Mark Latham Commodity Equity Intelligence Service

Monday 7th September 2015
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    China: Growth falls to 2%


    Then there will come a crash -- in asset values and expectations, if not in production and employment. After the crash, China will revert to the standard pattern of an emerging market economy without successful institutions that duplicate or somehow mimic those of the North Atlantic. Its productivity rate will be little more than the 2 percent per year of emerging markets as a whole; catch-up and convergence to the North Atlantic growth-path norm will be slow if at all; and political risks that cause war, revolution or merely economic stagnation rather than unexpected booms will become the most likely surprises.

    I was wrong for 25 years straight -- and the jury is still out on the period since 2005. Thus, I'm very hesitant to count out China and its supergrowth miracle. But now "a" crash -- even if, perhaps, not "the" crash I was predicting -- is at hand.

    A great deal of China supergrowth always seemed to me to be just catch-up to the norm one would expect, given East Asian societal-organizational capabilities. China had been far depressed below that norm by the misgovernment of the Qing, the civil wars of the first half of the twentieth century, the Japanese conquest and the manifold disasters of rule by the paranoid Mao Zedong. Take convergence to that East Asian societal-capability norm, the wisdom of Deng Xiaoping and then Jiang Zemin in applying the standard Hamiltonian gaining-manufacturing-technological-capability-through-light-manufacturing-exports development strategy (albeit on a world-historical scale) and a modicum of good luck, and China seemed understandable. There thus seemed to me to be no secret Chinese institutional or developmental sauce.

    Given that, I focused on how China lacked the good-and-honest government, the societal trust and the societal openness factors that appear to have made for full convergence to the U.S. frontier in countries such as Japan. One of the few historical patterns to repeat itself with regularity over the past three centuries has been that, wherever governments are unable to make the allocation of property and contract rights stick, industrialization never reaches North Atlantic levels of productivity.

    China will -- unfortunately -- likely become another corrupt middle-income country in the middle-income relative development trap.

    Sometimes the benefits of entrepreneurship are skimmed off by roving thieves. Sometimes economic growth stalls. Sometimes profits are skimmed by local notables, who abuse what ought to be the state's powers for their own ends. China -- in spite of all its societal and cultural advantages -- had failed to make its allocation of property rights stick in any meaningful sense through the rule of law. Businesses could flourish only when they found party protectors, and powerful networks of durable groups of party protectors at that.

    Professor of economics, U.C. Berkeley

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    China's economy showing signs of stabilising - state planner

    China's power usage, rail freight and property market have all shown improvement since August, indicating that the economy is stabilising, the country's top economic planning agency said on Monday.

    The effects of supportive policies, including interest rate cuts, property market stimulus and local government debt swaps, will feed into the economy over the next few months and help underpin growth, the National Development and Reform Commission (NDRC) said on its website.

    "The power usage, rail freight, as well as real estate prices and turnover have all improved into August, indicating the economy is stabilising amid fluctuations," the NDRC said.

    "The economy is expected to maintain steady growth and we are able to achieve annual economic growth target," it added.

    A flurry of recent soft indicators - and a collapse in China's stock markets - had heightened fears of a hard landing for the world's second-biggest economy and sent global financial markets into a tailspin.

    China's economy, which grew 7 percent in the first half from a year earlier and in line with the government's target for the year, is headed for its slowest economic expansion in 25 years in 2015.

    The recent downbeat data, however, has raised the risk the government could miss the full-year growth target.

    The National Bureau of Statistics said on Monday that it had revised China's economic growth rate in 2014 to 7.3 percent from the previously released figure of 7.4 percent.

    The NDRC cited data from the State Grid as saying that China's total power consumption in August rose 2.47 percent on the year - the fastest growth so far this year and steady growth was likely to continue in September.

    The average daily rail freight volume rose 1.6 percent in August from July, the NDRC said

    China's exports are likely to swing into positive growth in August from a 8.3 percent drop in July, the agency said without giving specifics.

    The customs office is due to release August trade figures on Tuesday. Analysts polled by Reuters expected exports to drop 6.0 percent in August compared with a year earlier.
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    Tianjin: 1000 Chemical plants to be relocated.


    At a cabinet meeting in Beijing to draft a new water pollution prevention law, China’s minister of industry and information technology, Miao Wei, said that since the Tianjin explosion local governments throughout the country have provided his ministry with plans to relocate about 1,000 chemical plants away from population centers.

    According to the official People’s Daily newspaper, the relocation proposals involve plants that are either hazardous or heavily polluting. The project, if it goes forward, would cost a total of about $63 billion. Miao did not provide details on who would pay for the moves.

