Mark Latham Commodity Equity Intelligence Service

Tuesday 21st April 2015
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Beijing to inject $US60bn into two banks

China's central bank was set to inject more than $US60 billion from nation's foreign-exchange reserves into two state policy banks, Caixin magazine reported on Monday.

The local business publication, citing unnamed sources, said the People's Bank of China would inject $US32 billion into the China Development Bank and $US30 billion in the Export-Import Bank of China.

The funds would be from the nation's forex reserves, which are managed by an arm of the central bank and stood at $US3.73 trillion at the end of first quarter, according to the report.

The move would make China's central bank the second largest stakeholder in the China Development Bank and the biggest in the Export-Import Bank, according to Caixin.

Agricultural Development Bank of China, another state policy bank, would receive a fund injection from the Ministry of Finance, the magazine said on its website. It didn't give further details, though it said the plan had been approved by the State Council, China's top government body.

This month, the State Council unveiled a plan to strengthen control over the three banks, emphasising the policy nature of the three banks, in a bid to ensure their lending is more tightly coordinated with Beijing's policies at home and abroad.
MGL: Spun as policy move, smells like a rescue.

Rio Tinto releases solid first quarter production performance

Rio Tinto chief executive Sam Walsh said “We continue to drive efficiency in all aspects of our business, which is reflected in our solid production performance during the first quarter. By making best use of our high quality assets, low cost base and operating and commercial capability our aim is to protect our margins in the face of declining prices and maximise returns for shareholders throughout the cycle.”





vs Q1’14

vs Q4’14

Global iron ore shipments (100% basis)





Global iron ore production (100% basis)















Mined copper





Hard coking coal





Semi-soft and thermal coal





Titanium dioxide slag






Global iron ore shipments of 72.5 million tonnes (Rio Tinto share 57.3 million tonnes) were nine per cent higher than in the first quarter of 2014. Production of 74.7 million tonnes (Rio Tinto share 59.4 million tonnes) was a 12 per cent increase year on year.

Record first quarter bauxite production was four per cent higher than the first quarter of 2014, primarily due to a strong performance at Weipa.

Aluminium production in the first quarter was in line with the same period of 2014, despite the partial shutdown at Kitimat, which continues to prepare for first hot metal at the modernised smelter by mid-2015.

Mined copper production was 12 per cent higher than the fourth quarter of 2014, driven by higher throughput at Kennecott and Escondida. Lower grades at Kennecott were the primary driver of the nine per cent decline compared with the first quarter of 2014.

During the quarter, the Government of Mongolia and Rio Tinto formally celebrated the major milestone of Oyu Tolgoi shipping one million tonnes of concentrate.

Higher first quarter coal production was primarily driven by improved production rates at Kestrel South following the longwall ramp-up, increased semi-soft production at Mount Thorley and Warkworth and higher thermal production at Hail Creek.

Titanium dioxide production was 17 per cent lower than in the first quarter of 2014 as production continued to be optimised to align with market demand.
MGL: See detailed note on our other RTZ story. Its a miss! 

Oil and Gas

Saudi Record Production Promise, Specs Pile In Blackstone Skeptical

WTI crude prices are falling (back below $55) after Saudi Arabian Oil Minister Ali al-Naimi said production in the world's biggest crude exporter would stay near record peaks around 10 million barrels per day in April.

The investment community remains divided over the future (perhaps more a reflection of time horizons): BofA notes Large Speculators bought crude contracts for the 3rd consecutive week - the longest streak since June 2014; but Blackstone (among other private equity firms) have stayed on the sidelines (despite plenty of cash to put to work) as public markets have exuberantly filled the void so far this year: Oil producers have been able to “raise a lot of debt and, in some cases, equity publicly at values that we wouldn’t touch."
Oil prices have risen over the last few week prompting excitement that the 'slump' is over - but the last 2 days have seen notable selling pressure...

Saudi Oil Minister Ali Al-Naimi noted:

“We will always be happy to supply to our customers with what they want. Now they want 10 million,”

But that hasn't stopped speculators piling in en masse...
MGL: Image title
Right now the core of our argument has been that Oil equity is expensive. We think it discounts prices much higher than the $64 implied in this chart from ML/BoA. 

On this chart they have EOG right on the average, so we'll look at EOG.

Point 1: EOG is profitable at $55-$65 Oil.Image title
This means we can attribute value to its RESOURCE acreage.

