “While Alcoa of Australia is making a significant up-front payment to secure this important gas supply, the Alumina board remains committed to distributing excess funds to its shareholders. The board anticipates that if current market conditions prevail, Alumina will be in a position to continue to pay dividends to shareholders, and the board will review the options available to supplement dividends in light of the energy repayment,” Wasow added.

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MGL: No price given. However, if you assume it's a 10% contract deposit, which might be a reasonable guess, it works out at $8-$9 an mmcf over the period?

Sberbank head says not willing to restructure loan to Rusal

The head of Russia's top lender Sberbank, German Gref, said on Tuesday the bank was not willing to restructure a loan to aluminium producer Rusal.

"There is nothing new. There has been no proposal that is acceptable to us," Gref told reporters.

Rusal, the world's largest aluminium producer, has long hoped to reach agreement with lenders to revise the terms of its multi-billion dollar debt.
MGL: Rusal's debt position, whilst onerous, is not parlous, and its largely self inflicted by the CEO's determination to own a chunk of Norilske. Rusal has $1bn in free cash flow, so it can easily finance its current $9bn odd debt load. Cynically, we've regarded Rusal's position as oddly defensive, there's no spare cash for the Kremlin to raid, and no spare balance sheet strength for Kremlin inspired antics, like, for example a Mechel rescue.

Nautilus Minerals resumes undersea mining exploration

Canadian seafloor miner Nautilus Minerals said Tuesday it has struck a deal with provider Gardline CGG, which will allow the company resume exploration around Solomon Islands, east of Papua New Guinea (PNG), where it is developing a gold, copper and silver underwater mine.

The goal is to expand Nautilus’ Seafloor Massive Sulphide prospect inventory by applying high tech exploration techniques the firm has been refining since 2006.

The company’s CEO, Mike Johnston, said the goal is to expand Nautilus’ Seafloor Massive Sulphide prospect inventory by applying high tech exploration techniques the firm has been refining since 2006.

Gardline CGG will supply a vessel, the MV Duke, equipped with a hull mounted Kongsberg EM302 multibeam system, a state of the art seafloor mapping system that provides some of the highest quality seafloor mapping data available, according to Nautilus.

The deep sea miner settled a key dispute with the PNG’s government last year, and since then, progress has moved quickly on the Solwara 1 project. The company expects to have all its undersea mining tools ready to go by the middle of next year.

It has also entered a charter agreement for a massive mining vessel, which it expects to receive in late 2017. After that, Nautilus expects to start digging up copper and precious metals almost right away.
MGL: We continue to watch Nautilus, not because we're fans of the equity, (too difficult!), but because Nautilus may be the start of something really interesting: a strategic move by the worlds big miners offshore. Its happened in Oil, and Diamonds. Where it to happen in base metals, it would radically alter our thinking about the ultimate availability of metal. Onshore deposits, after all, are seeing declining grades, increased capex per tonne mined, and smaller sizes of discoveries. 

Chile reduces 2015 Copper output forecast

Chile, the world’s largest copper producer and exporter, will mine this year less of the red metal than previously anticipated, with estimations dropping from 6.0 million to 5.94 million tonnes, the state copper commission Cochilco said.

While the recent floods weighted on the forecast changes, they were mostly triggered by a lower estimate from projects run by Anglo American and at the Zaldivar mine, operated by Barrick Gold

In its annual global trends report released Tuesday, the authority said that while the recent floods weighted on the forecast changes, they were mostly triggered by a lower estimate from projects run by Anglo American and at the Zaldivar mine, operated by Barrick Gold, El Mercurio reports (in Spanish).

"There is an effect, albeit of low significance, from operations temporarily halted (mostly Codelco's Salvador and JX Nippon's Caserones) due to the heavy rains," the commission noted.

In terms of prices, Cochilco said it sees the red metal averaging $2.85 a pound this year, losing a bit in 2016 to settle at to $2.80.

Global copper production has been affected by several unforeseen events in the last few weeks. Before Chile’s torrential rains and floods workers in Indonesia blocked roads over a pay dispute, forcing the world’s second largest copper mine to halt production for five days.