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    UK manufacturers halve 2015 growth forecast as export orders slump

    UK manufacturers halve 2015 growth forecast as export orders slump

    Britain's main manufacturing lobby has halved its forecast for growth this year after overseas orders fell to their lowest since the financial crisis, while recruiters said skills shortages were leading to higher wages but slower job growth.

    British manufacturing expanded 3.1 percent last year, its best performance since 2010, but the EEF manufacturers' organisation said on Monday that it expected growth to slow this year to just 0.7 percent, down from an earlier forecast of 1.5 percent.

    "While UK data has continued to point to solid growth, UK manufacturing is having to contend with a roller-coaster of risks from the rest of the world, and the white-knuckle ride is starting to take its toll," EEF chief economist Lee Hopley said.

    Uncertainty about the scale of an economic slowdown in China have caused share prices there to tumble in recent weeks, and both the United States and China have reported the slowest manufacturing activity in more than two years.

    The EEF said the proportion of British manufacturers reporting growth was the lowest since late 2009, and that new export orders had edged down to a six-year low, a weaker picture than a similar survey had shown last week.

    But for central bank policymakers in Britain and the United States, who are considering when to start to raise interest rates, the broader picture is mixed. Domestic conditions are strong, and tight labour market is starting to push up wages.

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    Oil and Gas

    Russia Targets One Third Increase In Oil Output In 20 Years

    Russia could increase its oil output by a third to over 14 million barrels per day (bpd) in the next two decades, it's most powerful oil executive said as Moscow targets growing Asian markets.

    Russia is already the world's top oil producer, steadily pumping near its post-Soviet highs of 10.7 million bpd thanks to the weak rouble which offsets the impact of low oil prices by reducing production costs.

    A proposed increase in Russia's oil production signals Moscow would not act to support falling prices, a stance similar to OPEC, in a move to defend its market share.

    "Our position is that Russian annual oil production in the future may reach 700 million tonnes (14 mln bpd) and higher," Igor Sechin, Chief Executive of the world's top listed oil firm by output, Rosneft, told the Eastern Economic Forum.

    To reach the goal and beat Soviet records of over 11 million bpd reached in late 1980s Russia needs to increase exploration drilling, boost hard-to-extract resources and speed up development of Arctic offshore, Sechin said.

    Russia's rapid turn to Asia comes at a time when ties with the West are at their lowest point since the Cold War because of the conflict in Ukraine. Russia is under sanctions, which also ban western firms from helping to tap Arctic offshore and shale oil resources.

    Russia plans to at least double its oil and gas flows to Asia over the next 20 years, sending at least a third of its oil and a third of its gas eastwards by then.

    That is a swing away from traditional westward routes that date back to Soviet times when Europe was the only market capable of absorbing Russian energy.

    Sechin said Russia can boost gas exports to China to as much as 300 billion cubic metres a year. Now, gas is being exported only by sea from the Sakhalin-2 LNG plant, in the Pacific.

    China got 0.2 billion cubic metres of gas from Russia last year, in a form of LNG, according to BP data. Pipeline gas should reach China by the next decade, according to Gazprom plans.

    "This means that a powerful energy bridge between Russia and Asia-Pacific region is really possible. The question is in investments... and adequate oil prices," Sechin said.

    Wang Yilin, board chairman at CNPC, to which Rosneft ships over 15 million tonnes of oil annually via one of the routes, a spur of East Siberia-Pacific Ocean pipeline, told reporters that work was ongoing to increase imports.

    "We will cooperate with Rosneft on this (crude oil supplies increase). We are good friends with Sechin," he said.

    The only top-profile western guest at the forum was the chief executive of Royal Dutch Shell, Ben van Beurden, who met Gazprom CEO Alexei Miller and discussed expansion of Sakhalin-2, Russia's sole LNG plant.

    Current oil prices of around $50 per barrel are in line with investment forecasts for Russia's largest producers like Surgut , Russia's No.4 biggest by output.

    Sechin said that production costs for Russia's largest operating fields were down to around $3 per barrel now, thanks to the weak rouble, from $7-5 over the past couple of years and are now comparable to those in the Gulf, one of the world's cheapest locations for extracting oil.

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    Middle East oil outflows tumble with VLCCs idle

    A significant fall in demand for the transport of crude has caused Middle East outflows of oil to tumble to their lowest levels since before the summer, according to Platts ship-tracking tool cFlow.

    This has resulted in numerous VLCCs being idled for longer while ample supply and low bunker fuel prices have continued to push down freight rates, the analysts agency said.