EOG EV= $57bn
EOG value of RESERVES:  $27bn at $95 Oil $3 Gas. First we need a haircut to bring the Oil reserves to $60. (50% reserves are Oil, so that 13.5bn at $95, lifting cost is $15, so $13bn arises from cumulative $80 margins. At $60 Oil the margin is $45.  Implied PV10 of reserves at $60/$3 is therefore $20bn.

Implied value of the undrilled acreage at EOG= $37bn. EOG has 10000 undrilled locations. Market is valuing each location at $370k. Those locations represent 15 years inventory, so a 1st year drill is more valuable in money than the 15th year location. There's a quick and dirty way to NPV that location number for time, thats multiply by 3. Its not accurate, and we would not build a spreadsheet on that method, but it gives a 'balbark' number. (Who knows what the Oil price will be in 15 years? ) 

So that $1.1m per location in EOG sights. 

Point 2: EOG wells are better than the average:
Image title

Again, we're dealing with many geologies, much time, regulatory risk, and productivity gains. So there's so many moving parts in a 15 year inventory, I dont even want to try to model it properly. We'll collapse the company into NOW, and make some assumptions on present day data.

We know EOG wells on average are roughly 2x as productive as competitors: implies flush production per well of 800bpd.
(Implied EBITDA per well is ~ $9m, $4m in first year)
We know EOG's inventory generates an after tax rate of return of around 35%. 
(Implied cost per well ~$6.6m, minus market implied value per well of $1.1m gives $5.5m per well)
We know an 800bpd well at flush production is about 200k boe EUR. 

There's some big assumptions going on in here, but yes, with reasonable industry metrics, I can actually make the figures work.

Which all strongly suggests that the E&P shale sector is actually on fair value at $60 crude. 


Indian Govt to bear entire LPG subsidy for FY16

In a strong push to upstream oil companies, the government has decided to bear the entire domestic cooking gas subsidy in 2015-16, report Siddhartha P Saikia & Prasanta Sahu in New Delhi. The upstream players would, however, have to bear a part of the kerosene subsidy, officials in the ministries of petroleum and finance told FE.

Though companies like ONGC, Oil India and Gail India have long asked for removal of the subsidy burden on them, the immediate trigger for the move is to make the atmosphere conducive for the proposed sale of 5% stake in ONGC. Based on average crude oil price of $60/barrel, LPG subsidy for FY16 is estimated at R18,000 crore and assuming crude at $70/barrel, it could be in the vicinity of R25,000 crore.

For kerosene, the under-recovery burden is expected to be around Rs 13,000 crore assuming average crude oil price at $60/barrel and it could go up to Rs 16,500 crore if crude price moves northwards to around $70/barrel. In FY14, the under-recovery on kerosene stood at Rs 30,575 crore while it was Rs 46,458 crore for LPG.

“The government will bear the full cash subsidy on LPG while the under-recovery on kerosene will be shared with upstream companies,” one of the officials said. He said the budget allocation of Rs 30,000 crore (Rs 22,000 crore for LPG and Rs 8,000 crore for kerosene) should be enough to meet fuel subsidy bill in this fiscal.

ONGC, Oil India and GAIL (India) — forked out Rs 42,822 crore for the oil subsidy in FY15. The government paid another Rs 27,409 crore towards compensating OMCs. The subsidy burden on upstream oil companies had increased from Rs 32,000 crore (30% of the total under-recovery) in 2008-09 to Rs 67,021 crore (48% of the total subsidy bill) in FY14.

Finance minister Arun Jaitley in his Union Budget for 2015-16 estimated petroleum subsidy at Rs 30,000 crore, 50.22% less compared with the revised estimate of Rs 60,270.00 crore for 2014-15. The 2015-16 Budget estimated India’s subsidy bill at Rs 2.43 lakh crore, around 9% below the revised estimate of Rs.2.66 lakh crore for 2014-15. The reduction has been aided by the fall in the price of crude oil, the decontrol of diesel and the direct benefit transfer scheme for disbursing LPG subsidy.
MGL: India's subsidy bill halves as a result of the Oil crash. Moving it from the companies to the gov't is interesting, and makes us wonder whether this is a precursor to gently moving LPG prices higher at retail. 

Halliburton warns of weakness in N America, international operations

Halliburton Co warned of headwinds in its international operations and pricing pressure for its oilfield services in North America, its largest market, as an extended slump in oil prices continues to force drillers to slash spending.

The company's shares rose 3.8 percent to $48.69 before the bell on Monday after it posted a better-than-expected quarterly profit, helped by higher revenue and operating income from Latin America, the Middle East and Asia.