London-listed Antofagasta Plc had to slash its copper-output forecast for Los Pelambres copper mine, its biggest operation in Chile, by around 5,000 tonnes last month. The announcement was followed by a court decision to force the company destroy a giant dam it constructed for the same mine.

Meanwhile, BHP Billiton recently revised down its 2015 forecasts for output from Escondida, the world’s largest copper mine, due to decreasing ore quality.

These floods in Chile are the worst in 80 years. 

List of mines impacted:

World No. 1 copper miner Codelco suspended mining operations at its Chuquicamata, Ministro Hales, Radomiro Tomic, Gabriela Mistral, and Salvador deposits due to the state of roads and mine access following the rains, the state-run firm said on Wednesday.

Other mines affected by the rains include Antofagasta's Michilla mine and Centinela copper complex, Anglo American PLC's Mantoverde and Lundin Mining Corp's Candelaria.

In most, if not all cases, mines have been closed since March 26, the main issue is that the roads, infrastructure, and cities nearby are now a disaster area. (The pictures, above, tell the tale.) There have been few, if any reports of actual mine damage. 

Cochilco's estimate is total disruption of 1%, or 60k mt.  Thats 2 weeks production for Chile, but 6-8 weeks in the effected areas? 


Barrick hints at Mick Davis deal

The world’s top gold producer may also look at disposing of its Zaldivar copper mine in Chile.

In an interview with the Financial Times John Thornton, chairman of the Toronto-based miner, would not comment on specific sale plans or negotiations for Barrick’s copper business.

But Thornton, who took over as chairman almost a year ago did indicate what a good deal may look like:

“I could imagine a joint venture in which, let’s say, we sold a minority interest to a party [with] a world-class chief executive and that chief executive was going to run the copper business the way he thought made sense.

“We would build the business with him. We would be majority owner or even 50-50 owner. It would build value for us.”

Mr Thornton said it would be a “good example” to assume that Barrick could go into a partnership with someone such as Mr Davis.

Sounds like just about everyone is hoping to get into bed with Mick Davis and his $5.6 billion X2 Resources fund these days. Not surprisingly, X2 declined to comment for the story says the FT.
MGL: Investor's have always loathed Barrick's exposure to copper, the Zambian fiasco was, for many the last straw. So this new management has likely been read the riot act, and is looking for a exit. Mick Davis is credible and might create some value for Barrick, Zaldivar is a great property, the Zambian asset, not as good, either geologically, or politically. Mick Davis is saying nothing. 

Barrick stock, meanwhile, has an interesting little head and shoulder base underneath it now. 

China's 10 nonferrous metal output up 6.8% in Jan-Feb to 7.7 mln tons

The combined output of the ten nonferrous metals rose 6.8% year on year to 7.7 million tons in the first two months of this year, according to the latest statistics released by the National Development and Reform Commission.

The output of aluminum electrolytic rose 4.9% year on year to 4.64 million tons in the two-month period. The output of copper and alumina oxide see a growth of 15.7% and 13.4%, respectively.

The output of lead dropped 5.3% year on year in the period, and the output of zinc went up 16.7% from a year earlier in the first two months.

In Feb 2015, the prices of major nonferrous metals reflect a decrease from Dec 2014. The average prices of copper and lead futures on the Shanghai Futures Exchange stood at RMB 40,964 and RMB 12,495 per ton, down 13.3% and 6.6% from Dec 2014, respectively.

In the first two months of this year, China¡¯s nonferrous industry realized RMB 20.6 billion in profit, 1.8% higher than in the same period of 2014.
MGL: Aluminium production growth continues to decelerate, last year it was over 7%. Copper, Bauxite, and Zinc output growth exceeds demand growth, Aluminium and Lead are now below demand growth, and Aluminium is persistently below demand growth.

All we need is an improvement in global economic data to ignite  Aluminium, no sign of that in our newsflow --yet.

Steel, Iron Ore and Coal

Atlas Iron suspends operations in WA's Pilbara

Junior miner Atlas Iron will progressively suspend production at its Pilbara mine sites in response to the low iron ore price, creating uncertainty for almost 600 workers.