    Over the week to Wednesday, sailings from Saudi Arabia, Iraq's Basrah, Iran and the wider Middle East fell to their lowest levels since before the start of June, according to cFlow data, as refinery run cuts across parts of Asia weakened demand.

    Departures from Saudi Arabia fell to 24 this week, from 30 last week, while total sailings for August slipped to a four-month low of 125 VLCCs, down from 137 in July.

    Five tankers left over the week from Iraq's southern terminals, while in August, a total of 36 departed, up from 34 in July.

    The slight increase in VLCC sailings was in contrast to actual crude oil exports from Basrah on all ship-types, which fell in August, to 3.021 million b/d, a drop of 43,000 b/d from July.

    Oil ministry spokesman Asim Jihad attributed the fall to a technical fault in the export system.

    Iranian weekly sailings dipped to three, the lowest since mid-July, while total departures for August fell to nine, an all-time low for the year thus far.

    The volume of outflow from the Middle East is typically lower than the count of ships leaving the region's individual ports because over a quarter of VLCCs tend to co-load.
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    Saudis may follow UAE and cut fuel subsidies - paper

    Saudi Arabia was looking more closely at cutting gasoline subsidies, a move it has been studying for years, after the United Arab Emirates did so last month, with both states trying to save money in an era of cheaper oil, a newspaper reported.

    Saudi domestic gasoline prices are some of the lowest in the world. Allowing them to rise would be one of the biggest economic reforms in the country for years and a highly politically sensitive one as many Saudis rely on cheap fuel.

    United Arab Emirates let gasoline prices rise 24 percent last month.

    Al Watan's Saturday edition quoted unnamed sources as saying Saudi Arabia cannot leave gasoline prices at ultra-low levels indefinitely because that would hurt the economy.

    The newspaper did not elaborate on when the government might make a decision and gave no details on the possible reform.

    However, a source in the Gulf oil industry told Reuters that Saudi officials were "seriously" thinking about reducing fuel subsidies gradually.

    Riyadh would probably not act as aggressively as the UAE because of political and economic considerations, the source said. He said UAE officials had advised Riyadh to "start small", possibly raising prices just a few percent.

    Saudi energy officials could not immediately be reached for comment.

    Unleaded gasoline costs only about 15 U.S. cents per litre in Saudi Arabia, the world's lowest price after Venezuela, according to website

    Economists estimate removing gasoline subsidies would save the kingdom nearly 30 billion riyals ($8 billion) annually, Al Watan reported. That would be a significant saving in a budget deficit which analysts estimate could total $120 billion or more this year if crude prices stay low, slashing state revenues.

    The reform could also help hold back burgeoning consumption. Domestic oil product demand rose 5.1 percent year-on-year to a record 2.98 million barrels per day in June, according to the Joint Oil Data Initiative.

    Al Watan quoted Fahad al-Anazi, deputy chairman of the economic and energy committee in the Shura Council, a top state advisory body, as saying any changes to subsidies would have to be accompanied by other measures to preserve public welfare such as providing cheaper public transport.

    This implied major reform might still be years away. The government is building public transport systems but the Riyadh metro is only due to be completed in 2019, for example.

    Because higher gasoline prices could fuel inflation in other goods, Anazi suggested the government might introduce new subsidies for some food and consumer items, or let poorer people keep their fuel subsidy.

    Such subsidies would be provided to Saudi citizens rather than the large number of foreigners in the country, he said.

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    Qatar acknowledges LNG Glut.

     Qatar News Agency) Global supply of liquefied natural gas (LNG) is set to increase significantly from 245m tonnes per annum (mtpa) in 2014 to 297mtpa in 2017, a QNB weekly analysis said.

    Three major projects have recently been completed; over 100mtpa of LNG projects are currently under construction; and 600mtpa of projects are under consideration. 

    However, the viability of many of these projects is being threatened by a number of factors, not least the recent collapse in crude oil (LNG prices for long-term contracts are usually indexed to crude oil benchmarks) and LNG spot. Qatar is well placed to compete with the expected increase in supply. It is the lowest cost LNG producer globally; already accounts for 31% of the global market (74mtpa in 2014); and sells most of its gas through long-term contracts, ensuring stability of supply. 

    The three major global projects that have recently been completed have faced some difficulties. The 8.5mtpa Queensland Curtis LNG project in Australia, was completed in 2015 after considerable delays. A 4.7mtpa Algerian facility completed in 2014 is only producing at 50% of capacity due to a lack of feedstock. 

    The 6.9mtpa facility in Papua New Guinea was completed in 2014 and a new 2mtpa facility started production in Indonesia in 2015. 