However, revenue and profit from all other regions fell due to the global slump in oil prices , which have nearly halved since peaking last June.

"Industry prospects will continue to be challenged in the coming quarters," Chief Executive Dave Lesar said in a statement.

Halliburton agreed to buy smaller rival Baker Hughes Inc for $35 billion last November, to better negotiate the slump in oil and resist pressure from oil producers to slash prices.

Excluding one-time items, Halliburton earned 49 cents per share, above the average analyst estimate of 37 cents, according to Thomson Reuters I/B/E/S.

Analysts covering the stock have cut their first-quarter earnings estimate for Halliburton by over a third in the past month.

Revenue fell 4 percent to $7.05 billion, but beat the analysts' average expectation of $6.96 billion.
MGL: Beats much reduced expectations here! We await the news of its sales program with interest, our guess is the units for sale may make a better price than we had thought some weeks ago.  4% fall in revenue, once again we're seeing here the slow unwinding of those enormous contractual obligations untertaken by Big Oil at peak cycle. The very strength in sales we've seen here, and at Schlumberger simply points to more Oil supply outside the US than the market might be expecting. 

EU to charge Russia's Gazprom with market abuse

The European Union will launch a legal attack on Russian gas giant Gazprom this week, ramping up tensions with Moscow, when antitrust agents will accuse it of overcharging buyers in eastern Europe, EU sources told Reuters on Monday.

Russia's state-controlled biggest company, a vital supplier of energy to Europe despite frequent political disputes, could receive a full charge sheet from European Competition Commissioner Margrethe Vestager on Wednesday, one source said.

More than two years after Brussels started investigating Gazprom, the move comes just a week after the new EU antitrust chief charged U.S. tech giant Google with abusing its market power after five years of hesitation by her predecessor.

Vestager seems determined to challenge big corporate powers since taking on the internationally powerful post in November, despite past offers of compromise from bothGoogle and Gazprom.

Despite the Danish commissioner's insistence that she would look at only the legal merits of a case that focuses on Gazprom pricing policies, differentiating between different customers, the accusations will do nothing to ease EU frictions with Moscow over Ukrainein which gas supplies have played a major role.

The sources said Vestager was likely to send the charge sheet, known as a statement of objections, to Gazprom once she returns from a trip to the United States, where she arrived within hours after charging Google. Such a document sets out concerns about possible anti-competitive practices.

The Russian behemoth, with annual sales of some $100 billion, supplies about 30 percent of the 28-nation bloc's natural gas. It has been under investigation since September 2012, including for hampering the flow of gas across Europe.
MGL: There's a certain inevitability about this decision. Gazprom looks overbought right now, and the 4.5% dividend yield is not covered by free cashflow. 

SABIC signs deal to use US shale gas in UK

Saudi Basic Industries Corp has signed a deal to use shale gas from the United States at its Teesside petrochemical plant in Britain, acting chief executive Yousef Abdullah al-Benyan told Reuters on Sunday.

"In fact we did sign the contract - we have not yet agreed with the supplier to publicly announce it, but we did firm up a contract for gas supply," Benyan said, declining to name the supplier.

He said the timing and other details of the project, which he described as the first use of shale gas exported from the U.S. Gulf in Britain, should be available by next quarter.

"It is going to meet our full demand for the next ten years and is renewable beyond ten years," Benyan said.
MGL: We presume this is actually gas liquids? Second big UK petrochemical company to switch its sourcing to US shale supply. The ongoing decline in N Sea gas production includes a decline in byproduct liquids production.

The global liquids market is showing much clearer evidence of the oversupply in Oil than the major benchmark crudes:
Image titleMount BelvieuImage titleAmsterdam.

Unlike this time last year when cold weather reduced exports of gas liquids, this year the upward trend of US exports is barely disrupted by an 'average' winter:

Image title
Here's the now expunged ARAMCO data on their gas liquids exports:
Image title
It clearly shows a 40% increase in exports between the summer months and the end year, it was our best evidence of Saudi activity in gas. Removing the data doesn't alter the reality; but it does alter analysts ability to verify our conclusions. 

Gas liquids are the very centre of the storm in the Oil patch, shale fields, both Oil and Gas, produce them in quantity.  Their abundance and cheapness likely ensure the bitter divide between liquids based petrochemical players and their Naptha competitors is ongoing. Image title
Here's Lyondell's cost curve. SABIC is right at the bottom. Lyondell is next up the curve. The Asians are on the far right.