The company went into a voluntary trading halt on Tuesday to launch a wide-ranging review of its operations.

In a statement to the stock exchange, Atlas said would wind down production at its mine sites over the month of April, with exports ending shortly after.

All of Atlas's projects will be put on care and maintenance until market conditions improve.
MGL: Atlas shuts. Its only 7m mt, so its a drop in the bucket. $326m of debt, and conversations with creditors have started.

China coking coal market faces downturn amid falling prices

China’s coking coal market remained weak in the past week, and prices dropped in major production bases following large miners’ price cut.

Shanxi Coking Coal Group -- China’s largest metallurgical coal producer has increased discounts, setting prices separately with each end user at varied extents of discount. It is offering key buyers a 30-100 yuan/t discount for primary coking coal sold in April and a 30-70 yuan/t discount for fat coal, market sources confirmed.

One Changzhi-based large miner also reduced free-on-rail prices by 20-35 yuan/t for lean coal from its major production mines, sources said.

Sources said some Luliang-based miners cut prices by 20 yuan/t, with the ex-works price of primary coking coal with 1.6% sulphur at 520 yuan/t, inclusive of VAT.

Some buyers from eastern China said the ex-works price of Shanxi primary coking coal with 1.6-1.8% sulphur stood at 480 yuan/t with VAT.

One Shanxi-based seller said the ex-works price of primary coking coal with 1.5% sulphur was 550 yuan/t, unchanged from March. The delivered prices of coal transported outside the province dropped as trucking freight dropped, with the freight from Lulin to Tangshan at 190-200 yuan/t, VAT-excluded.
MGL: Steel contraction impact still rippling down the supply chain.

Iron ore in fresh crisis as forward prices crumble

Iron ore is veering to a new crisis as prices for future delivery of the commodity slide 30 percent in the space of a month, and its outlook is now more bearish than oil and more dire than ever for miners struggling to just stay in business.

Prices of the steel-making ingredient for immediate delivery have slumped 60 percent over the past year as demand particularly from China slowed rapidly.

Despite the crumbling cash market, miners had been able to hedge future production at prices well above spot levels. Indeed, a month ago, miners could still sell 2017 output at close to $70 a tonne even as April 2015 prices fell below $60 for the first time in more than five years.

Forward iron ore prices have since tumbled below $47 for deliveries all the way until the end of 2017, depriving nearly all miners of any chance of establishing hedges at or above breakeven levels during that period.

A combination of factors brought about the recent capitulation in forward prices, most notably news that China plans to subsidise its iron ore sector to protect its flagging steel industry. Subsidies would help keep mines open and keep supplies flowing.

Aggressive shipments from Australian and Brazilian exporters have also weighed on forward prices.

As prices fall even further, "it will be an issue of cash flow, and those miners without the cash to ride out the storm are going to go under," said Jeremy Platt, analyst at London-based steel consultancy MEPS.

Only three of the world's top 10 largest iron ore miners are estimated to remain profitable at those prices, with Rio Tinto and BHP Billiton projected to have breakeven costs of around $35-36 a tonne and Fortescue estimated at around $44 a tonne, according to UBS.

All other miners, including the world's largest, Vale , are estimated to have production costs above $50 a tonne, and so are now faced with a quandary with nearby as well as deferred prices entrenched below that level.

Market participants say they are on the lookout for signs that high-cost producers outside of China may accelerate cutbacks in production amid deteriorating cash flows and limited revenue potential.
MGL: Vale cash cost $50???


Image title

This is Vale's cost to port.

Now we all know that Vale built these idiotic Valemax ships for much money. And we all know that instead of saving money, they cost money, simply because the Chinese refused to let them dock. So Vale had to tranship via the Philipines, more money. Result :$12 per tonne from port to delivery.

But, things have changed. Firstly Oil prices have collapsed, and thats roughly $6 a mt off that shipment cost, and secondly China now accepts Valemax ships, so no expensive transhipment. Last, but not least the BRL has taken a dive, so whereas Vale's cost to China last year was $35, today its more like $22. 