    There are currently 16 major LNG projects already under construction, which should add around 12mtpa in 2016 and 33mtpa in 2017. Australia and the US are adding the largest amount of capacity. Australia made large discoveries of natural gas in the 2000s and invested heavily in LNG USD180bn of LNG projects are currently under construction with total capacity of 60mtpa. 

    The US is currently building 50mtpa following its shale gas revolution which has transformed the US from a hefty importer of natural gas to a soon-to-be exporter. As a result, a number of plants that were designed as LNG importing terminals are being converted to export facilities. Some additional LNG capacity is also expected from Malaysia (4.8mtpa in 2015-16) and Russia (16.5mtpa in 2017-19). 

    The plug is unlikely to be pulled on projects that are under construction. They already have long-term commitments from buyers for the sale of LNG and their breakeven oil price is estimated at around USD50/barrel, just about manageable at present. However, we expect there to be some slippage in the completion date of these projects due to their complexity, rising costs as well as permitting and regulatory issues. 

    In addition to under construction projects, there are numerous projects being considered, including around 600mtpa of proposed projects, around 260mtpa of which are in the initial engineering and design phase. 

    However, in the current environment, very few of this massive volume of projects is likely to be considered viable for a number of reasons. First, the breakeven oil prices on these projects is estimated at around USD70-80/barrel, well above current market levels. 

    Second, China is expected to be the main source of future demand growth for LNG and concerns about its economy slowing down may undermine the global LNG demand outlook. 

    Third, construction costs more than doubled in 2007-13 compared with 2000-06, with higher labour costs being a particular issue in the US oil and gas sector. Fourth, the large amount of new capacity that is already under construction seems to point to a likely oversupplied market until at least 2020, discouraging the approval of projects that are currently under consideration. 

    Fifth, buyers are reluctant to enter into long-term contracts in the current market environment as spot LNG prices are low and falling. Without long-term gas sales contracts in place, large-scale LNG projects are highly unlikely to be able to put the financing in place, making it hard to get these projects off the ground. 

    Some companies have already cancelled projects. For example, Royal Dutch Shell cancelled its USD20bn Arrow project in Australia at the beginning of 2015 and Woodside has pushed back a decision on its Browse floating LNG project in Australia from 2014 to 2016 at least. In this environment, we expect few new LNG projects to be initiated in the short-term. LNG projects have a construction period of 4-6 years. Therefore, a delay in initiating new projects over the next year or two, should lead to tighter LNG markets in the early 2020s. 

    To summarise, LNG capacity is expected to increase sharply up to around 2020 leading to a glut in supply, depressing prices. Qatar is in a strong position versus new producers thanks to its competitive pricing power and the long-term contracts it already has in place. In the longer-term, the current pause in the initiation of new LNG projects could to lead to a tightening of the market as demand catches up.
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    Woodmac bearish LNG


    “With the LNG market facing a wall of new supply just as China’s gas demand growth has faltered, it is surprising how few new projects chasing a final investment decision have been postponed,” said Noel Tomnay, VP Global Gas & LNG Research.

    Global LNG supply is presently around 250 million tonnes per annum (mmtpa) and there is a further 140mmtpa under construction, says Tomnay.

    Noel Tomnay, VP Global Gas & LNG Research, Wood Mackenzie.

    “Recognising that the global market will struggle to absorb such a large supply uptick, for some time now we’ve been forecasting a soft global market,” he said. “However that bearish prognosis is now being exacerbated by a demand downturn.”

    LNG prices are stuck in the US$7-US$8 per million British thermal unit range, compared to the US$11-US$12 needed long-term to make the economics feasible, according to Tomnay.

    Wood Mackenzie points to Asia and China, in particular, as being key to its revised outlook. China’s LNG import commitments are set to rise by 17 per cent year-on-year between 2015 and 2020, from 20 to 41 mmtpa but China will struggle to take all this LNG so quickly.

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    IEA gas expert says Aus LNG will struggle to break-even

    Two-hundred billion dollars of investment that’s poured into six natural gas plants currently under construction in Australia will struggle to generate a return due to falling energy prices, according to the International Energy Agency.

    The Australian Financial Review reports that IEA senior gas expert, Constanza Jacazio, also says the three projects currently in planning stage are unlikely to go ahead.

    "In a $US60 oil environment the Australian projects will continue, but you are probably not breaking even," Ms Jacazio said in an interview from Paris, the AFRreports. "Will anything else in Australia proceed beyond this next portion of projects? I think in this environment it is very unlikely."

    Australia’s six LNG projects across Western Australia, Queensland and the Northern Territory were all planned when energy prices were high courtesy of strong Asian demand.