Now if polythene demand picks up, and thats the centre of the petrochemical market, you could see a boom in petrochemical margins. SABIC and LYONDELL are the airlines of the resource space. 


Petrobras nets 2015 financing deals

Petrobras nets 2015 financing deals

Petrobras has agreements in place to meet all of its funding requirements for the year, the beleaguered Brazilian giant said.

The state-owned player hatched a number of deals with financial institutions late last week that are set to collectively bring in more than $3 billion, with almost the same amount coming from a platform sale-and-leaseback transaction.

The $3 billion co-operation agreement with Standard Chartered Bank for the sale-and-leaseback of an unspecified number of production platforms has a 10-year period.

Petrobras also closed a deal with Banco do Brasil for 4.5 billion reais ($1.48 billion) in export financing for a six-year period.

A 3 billion reais standby loan facility with Bradesco has a five-year period, the same term as a 2 billion reais standby loan with Caixa Economica Federal.

“These transactions, along with the ones already entered into this year, will meet the company’s 2015 financing requirements,” Petrobras said.

“Petrobras will continue to assess financing opportunities aimed at anticipating some of the requirements for 2016,” it added.

The company also approved a $13.7 billion divestment plan for this year and next.
MGL: Petrobras is rolling out 'good news' this last few weeks, and the stock has perked up from the all time lows.  We suspect when we see the audited numbers, scheduled for tomorrow, there might well be a rights issue. EV+Contingent liabilities equals $320+ bn dollars as far as we can tell, and thats a mighty 15x ebitda.  

PDVSA says Venezuela oil exports at 2.4-2.5 million bpd

OPEC member Venezuela is currently exporting between 2.4-2.5 million barrels per day from national crude production of around 2.85 million, the head of state oil company PDVSA said.

Venezuela's output figures have often conflicted with international agencies, which estimate lower output due to methodological differences about how to count extra-heavy crude.

"We are producing right now 2.85 (million) of crude ... We have increased in the last four months 40,000 barrels per day. We plan to increase at the end of this year roughly 100,000 or 120,000 barrels per day, most from the Belt," PDVSA president Eulogio Del Pino said.

"We are exporting in the order of 2.4, 2.5 (million)," he added, giving latest data to foreign reporters on a trip to the Orinoco Belt region in recent days.

Total investment in that region, recently renamed the Hugo Chavez Belt in honor of Venezuela's late president and where PDVSA has multiple joint ventures with foreign companies, should reach $15 billion this year, he added.

Much of that would be in drilling, with PDVSA currently connecting new oil wells at a rate of two per day, and aspiring to raise that to three, the PDVSA boss said.

"We need one well per day at least to compensate decline," he said, adding that to speed well construction, contractors needed to move down closer to the Orinoco from the northern coastal region where they are based to save time and transport.

"If we go to 90 wells a month, 3 per day, we will feel very comfortable."
MGL: Even bankrupt Venezuela is producing more crude.Image title

Here's the 2020 Zeros on Venezuela. Now that is truly heroic piece of paper. 9c on the $!

UK forces sale of Russian billionaire's North Sea fields

Britain's energy minister has decided to force Russian billionaire Mikhail Fridman to sell North Sea gas fields he recently acquired as part of a $5.4 billion takeover deal of DEA, the former oil and gas unit of Germany's RWE.

The decision comes two weeks ahead of a general election in Britain and further sours Britain's relations with Russia in light of Western sanctions over Russia's involvement inUkraine.

"The Secretary of State Ed Davey ... proposes to revoke DEA UK's North Sea petroleum licences unless LetterOne arranges for a further change of control of the DEA UK gas fields in the North Sea," the ministry said in a statement.

LetterOne has up to six months to make a change in ownership, the ministry added.

The company was not immediately available for comment.
MGL: This deal was consumated in March 2014. The value of these assets is surely impaired. So Fridman has a headache. 

Legacy Oil + Gas targeted by activist shareholder

Intermediate producer Legacy Oil + Gas Inc formed a special committee on Monday to deal with hedge fund FrontFour Capital's move to gain seats on its board, the first major case of shareholder activism in Canada's oil patch since last year's sharp drop in crude prices.

Calgary-based Legacy, which has assets in southern Alberta and light oil operations in the Bakken region of southern Saskatchewan, came under scrutiny last month after legal documents showed it was back-stopping a loan for Chief Executive Officer Trent Yanko.

In a statement, the company confirmed it received notice of Connecticut-based FrontFour's plans to nominate three directors at Legacy's May 26 annual general meeting.