Last but not least consider quality:Image title
Australian ore is about 50-55% grade (older mines are better), but it is wet, and it has nasty Al/Si impurities which make blast furnace owners wince. (Basically you need more coking coal to make steel with Pilbara grades)

Brazilian ore is 64%, ie above grade standard, its dry, and has less impurities.

This means revenue per tonne shipped is simply higher for Brazilian grades. 

Right now we think Vale is bottom of the cost curve, and Fortescue is losing money on a cash basis with their low grade high impurity product that garners a 20% discount on sale. So be wary those cost curves, they just dont tell the entire story.

Now as a stock Vale has some real issues, unlike its Australian brethren capex is still going like a train, and thats eating cash. They have dollar denominated debt, that kills the benefit of the falling exchange rate. But operationally, Vale is the best configured of the big 3, (or 4..)

We're not buyers though. Iron ore is horrible, and although Beijing is, at last, turning on the gas, we're just not sure it helps iron ore much.


Chinese banks reduce credit to steel mills

Chinese banks are reducing their exposure to the country’s debt laden steel sector, withdrawing credit from struggling steel mills, according to the Economic Observer, a financial newspaper.

The Chinese banking system withdrew 150 billion yuan in loans from the steel sector, which accounts for 10 per cent of total planned lending of 1.5 trillion yuan.

Privately controlled steel mills have been hard hit by the latest lending policy. Zhao Xizhi, honorary chairman of the China Metallurgy Association says the cost of funding for private mills is about twice as expensive as state-owned firms.
MGL: This is worth watching. A steel sector deprived of credit must curtail production unless cash on cash returns are positive. 

If true, and generalised, ie we dont see other credit replace the banks then we should see rebar lift:

Image title

Hebei, China's most polluted province cuts coal use

Hebei province, known for the worst air condition in China, vowed on Wednesday to clear the smog by reducing coal-related pollution.

Hebei Vice Governor Zhang Jiehui said the province would cut emissions from coal-fired power stations by half.

Stations that can not meet the goal will be shut down, according to the provincial government.

The government also plans to close all solid clay brick kilns as they cause heavy pollution.

Coal emissions contribute half of the air pollution in Hebei, the vice governor said at an air pollution control meeting.
MGL: This anti-smog story in China has legs.  Its a disaster for coal, China is the largest user worldwide, and by a country mile.

China key steel mills daily output down 2.2pct in late-March

Daily crude steel output of key Chinese steel producers dropped 2.18% from ten days ago to 1.613 million tonnes over March 21-31, showed data from the China Iron and Steel Association (CISA), reflecting persisting weak demand in downstream sectors.

The drop was mainly due to output cut in some steel mills, which ran low capacities amid huge losses in an oversupplied domestic market and greater environmental protection pressure.

The Purchasing Managers Index (PMI) for the Chinese steel sector dropped 2.1 percentage points on month to 43.0 in March, the 11th consecutive month below the 50-point threshold separating growth from contraction, indicating persisting sluggishness in this sector, official data showed.

The extended decline came despite a rise in steel products in late March, as demand gradually improved with increased construction activities.

Over March 23-29, the price of steel products increased 1% on month, with the price of rebar increased 1.4%, according to data from the Ministry of Commerce.

The CISA didn’t give an estimate on China’s total daily output during the same period.

Meanwhile, the CISA members produced 1.60 million tonnes of pig iron on average each day during the same period, down 2.59% from the previous ten days.
MGL: Feels backward looking. Beijing moving now to support the feeble economy. Beijing's agenda is clean growth, not recession, and many Chinese numbers are in recession territory.

Italy's Lecco steel mill to restart production, hire staff

Italy's Lecco steel rolling mill, formerly owned by the country's second-largest steelmaker Lucchini, will restart production in May and will hire nearly 100 staff including former employees currently under redundancy contracts.

Lucchini was previously owned by Russia's Severstal but was placed under special administration in 2012, battered by stiff competition from Asia and depressed demand following the 2008-2009 financial crisis.