    Major energy investors from the US, Japan and China pumped tens of billions of dollars into the industry based on projections that energy prices would remain higher for longer.

    But strong supply from the US shale and Saudi Arabia, coupled with a larger than expected slowdown in demand from China has seen oil prices plunge to six-and-a-half year lows.

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    YPF, Gazprom Sign Accord to Develop Gas Projects in Argentina

    YPF SA Chief Executive Officer Miguel Galuccio and his counterpart at Gazprom PJSC Alexey Miller signed an agreement to develop projects in Argentina.

    The agreement to develop tight and shale hydrocarbons in Argentina sets out the principles for cooperation for a final accord that could be signed in the Russian spring, Sergei Kupriyanov, Gazprom’s spokesman, said after the signing ceremony Friday in Vladivostok, Russia. That may be March, according to the company.

    YPF, the state-run energy company, is seeking partners to finance development of a shale formation the size of Belgium known as Vaca Muerta that contains at least 23 billion barrels of oil. Chevron Corp. is now producing 43,000 barrels of oil equivalent a day with YPF while Dow Chemical Corp. is developing gas in an area called El Orejano. Similar deals have been signed with Malaysia’s Petroliam Nasional Bhd. and China Petroleum & Chemical Corp.

    The accord will provide “a significant impulse for the development of the republic’s oil and gas industry,” Gazprom Miller said in the statement.

    Argentine President Cristina Fernandez de Kirchner and Russia’s Vladimir Putin attended the signing of a memorandum between the two companies in April.
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    Gazprom cements gas ties with European partners

    Russia's Gazprom increased its industrial muscle in the heart of Europe on Friday, bulking up through deals on asset swaps and more pipeline capacity with energy companies keen to get back to business as usual.

    Gazprom secured access to western European gas storage as well as a deal with industry partners to double the capacity of the Nord Stream pipeline to deliver gas to Europe bypassing Ukraine, with which Russia is in a protracted conflict.

    The surprise revival of an abandoned deal between the Russian behemoth and German chemicals group BASF will give Gazprom access to German gas trading and storage in exchange for more stakes in Siberian gas fields.

    BASF's oil and gas production unit Wintershall said in a statement the partners had deemed the time ready to complete the transaction. "We are convinced that natural gas from Russia is necessary to ensure energy security in Europe," it said.

    The European Union has been trying to loosen Russia's grip on the EU's gas supply - it currently supplies one-third of the gas used by the bloc. Gazprom abandoned its South Stream pipeline project, designed to deliver gas from Russia to Europe via the Black Sea and Bulgaria, last year under EU pressure.

    The EU has instead encouraged the development of alternative supplies from the Caspian Sea and the United States.

    Now an agreement with a group of Western energy companies on the Nord Stream link via the Baltic Sea to Europe will allow it to come online in 2019, giving it a head start on the competition.

    "The fact that the global energy majors participate in the project bespeaks its significance for securing reliable gas supply to European consumers," said Gazprom Chairman Alexei Miller in a statement.

    German officials remain concerned about the situation in Ukraine, but have praised Russia's approach during talks to seal an accord over Iran's nuclear programme.

    They say Moscow has also shown signs that it is prepared to play a more constructive role in discussions over how to resolve the civil war in Syria - the source of many of the hundreds of thousands of migrants heading for Europe.

    Austrian energy group OMV, a long-standing partner of Gazprom, separately reported progress on its own asset-swap talks with Gazprom.

    OMV chief executive Rainer Seele, a German who recently joined the Austrian firm after many years at BASF, spoke of extending a "trustful partnership".

    Shell's Chief Executive Ben van Beurden, partner to the pipeline deal, stressed Europe's dependence on Russia.

    "New projects like Nord Stream 2 are needed to ensure that Europe's demand for energy is met, especially as gas production in Europe itself is falling," he said.

    Nord Stream 2 will come on line just as a rival pipeline is supposed to bring Caspian gas to Europe, boosting competition for market share in the bloc and loosening the ties between politics and energy security.

    New liquefied natural gas (LNG) exports from the United States should also be in full swing by then and likely landing on Europe's shores in significant volumes, an development set to challenge Russia's current energy dominance.

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    Chevron Pays To Keep Workers Quiet At Its Gorgon LNG Project

    Shareholders in Chevron Corporation haven’t had much to smile about lately, and they’ll have even less to smile about when they learn that construction workers on the Gorgon liquefied natural gas (LNG) project in Australia have just won a generous increase in pay and conditions.

    A year late on its timetable, and close to double its original budget, the $54 billion Gorgon project has become a case study of “how not to” in the oil world.