"We have formed a special committee to engage with FrontFour and now that matter is in their hands. I am not in a position to comment on it," Yanko said.

The committee is made up of three independent members of the board, including Jim Bertram, executive chairman of Keyera Corp .

"We are not surprised by the activist approach given Legacy's leveraged balance sheet, discounted trading multiple, and recent issues around corporate governance with respect to a personal loan guarantee for its CEO," said RBC Capital Markets analyst Shailender Randhawa.

Yanko and his wife bought $5.68 million worth of Legacy shares last year through a margin loan from the Bank of Nova Scotia supported by the lending value of stock owned by the couple.

Last year's oil price drop and accompanying slide in Legacy shares triggered a margin call in December. In order to avoid the Yankos' shares being sold off, Legacy's board guaranteed the loan.

Activist investors have been eyeing debt-ridden energy companies as U.S. crude prices tumbled to less than $45 a barrel from more than $100 last year. Most, however, are waiting for volatility to subside.

FrontFour owns 6.8 percent of outstanding Legacy shares. It was co-founded by Zachary George, son of former Suncor Energy Inc CEO and Rick George.

Zachary George is one of FrontFour's three shareholder nominees, along with Martin Ferron, CEO of North American Energy Partners Inc, and Matt Goldfarb, acting CEO of Cline Mining Corp.

FrontFour said last week it was seeking to elect nominees to ensure the Legacy board "acts in a manner consistent with governance best practices and maximizes value for all shareholders."
MGL: PV10 is C$3bn vs a mcap of C$1.3bn. Legacy started well, and we confess to liking them 5 years ago. But initial enthusiasm turned quickly sour as the company invested in a entire smorgasbord of Canadian shale acreage, none of which really excited or delivered. 

There's some value here. 

Encana Says to Explore Sale of Haynesville Gas Properties

Encana Corp. is seeking buyers for its natural gas properties in Louisiana as it focuses on drilling for oil and other liquids in Texas and Canada, people with knowledge of the matter said.

Citigroup Inc. is soliciting offers for Encana’s Haynesville Shale basin acreage, valued at as much as $1 billion, said the people, who asked not to be identified because the information is private. The bank has begun reaching out to private-equity firms, energy explorers and other potential buyers, the people said.

- See more at:
MGL: This is a big chunk of 'prime acreage', the trouble is the Haynesville's dry gas output simply struggles to compete with the Marcellus. It is the closest large field to the big LNG export terminals on the La/Tx coast, and it will be interesting to see if Japanese utilities throw their hats into the ring. 

Alternative Energy

China on track after adding massive 5.04GW of solar in Q1

China has installed 5.04GW of solar in the first quarter, with 4.38GW of utility-scale PV and 660MW of distributed generations, PV-Tech reports, citing figures from China’s National Energy Administration.

According to the website, the instals take China's cummalative capacity to 33.122GW, and puts it ahead of track for this year's target of 17.8GW.

Financial analyst Mahesh Sanganeria of RBC Capital Markets said the Q1 result was much stronger than expected, and indicated "the likelihood of achieving full year installation target",PV-Tech reports.

Mr Sanganeria said with strong demand also in Japan and the UK, key makers such as JA Solar, Trina Solar and Yingli Green Energy were likely "to meet or beat their respective Q1 shipment targets", the website added.
MGL: Is the Chinese Solar installation wave finally stepping up a gear? Last year we had nothing but disappointment on execution as local issues frustrated Beijing's policy thrust.

Precious Metals

Scientists reveal diamond bearing rocks more common than thought

The group also found evidence that suggests orangeites were formed from lava produced by massive volcanic eruptions several tens of millions of years ago.

A team of Australian scientists have unveiled a ground-breaking study that identifies, for the first time, the exact source of diamond-bearing rocks known as orangeites.

The paper reveals that orangeites —until now believed to be common only to South Africa— may be present in much higher abundance worldwide

Published Monday in the April edition of Nature Communications, the paper reveals that orangeites —until now believed to be common only to South Africa— may be present in much higher abundance worldwide, especially in Australia.

Rough on the outside, these rocks contain not only treasured diamonds but also tiny fragments of mantle and crustal rocks. By using highly sophisticated geochemical and isotopic analytical techniques, the scientists were able to link those fragments to the source of the orangeites, deep in the interior of the planet.

“We found strong evidence that orangeites are sourced from MARID (Mica-Amphibole-Rutile-Ilmenite-Diopside) mantle, which up until recently had only been recognised in South Africa," leading author, Professor Fiorentini — from The University of Western Australia — said in a statement.  "However, ongoing studies suggest that MARID mantle may occur in other continents, including here in Australia."