The company sold the Lecco mill in the country's north to privately-owned steelmakers Duferco and Feralpi late last year, after selling its core steel plant in Piombino on the Tuscan coast to Algerian conglomerate Cevital.

Steel prices ST-CRU-IDX are currently at their lowest level in nearly six years, pressured by over-supply globally and demand that has yet to fully recover from the 2008-9 crisis.

As such, while the restart of the Lecco mill will be welcomed by an Italian government struggling to pull the country out of recession, rival steelmakers will be less pleased.

Duferco and Feralpi said on Wednesday they had formed a new company, Caleotto SpA, to own and operate the Lecco mill, rehire 74 staff who were laid off by Lucchini and employ an extra 10 staff.

The new owners also plan to invest more than 5 million euros ($5.4 million) between now and 2019 in the plant.

Italy's steel sector is Europe's second-largest after Germany but has been hard hit by post financial crisis austerity measures imposed on the country.
MGL: Capacity, once built, never leaves, it just is marked down in price. Severstal took an $800m loss on sale of this plant, and thats after some writedowns. 

Metinvest seeks breather from debt repayments

Left with barely any cash as a result of Ukraine's economic and political turmoil, the country's largest steel company, Metinvest, has asked creditors for a timeout on repayments.

"The idea is to give the company and all our creditors time until the end of January 2016 to agree within two next quarters a new schedule of our overall debt repayments," Kutepov said.

Metinvest's net profit slumped nearly 60 percent in 2014 to $159 million, the company said.

"The reality now is that after repaying its debts in 2014 the company has only enough funds to secure stable operations during 2015," Kutepov said.

He said Metinvest had asked bondholders to agree to extend its 2015 bond from May 20 to January 2016 and was also seeking extensions for its Eurobonds maturing in 2017 and 2018.

It has already agreed a part exchange of its $500 million May 2015 Eurobond for 2017 notes with a 10.50 percent coupon, but around $113 million was due to mature this year.

The company has offered to repay 10 percent, or around $11 million, of the 2015 bond and move the remaining sum to January, Kutepov said.

"These negotiations will be quite difficult and I would not risk assessing the chances for a success," he added.

The company's total outstanding debt as of Feb. 28 stood at $3.1 billion. Its 2017 and 2018 bonds are both trading at around 40-45 cents on the dollar.

Metinvest's revenues fell 18 percent to $10.6 billion in 2014 due to lower output of steel products, it said.

Its core earnings, however, rose 14 percent to $2.7 billion thanks to a weaker hryvnia currency which helped the company to reduce costs.

Business has not improved this year as rail networks in the separatist east have been disrupted by clashes between government troops and pro-Russian rebels, Kutepov said.
MGL: No equity, bonds trade in the 40's. Image title

Spring in China heralds better steel market expectations

Spring in China heralds better steel market expectations
China's steel market outlook for April remains similar to March, underpinned by expectations of stronger construction activity in spring time, according to the latest Platts China Steel Sentiment Index (CSSI).

CSSI in April showed a headline reading of 74.7 out of a possible 100 points, rising from 72.2 in the previous month, and was the highest reading since March last year.

The CSSI reflects expectations of market participants for the current month.

A CSSI reading above 50 indicates an expansion and a reading below 50 indicates a contraction.

"The latest CSSI shows the seasonal aspect of China's steel market as March and April in both 2014 and 2015 were by far the strongest months in terms of expectations of new orders," said Paul Bartholomew, a Platts analyst on steel and steel raw materials.

    "With Chinese New Year and the coldest winter months now out of the way, construction activity is expected to resume and help drive demand for steel. There has been greater emphasis on domestic demand for steel in the past two months rather than exports, which China relied on heavily last year."

There was a big change in the outlook for steel inventories, with most industry participants expecting steel inventories to start declining after staying high for much of this year.
MGL: Chinese traders may be commenting more on the political landscape than the economic landscape here. If Beijing's crackdown has run its course, and that's possible, we may see some kind of normality return to steel and iron ore in China. 

Only this time it's Beijing's version of normal. Not the '7% forever' China-holics. 