    But what will really rile Chevron shareholders is a 5% pay rise granted earlier today to construction workers, plus a reduction in their work rosters from 26 days on site, with nine days off, down to 23 days on and 10 days off, which is as good as second pay day

    More money and less work time for contractors and employees on the Gorgon project are in contrast to a 39% share-price fall by Chevron over the past 12-months with the only compensation for shareholders being a steady dividend of $1.07 for the June quarter.

    What also makes the latest pay and time deal more remarkable is that it comes at a time of low oil prices and the likelihood that the project will struggle to post reasonable profits, at least in its early years, thanks to the cost blow-outs and completion delays.

    Officially, Gorgon is more than 90% complete and scheduled to start delivering LNG to customers in Asia later this year. or early next.

    Why it has proved so difficult to build, and so much more than budgeted, are questions that Chevron shareholders might start probing especially after the latest pay deal for workers.

    One explanation for the extra money is that Chevron, which manages Gorgon and has a 47.3% stake in the project, simply wants to get the job finished and get some cash coming in the door, rather than continuing to bleed capital.

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    BP shares at risk from M&A temptation - BAML

    BP will need to buy oil and gas fields to offset falling production, which could lead it to issue equity to raise funds, Bank of America Merrill Lynch (BAML) said on Friday, cutting its rating on the oil major's shares to underperform from neutral.

    As oil prices are expected to recover only slowly over the next two years, the British oil and gas company will have to sell more assets, cut spending by an additional $5 billion and increase borrowing to maintain dividends, the U.S. bank said.

    With lower in-house growth, BP will need to acquire companies or assets. All this could result in BP issuing shares to raise funds, it said.

    "We warn of increasing M&A (merger and acquisition) risk: BP is in our view likely to replace organic with inorganic investment opportunities -- including the risk of value destruction as well as further dilution from at least partially equity-funded M&A," BAML said.

    "Should project sanctioning see further delays as we face persistently low oil prices, we believe the temptation to engage in more M&A and external reserve replacement will only grow," it added in the report published on Friday.

    BP declined to comment.

    Barclays last month rated BP's shares "overweight", noting progress in cost saving. "We continue to see BP as having a differentiated opportunity to reduce costs relative to the wider peer group and anticipate further progress throughout the rest of 2015 and into 2016," Barclays said.

    Like most peers, BP has slashed spending in the face of an extended period of low oil prices.

    It has also sold more than $50 billion of assets over the past year to boost its balance sheet and to finance the costs and fines of the deadly 2010 Gulf of Mexico oil spill.

    BP, for years the subject of speculation that it could be an acquisition target, is expected to maintain its dividend payout through increased borrowing, BAML said.

    Assuming benchmark Brent crude oil prices recover to $70 a barrel by 2017, BP will still need $4 billion in additional cash savings to cover dividends, BAML said.

    "Given the industry's patchy track record on creating value from M&A, we believe investors will be rewarded for patience. In other words, we believe it pays to stand on the sidelines and evaluate any M&A proposition after it is announced," BAML said.
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    Parex increases 2015 production guidance

    Parex forecasts 2015 production to be approximately 27,400 bopd as compared to the original 2015 oil production guidance of 26,500 bopd. The revised production forecast represents an increase of 22% compared to the 2014 annual average oil production of 22,526 bopd. Fourth quarter 2015 oil production is forecast to be 28,500 bopd, an increase of 7% from production of 26,544 bopd for the fourth quarter of 2014.

    Capital expenditures for 2015 are estimated to now range between $140-$145 million dependent upon oil prices as Parex will continue to review its discretionary exploration capital programs in the context of our funds flow from operations given the lower oil price environment.

    Parex plans to drill the Taringa-1 and Tautaco-1 wells back to back to increase drilling rig efficiencies and accordingly does not expect to commence drilling the Taringa-1 well until surface negotiations are complete for the Tautaco prospect on block LLA-10, which is anticipated to be late 2015. Accordingly for the remainder of 2015 capital expenditures will likely be limited to drilling the Jacana-2 appraisal well on LLA-34, commencement of drilling the Taringa-1 exploration well, Tautaco prospect civil construction and finishing facilities work on LLA-34, Rumba and LLA-32.

    Parex is committed and able to maintain its strong balance sheet and cash reserves notwithstanding the lower oil price environment. At June 30, 2015 Parex had drawn no bank debt on its USD $200 million syndicated credit facility and had working capital of approximately USD $90 million including approximately USD $104 million of cash.
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    US Oil Export embargo days are numbered.