The group also found evidence that suggests orangeites were formed from lava produced by massive volcanic eruptions several tens of millions of years ago. Until now, the common beliefwas that diamonds were formed about 990 million years ago.
MGL: The diamond cartel will not like this news. 

Base Metals

Philex gets Philippine govt clearance for $1.2 bln Silangan mine

Philex Mining Corp has been cleared by the Philippine government to proceed with the development of its $1.2 billion Silangan copper-gold mine, paving the way for production to potentially begin in 2018.

The Silangan mine in Surigao del Norte province in the southern Philippines represents Philex's biggest prospective revenue driver when its Padcal mine in the north closes in about 2020 unless it gets a mine extension.

The Department of Environment and Natural Resources had approved the project's development plan in an order signed April 10, Philex said in a filing to the stock exchange on Tuesday.

Shares in the miner rose as much as 5.3 percent, outperforming the broader market which was down 0.3 percent as of 0345 GMT.

The miner plans to seek loans later this year to finance as much as 70 percent of the project cost estimated at between $1 billion and $1.2 billion, Philex Chairman Manuel Pangilinan said last week.

According to initial estimates, Silangan's resources comprise 5 billion pounds of copper and 9 million ounces of gold - among the biggest in the country.

Unlike other big mining projects in the Philippines, Silangan is not affected by a local moratorium on approvals for new production. But it would be covered by a new tax regime that Congress may legislate on to increase the government's share of mining revenue.

Last month, Philex said an additional 110.9 million tonnes of estimated mineral resources would augment Padcal's mineable inventory, which would allow it to extend mine life beyond 2020.
MGL: $740m mcap, $929m ev with $1bn to spend on a resource yielding 0.5% Copper and 0.7g/tonne of Gold. Its better than the old mine! Philex claims a 5 year payback, which sort of implies a 20% IRR. Stock is rallying off a record low, and there are better places for your money.

Aluminium premiums in Europe slide by half since peak

Surcharges for physical aluminium in Europe have spiralled down by nearly half, good news for industrial consumers such as beer can makers which had bitterly complained about warehouse backlogs of up to two years for delivery of the metal.

The unraveling of financing deals at warehouses, together with heavy Chinese exports, has unleashed a glut of aluminium, while demand remains poor.

Premiums paid over the LME cash price were mostly quoted in a range of $250-$290 a tonne for duty-paid material in Rotterdam.

That is a fall from premiums of $370-$390 in early March and about half the levels at a peak of $500 in November 2014.

"It's going down very fast and I don't know where it's going to stop," said one trader, who added that there were some deals with premiums as low as $230.

"If you have a lot of stocks and you want to get rid of them now you have to go down."

The bulk of the estimated 10-12 million tonnes of global aluminium inventories have been locked up in financing deals for the past several years, but a flatter forward curve is making them much less lucrative.

Under the financing deals, investors previously have been able to sell aluminium forward at a healthy profit and store it cheaply until the deals mature, keeping the metal off the market.

"The contango doesn't support the financing deals and so there's no new deals going on," a second trader said.

A contango is when a forward price is higher than a nearby one.

The spread between the cash LME aluminium contract and the 15-month contract has sharply contracted over the past 12 months to $31.75 a tonne from $109.75.

The other driver of lower aluminium premiums have been high levels of Chinese exports.

Preliminary Chinese trade data show exports of unwrought aluminium and aluminium products were 360,000 tonnes in March, down 14 percent from the previous month, but still at relatively strong levels.

If exports continue to decline in April, that could help keep premiums from falling further, said a source at a producer.
MGL: Demand remains poor.

Everything else we look at in Aluminium suggests an 'end of bear market' situation.
Capex has collapsed. Capacity adds are fading (even in China!! Yes we're seeing completions of capacity started under the prior politburo, but this politburo has banned new capex by the SOE's in Aluminium, so capacity growth is fading now)

Its a gruelling argument, and a slow burn bull case. Image title
At the end of the day, inventory is falling. Thats bullish!

Steel, Iron Ore and Coal

China Shenhua Mar coal output down 16% on year

China Shenhua Energy Co., Ltd, the listed subsidiary of state-owned coal giant Shenhua Group, produced 23.1 million tonnes of commercial coal in March, down 16% year on year -- the seventh consecutive year-on-year decline, the company said late April 20.

It represented an increase of 12.7% from February, as the miner put its coal mines into normal production after the Lunar New Year holidays.