China's steel production slips in the first two months

In the first two months, the total output of crude steel slipped 1.5 percent from the same period last year to 130.53 million tonnes, while the profit of the iron and steel industry plunged 45.2 percent year on year to 9.03 billion yuan, according to the statement.

The output fluctuations came amid China's efforts to tackle overcapacity, which has plagued China since the 2008 financial crisis.

The Ministry of Industry and Information Technology said last month it will accelerate the overhaul of its overly-invested iron and steel sector to bring it back to a "basically balanced level" by 2017.
MGL: For the first time in China steel output is going in the general direction Beijing policymakers wish to see. 

China Plans Iron Ore Subsidy for Miners Amid Rout

China, the world’s largest buyer of seaborne iron ore, may introduce a nationwide subsidy for local producers of the steel-making commodity amid slumping prices, according to the official Shanghai Securities News.

A plan for the proposed subsidy is in the final stages of being drafted and it could start as soon as the middle of this month, the newspaper reported on Wednesday, citing people in the industry that it didn’t identify. 

Benchmark iron ore prices sank below $50 a metric ton to a 10-year low last week as surging low-cost supplies from the world’s biggest mining companies including BHP Billiton Ltd. boosted a worldwide surplus as Chinese demand faltered. The rout has left higher-cost producers in China and overseas making losses, threatening mine closures and redundancies. Low-grade operations in China’s Hebei province are among the most exposed suppliers, Morgan Stanley said in a March 24 report.

“The subsidies, if implemented, will sustain domestic production, increase the global supply of iron ore and result in prices slumping further,” Wu Zhili, an analyst at Shenhua Futures Co. in Shenzhen, told Bloomberg by phone on Wednesday, commenting on the newspaper’s report. Domestic mines account for about 20 percent of China’s iron ore demand, according to Wu.

Two versions of the subsidy are under consideration, the report said. Payments may be pegged to the grade of the ore, with producers of lower-quality output receiving bigger payments, or there may be figure of 6 yuan ($1) a ton, it said.

As China’s steel demand drops this year, cuts to output will increase, reducing demand for iron ore, the China Iron & Steel Association said in a monthly statement on Tuesday. Iron ore prices won’t rebound as the oversupply will persist, according to the association.

China’s apparent steel demand fell about 5 percent in the past six months from a year earlier, the biggest drop since the global financial crisis, Goldman Sachs Group Inc. said in a report on April 6. Global iron ore consumption will contract this year, according to Deutsche Bank AG.
MGL: Nasty if true. If so, its clearly Beijing swinging into action to prevent social unrest, and sustain employment in areas, like Hebei already severely stressed by new pollution controls and the likely contraction in steel capacity.

A $1 a mt is not really enough to make much difference in the current iron ore market. 

Glencore, Japan's Tohoku set annual coal price down 17 pct -sources

Mining group Glencore Xstrata Plc and Japan's Tohoku Electric Power Co have settled an annual Australian thermal-coal import contract 17 percent lower than a year earlier, sources with direct knowledge of the matter said on Tuesday.

The price for the fiscal year beginning April 1 was set at 67.80 per tonne, the same as an agreement last week between Tohoku and Rio Tinto , the three sources said, underscoring a mounting supply glut for thermal coal worldwide.

Australia is by far the biggest supplier to Japan, accounting for 80.4 million tonnes last year, or nearly three quarters of its thermal coal imports.

The price set by Tohoku and the two suppliers will likely be followed by other Japanese utilities.

Annual contracts starting in April account for the majority of Australian thermal coal imports to Japan, covering around 50 million tonnes.

International coal markets have been hit as China, the world's biggest producer and importer of the fuel, has curbed imports to support its own mines and as it battles pollution at home.

A Tohoku spokesman said it had agreed with multiple resource majors on Australian coal supplies for the new fiscal year but declined to give details.

Glencore did not immediately respond to requests for comment.

Other would-be buyers said they were disappointed with the price, as spot has recently plunged to below $60 a tonne.

Asian benchmark thermal coal from Australia's Newcastle terminal has fallen around 10 percent this year, last settling at $56.85 a tonne. The price has lost more than 60 percent since early 2011.
MGL: Image title
Spot coal has completely collapsed following this bruising deal.
We think the Japanese sought volume, and Glencore refused to budge below $67 for volume.  