    WASHINGTON — Momentum is growing to lift the 40-year ban on exporting U.S. oil to foreign nations, with a federal report concluding that doing so wouldn’t raise gasoline prices. Congress could vote on proposals when it returns from its summer vacation next week.Rep. Joe Barton, R-Texas, said he has “green lights” from the House Republican leadership, and is confident the House will pass a bill on ending the ban this fall.“It is up to this Congress to examine the issue and move towards a better policy that reflects the reality of America today, not the America of 1975,” Barton said in an email.Republican presidential candidates are also seizing on the issue, with Sen. Marco Rubio, R-Fla, declaring that ending the ban is one of the first things he’d do if elected president. There’s opposition among Senate Democrats, but also a growing willingness among some to consider the idea that seemed a political impossibility just a few years ago.The oil export ban was put in place after the 1970s Arab oil embargo, ostensibly to protect Americans from gasoline shortages and sharply higher prices. But oil companies and many energy economists argue that it’s an outdated policy at a time of enormous American oil and natural gas production, and that lifting the ban would encourage more drilling.The Obama administration has taken small steps, including an announcement last month that it would start letting companies send lighter U.S. oil to Mexico where it’s good for aging refineries there, and get heavy Mexican oil in return.

    WASHINGTON — Another Senate Democrat has signaled his support for exporting U.S. oil — as long as it is part of a broader clean energy plan.

    The declaration from Sen. Michael Bennet came during the Rocky Mountain Energy Summit, when the Coloradan was asked if he backed oil exports.

    “In the context of being able to move us to a more secure energy environment in the United States (and) a cleaner energy environment in the United States, yes,” Bennet said.

    A spokesman for Bennet said the senator believes a move to lift the 40-year-old ban on crude exports “would have to be part of a more comprehensive plan that includes steps to address climate change and give the country and the world a more sustainable energy future.”

    Bennet’s comments make him the latest Senate Democrat to suggest he is open to oil exports — even if the support is predicated on other changes.

    Senate Democratic Leader Harry Reid recently said there was room for a “compromise” on the issue. “We should sit down and try to work something out with the people who are so focused on exporting it and those people who are so focused on not exporting it and come up with a deal,” Reid told Politico.

    And Sen. Robert Menendez, D-N.J., a longtime oil export critic, highlighted the possibility of strategically selling U.S. crude abroad to bolster a new round of nuclear negotiations with Iran.

    To some oil export advocates, the declarations are a sign of building momentum — that a change in policy is viewed as practically inevitable by some lawmakers who want to extract some concessions in exchange for a yes vote.

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    U.S. Oil Rig Count Falls to 662 in Latest Week

    The U.S. oil-rig count fell by 13 to 662 in the latest week, breaking six consecutive weeks of increases, according to Baker Hughes Inc.

    The number of U.S. oil-drilling rigs, which is a proxy for activity in the oil industry, has fallen sharply since oil prices headed south last year. The rig count dropped for 29 straight weeks before climbing modestly in recent weeks.

    Despite recent increases, there are still about 59% fewer rigs working since a peak of 1,609 in October.

    According to Baker Hughes, gas rigs were unchanged at 202.

    The U.S. offshore rig count is 33 in the latest week, up three from last week and down 32 from a year earlier.

    For all rigs, including natural gas, the week’s total was down 13 to 864.
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    China Plows Big Money Into Australian Agriculture

    Australian deal makers are swapping hard hats for cowboy hats as Chinese investors increasingly explore a new natural-resource boom: agriculture. As WSJ’s Daniel Stacey reports:

    China became the largest investor in Australia’s agricultural sector during the financial year ended June 2014, according to a report from the country’s Foreign Investment Review Board, pouring in 632 million Australian dollars ($450 million), almost twice as much as the year before.

    Chinese investment in Australian mining projects fell by a third to A$5.85 billion during the same period, the latest figures available.

    Australia’s Seafarms Group is seeking offshore investors to help develop a A$1.45 billion prawn farm in the country’s remote northwest. Nearby, Chinese company Shanghai Zhongfu last year spent A$700 million to launch a sugar and sorghum farm. Integrated Food and Energy Development, a private Australian company, is pitching a project to offshore investors that would convert five cattle stations in Queensland state into a A$2 billion enterprise producing sugar, guar beans and cattle.

    China’s push into Australian agriculture has been more cautious than its rush into mining, in which companies spent big on projects at high prices only to lose out as metals prices fell and costs soared. The agriculture investors are mostly limiting their ambitions to joint ventures and stakes in exchange for a share of output. They’re tapping local expertise and retaining existing managers, rather than trying to gain full ownership of farms or launch major greenfield projects, local deal makers say.