However, coal sales of the group continued to decrease on the back of sluggish demand from end users. Sales in March dropped 36% on year and down 14.5% on month to 25.4 million tonnes, the seventh consecutive year-on-year decline.

In the first quarter, Shenhua produced a total 69.3 million tonnes of coal, down 13.3% year on year; while total sales during the same period dropped 33.5% on year to 72.8 million tonnes.

Despite sliding market demand, Shenhua kept its prices steady in March, pegging the benchmark 5,500 Kcal/kg NAR thermal coal steady at 490 yuan/t after discounts, 11.6% higher than the mainstream spot price of 439 yuan/t by end-March.

In March, China Shenhua sold 11.6 million tonnes of coal via northern Chinese ports, down 41.7% year on year and down 23.7% from the month before. Of this, coal shipped from Shenhua’s exclusive-use Huanghua port stood at 6 million tonnes or 51.7% of the total, down 42.9% on year and down 23.1% on month.

In the first quarter, the company sold 33.8 million tonnes of coal via northern Chinese ports, down 36.6% year on year. Of this, coal shipped from Huanghua port stood at 17 million tonnes or 46.4% of the total, down 41.2% year on year.

It didn’t import any coal during the same period, while total exports reached 0.3 million tonnes, down 50% on year, with March exports at 0.1 million tonnes, unchanged from the previous month.

Meanwhile, China Shenhua generated 16.1 TWh of electricity in March, down 15.3% year on year but up 39.8% from February, while total power output over January-March decreased 7.6% year on year to 47.65 TWh.

Shenhua’s March power sales stood at 15.03 TWh, down 15.1% year on year but up 40.7% month on month. Total power sales in the first quarter decreased 7.6% year on year to 44.4 TWh.
MGL: These are ugly numbers for Shenhua. Stock has rallied off the lows, but it is difficult to see this as anything other than a trading stock. We also wonder whether analyst consensus is too high. 

Rio Tinto Q1 iron ore output misses forecasts

Rio Tinto on Tuesday missed first quarter analyst forecasts for iron ore shipments due to bad weather and transport delays, but maintained its full year production target in a bearish sign for prices already at 10-year lows.

The world's no. 2 producer after Vale increased production 12 percent in the first quarter from a year earlier, to 74.7 million tonnes, according to the company's latest operations report.

That was roughly in line with a forecast from UBS but around 8 million tonnes below other analysts' forecasts.

Iron ore shipments rose 9 percent to 72.5 million tonnes, still less than it mined, following a cyclone and a train derailment that blocked access to the company's Dampier port in Australia, the company said.

But Rio stuck to its forecast to increase annual shipments to around 350 million tonnes in 2015, implying shipments will have to average around 92 million tonnes over the next three quarters, and said it would use inventory to meet its targets.

"They will draw down on stocks, which means cheaper costs and larger output," said James Wilson, an analyst with Morgans Financial.

Iron ore prices have slumped after low cost mega miners Vale, Rio and fellow Australian BHP Billiton ramped up output just as demand growth in China began to slow.

China's crude steel output in March fell 1.2 percent from a year ago to 69.48 million tonnes as softening demand and tough environmental checks led mills to cut output.

Steelmakers have warned that production could come under further pressure and more domestic producers could go under.

"It's all becoming more about Chinese demand and where that ends up," said Paul Phillips, a partner at Perennial Growth Management.

The Anglo-Australian miner has been cutting costs to protect its margins in the face of declining prices for iron ore, which accounts for about 90 percent of overall earnings.

Rio Tinto's average cash cost of iron ore production was $19.50 a tonne in 2014, and is forecast at about $17 a tonne this year. Iron ore delivered to China currently fetches around $50 a tonne .IO62-CNI=SI, down from a high above $190 a tonne four years ago.
MGL: This miss by RTZ is roughly the sum of all closed marginal Australian iron ore mines.  Pushes the supply peak further out in time, and makes us fret about what price the ore finds buyers. 

Prefer BHP. 

In classic commodity bear market fashion we've seen the price damage (-60% odd in 12months), but we've yet to see the time damage. $50 +/- ore for how long? If Beijing is to be believed there is simply no demand growth to bale us out of the bear.

So it becomes a matter of assessing those 5% + yields, and whether the companies can sweat the assets to produce the cashflow to sustain them. The case is simply easier at BHP. Rio's dividend is not covered by free cashflow. 