$56 spot coal is simply dire, its always possible Glencore traders are dumping out some cargo's they bought prior to the deal, and thats creating a nasty whiplash market. 

Australia chases BHP, Rio Tinto on Singapore tax shelter - AFR

Australia is pursuing global miners BHP Billiton  and Rio Tinto for shifting billions of dollars in iron ore profits through marketing hubs in Singapore that pay almost no tax, the Australian Financial Review reported on Tuesday.

The Australian Taxation Office was chasing multibillion dollar claims against each company, the newspaper said, citing a source with direct knowledge of the disputes.

The Singapore arrangements save the two companies more than A$750 million (382 million pounds) a year in Australian tax, it said.

The newspaper said BHP declined to comment on whether it received a tax bill tied to its Singapore hub, while Rio Tinto said it had not received a tax bill.

Both companies say their Singapore operations were not set up to cut tax but to serve their customers better, while the Australian tax office considers the arrangements tax avoidance.

"It is a big issue. It's huge," Tax Commissioner Chris Jordan told the Australian FinancialReview in March, referring to tax audits of more than 15 marketing hubs used by resource companies. "There's a lot of funds that have been transferred into hubs for the so-called marketing, shipping, you know sales, supposedly, that are being carried on."

The newspaper said sources insisted that Rio Tinto's Singapore-related earnings, which flow to a UK company, were in dispute.

Close to A$1 billion in base tax was at issue from 15 marketing hub cases, the tax office said, according to the newspaper.
MGL: We're really not convinced the big miners set up these arrangements as a tax dodge, it looks much more likely they were a response to a market that was moving inexorably away from 1 year contracts to spot. That applies to all the large Australian bulk commodities:- iron ore, coal, coking grades. 

Also probable, the discount applicable, say $5 a mt for bulk, was not a big deal when the three big bulk minerals were over $100 a metric tonne, but now that we are pricing the bulks at $50-$60 a mt, that discount is actually 10% of gross, and likely 25-30% of net profit per tonne, so it has become a big tax deduction. 

Tax authorities are clearly upset. So it has become an issue.

Atlas considers asset sales, restructuring to survive iron ore crash

Australia's Atlas Iron Ltd is reviewing its operations and could look to sell assets to combat a dramatic slide in iron ore prices in a vastly oversupplied market dominated by mega producers.

Shares in Atlas, one of a handful of small miners that emerged to meet rising demand for the steel-making mineral in China a decade ago but now struggling to stay afloat, were voluntarily suspended on Tuesday as it maps out a strategy.

Atlas shares have plunged 40 percent since January, outpacing a 35 percent decline in iron ore, and the firm said it has hired Lazard to advise on ways to reduce overheads.

Atlas could move to suspend production at the higher cost Mt Webber and Abydos mines, leaving it to focus on its more profitable Wodgina deposit, some analysts said.

"I reckon you would see them shrink to about two to three million tonnes a year from Wodgina only," said a analyst who has covered Atlas since its inception in 2004 and did not want to be named. "Wodgina is the closest to Port Hedland, has reasonably better grade and would be the cheapest operation."

Cheaper oil to run diesel-powered equipment, lower freight rates and a weaker Australian dollar against its U.S. dollar-priced sales have helped soften the blow, but the most recent price plunge means Atlas is operating with little or no profit margin

Spot ore .IO62-CNI=SI dropped to $46.30 a tonne this week, the lowest level since The Steel Index began publishing prices in October 2008.

That compares with a January average all-in production cost of A$60.80 ($46) CFR (cost and freight) China reported by the company.

"Atlas has already commenced discussions with a number of its stakeholders in relation to various initiatives intended to further reduce costs and preserve value," the company said, adding it would not comment further on the review.
MGL: Atlas trucked iron ore to port.  Small beer in the scheme of iron ore, but reinforces the idea that we are now down to the big 3+ Fortescue, and at $46 iron ore, Fortescue must be in the red.  Only BHP can really make use of Atlas's operations, it has trail nearby all three mines, but we should not expect movement from BHP, their current rail capacity is maxed out as far as we can tell. 