Shandong Iron and Steel gets full control of African mine

State-owned Shandong Iron and Steel Group Co Ltd said on Monday that it has acquired the remaining 75 percent stake it does not own in a mining project in western Africa's Sierra Leone.

Shandong Steel had earlier acquired a 25 percent stake in the project, Tonkolili Iron Ore mine, for about $1.5 billion in 2011.

With the completion of the stake purchase from the loss-making African Minerals Ltd, Shandong Steel also owns the associated infrastructure company African Port and Railway Services.

It, however, did not release the financial details of the acquisition.

Considering the significant debts of the project, the deal value should not be that big, said Wei Zengmin, an analyst at Shanghai-based domestic industry information consultancy Mysteel.

According to public information, AML had $167 million of unpaid debts by the end of November 2014.
MGL: Thus ends African Minerals. 

Steel demand in China forecast to decline through 2016

China's government is battling a property slump, excess capacity and capital outflows. Bloomberg

Steel demand in China will shrink this year and next to extend the first annual contraction since 1995 as economic growth in the world's biggest producer slows, according to the World Steel Association.

China's steel use will drop 0.5 per cent to 707.2 million metric tons in 2015 and fall to 703.7 million tons next year, the group said in a statement. In 2014, demand declined 3.3 per cent to 710.8 million tons, according to the Brussels-based body, whose members account for 85 per cent of global output.

China's government is battling a property slump, excess capacity and capital outflows, with the economy expanding last year at the slowest pace since 1990. To shore up the expansion, the central bank relaxed rules on home purchasing, cut interest rates and reduced the amount of cash banks must set aside as reserves. Asia's largest economy, which accounts for about half of global steel output, is the largest iron ore buyer.

"Steel demand in 2014 saw negative growth for the first time since 1995 due to the government's rebalancing efforts that had a major impact on the real-estate market," the association said in its short-range outlook on Monday. "In the medium term, no strong rebound is expected."

Global use will rise 0.5 per cent to 1.54 billion tons this year and a further 1.4 per cent to 1.57 billion tons next year, the association said. The group's projections refer to so-called apparent steel use, which reflects deliveries to the market from local producers as well as importers.
MGL: Finally, it looks as though China watchers have adsorbed the message from Beijing. 0.5% global demand growth in no way matches the ongoing surge of iron ore supply into the market. 

Classic commodity case study here. This time last year we could see the policy, but not the numbers. Now we see the numbers and the policy. Analyst can make spreadsheets, and tell you its awful. Iron ore prices have fallen 60%, what did their spreadsheets tell you last year?

POSCO Q1 profit up 20 pct, low iron ore costs outweigh weaker steel

South Korean steelmaker POSCO said on Tuesday its quarterly operating profit rose 20 percent, beating estimates, as lower iron ore input costs more than offset the impact of weaker steel prices.

POSCO, the world's sixth-biggest steelmaker, said operating profit in the January to March quarter was 622 billion won ($574 million) on a parent-only basis, above a consensus forecast of 602 billion won compiled by Thomson Reuters I/B/E/S. The closely watched parent-only measure refers to earnings from steel business, and excludes profit from affiliates.

That compared with 518 billion won in operating profit in the same period a year earlier, and 632 billion won in the October-December quarter.

In a regulatory filing, POSCO said revenue fell 8 percent in the quarter to 6.79 trillion won.

Prices of iron ore, a key ingredient in steelmaking, slid in the first quarter amid a supply glut and soft Chinese demand. Benchmark prices have dropped nearly 30 percent this year, hitting their lowest levels since at least October 2008, and POSCO said on Tuesday it expects iron ore prices to remain weak in the second quarter.

That has softened the blow of lower demand from steel from China, as the economy of world's top steel consumer grew at its slowest annual pace in six years at the start of 2015. The global steel business has also been hit by chronic overcapacity, capping price rises of the alloy sold for the automobile, shipbuilding, construction and home appliance sectors.

POSCO said on Tuesday it expects China steel price falls to decrease going forward.
MGL: Weak sales, and even weaker input costs. Also note that the avalanche of cheap Chinese steel exports fell sharply in q1, which presumably gave POSCO a breather in its markets. Image title
This stock has been in a bear market for more than five years. Rosy eyed analysts and Asia GNP growth lovers have just been trounced by poor capital discipline, rubbish returns on its enormous bloated asset base and a CEO in love with growing units at any cost. 

The CEO is gone. The new CEO is saying, and doing the right things, and the valuation is now 'inline' with global peers. Absence of a bear case, unfortunately, is not the same as a bull case.
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