India's Odisha state to renew 18 iron ore mine licences-official

India's top iron ore producing state is likely to renew the licences of 18 iron ore mines shut since last year, a state official said on Saturday, in a boost for local steel producers.

A panel of senior government officials in Odisha state has recommended the reopening of the mines, which were closed last year due to non-renewal of years-old leases, the state's mining director Deepak Kumar Mohanty told Reuters.

"We expect to complete the renewal process in 10 days," Mohanty said.

The re-opening of the 18 mines will raise iron ore output in Odisha state to 70 million tonnes this fiscal year, about the same level as before the mines were shut, from the 51 tonnes produced in the year ending March 31, the official said.

The panel has also recommended an extension of the lease period for eight separate mines in the state, which belong to Tata Steel, Steel Authority of India and Odisha Mining Corp and are currently operating under a so-called temporary express order, Mohanty said.

The Supreme Court last year ordered the closure of nearly half of the 56 mines operating in Odisha because they were operating without a renewal of years-old leases.
MGL: Odisha adds to the sense of Indian restart, we now have all three large iron ore states engaged on a legal process to restart mining.

India's 2014/15 iron ore imports hit record 15.5 mln T

India's iron ore imports jumped to a record above 15 million tonnes in the fiscal year to end-March as tumbling global prices and limited domestic supply pushed steelmakers to buy more of the raw material overseas, industry data showed on Monday.

Formerly the world's No. 3 supplier of iron ore, India has been importing it over the past three years due to court-imposed restrictions aimed at curbing illegal mining in the major producing states of Karnataka and Goa.

The shortage deepened last year when some mines in the states of Odisha and Jharkhand were ordered to close after the expiry of licences.

India's iron ore imports totalled 15.5 million tonnes in the past fiscal year, according to data compiled by industry consultancy SteelMint, which tracks shipments at 18 ports across the country. In the year to March 2014, imports were just 320,000 tonnes.

More than half of imports in fiscal 2014/15 were brought in by JSW Steel, India's third-largest steel producer, with 8.4 million tonnes. Tata Steel followed with 3.06 million.

Official Indian government data only covers April-December, with imports totalling 7.38 million tonnes, according to the trade ministry.

Despite the jump in shipments to India, global iron ore prices fell below $50 a tonne .IO62-CNI=SI last week to the lowest level since a key benchmark pricing index began in 2008.

The steelmaking commodity has lost about two-thirds of its value since the start of last year amid a global glut and slow demand from top iron ore buyer China.

The reopening of iron ore mines in states such as Odisha, Jharkhand and Goa may reduce India's imports in the current fiscal year, said Dhruv Goel, managing partner at SteelMint.

"We expect imports will be limited to 6-7 million tonnes, subject to global iron ore prices," Goel said.
MGL: Here's India's iron ore production:Image title
So if we take these  figures at face value, (and there's some scepticism needed on the volume of illegal mining at the peak, ie real production could well have been considerably higher than official values); that implies the gradual return to production could conceivably add a maximum of 100m mt to supply.

Two huge caveats:

1> Indian production is high quality low grade (ie low impurity, but only 30-40% grade), and how much is economic sub $50 iron ore?  

2> How large was illegal mining at the peak? We know licenses were issued and abused, ie an operation license was often used to produce multiples of the actual licensed figure. 

This all makes the Indian restart a very difficult animal to assess.  Suffice to say we do see something, and we do likely see net imports swing back to net exports. How long does that take? Miners are talking about a september restart.

Consensus now bearish Iron ore

Industry experts also don’t expect to see a recovery in the price of iron ore, a primary steel-making ingredient, anytime soon.Caroline Bain, senior commodities economist at Capital Economics Ltd. in London, last month forecast that iron-ore prices are likely to hit $45 a ton by year-end as large surpluses of iron-ore continue to flood into the market and Chinese demand cools.
MGL: MGL: From the WSJ. We've been hearing this for a while, but its the first time in print. 
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