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    Bayer issues fungicide warning for wine grape growers, pending crop investigation

    Germany's Bayer has advised wine grape growers not to use its Moon Privilege fungicide until its CropScience arm has investigated whether there is a connection between the product's use and reported crop damage.

    Growers have reported deformed leaves and lower yields from their crops this year.

    Referring to "atypical symptoms" in vines where Moon Privilege -- known as Luna Privilege in some markets -- had been deployed in 2014, a statement on the company's website said: "As long as the cause of this change in the grape vines remains unexplained, we recommend for precautionary reasons not to use Luna Privilege for wine growing.

    The statement also said that Bayer regrets the situation and is doing everything necessary to discover the cause.

    Some Swiss wine grape growers claim that the fungicide is responsible for the damage and are demanding compensation, Schweiz am Sonntag newspaper reported on Sunday.

    Growers have estimated a potential loss of up to 10 percent of the Swiss wine grape harvest, the paper said.

    "The damage will, in any event, be in the three-digit millions (of Swiss francs)," Andreas Meier, a grower in the northern Swiss canton of Aargau, was quoted as saying.

    The paper also said that Bayer has acknowledged in a letter to growers a "high probability" of a connection between the fungicide and damage to the 2015 harvest.

    Bayer CropScience did not respond immediately to Reuters' telephone and emailed requests for comment on Sunday.

    Last year Bayer said it expected more than 250 million euros ($279 million) in annual peak sales from its Luna group of products, which were launched in 2012 and are used for fruit and vegetable crops.
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    Base Metals

    Glencore emergency rights, suspends dividend.


    Glencore Plc, the commodity producer and trader, plans to sell assets and shares to cut its $30 billion net debt by about a third following the rout in global markets.

    Baar, Switzerland-based Glencore, which last week posted its biggest weekly decline in London since going public in 2011, plans to sell about $2.5 billion in new shares and assets worth as much as $2 billion. It also will suspend dividend payments until further notice as it aims to reduce its net debt by about $10.2 billion, the company said Monday in a statement.

    Glencore has lost more than half its market value this year, and along with BHP Billiton Ltd. and Rio Tinto Group has seen profits slump as commodity prices plunged to touch a 16-year low last month. Standard & Poor’s cut Glencore’s outlook to negative from stable last week, saying weaker growth in China will weigh on copper and aluminum prices.

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    400 000 t copper cathode removed in Katanga, Mopani review

    Central African mining company Katanga Mining Limited had begun a review of its business, including operations and expenses, in light of the challenging environment for commodities, Glencore said on Monday. 

    A similar review was under way at Mopani Copper Mines in Zambia, the London-, Hong Kong- and Johannesburg-listed global commodities mining and marketing company said. The review would include the suspension of production at Katanga and Mopani for 18 months up until the completion of the expansionary and upgrade of the ore leach at Katanga and the new shafts and concentrator at Mopani, which would provide a material reduction in overall operating costs at both operations. 

    The suspension of operations would remove 400 000 t of copper cathode from the market. Once complete, the programmes were expected to reduce net direct cash (C1) costs at Katanga to $1.65/lb and at Mopani to $1.70/lb from more than $2.50/lb currently. 

    The 181 000-employee Glencore, headed by CEO Ivan Glasenberg, said it would continue to fund the expansionary and upgrade projects at both operations, adding that Mutanda Mining continued to perform well, producing above nameplate capacity at a C1 cost of $1.33/lb.
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    Aluminium companies consider consolidation under SOE reform program

    China is trying to push its two biggest aluminium businesses together as part of a planned shake-up of State-owned enterprises, industry sources said, a move that would create the world's largest aluminium maker.

    Power company State Power Investment Corp is in talks to hive off its aluminium assets to Aluminium Corp of China Ltd, also known as Chinalco, allowing SPI to focus on power construction and generation, three industry sources said.

    The consolidation is shaping up as a test of Beijing's ambitions to restructure its vast but underperforming State-owned sector, particularly at a time of slowing economic growth.

    If successful it would be a fillip for reform, but slow progress in what is seen as a relatively simple tie-up underscores the problems China faces in more challenging SOE consolidation, such as merging rivals in the same industry.

    "Merging State-owned enterprises is going to be very difficult and will involve a lot of problems that could cause damage to the harmony of society," said Guo Chunqiao, a macroeconomic analyst at the State-backed research firm Beijing Antaike Information Development Co Ltd, referring to potential job losses.

    SPI, which inherited the loss-making aluminum assets when it was formed from the merger of two SOEs in June, wants to abandon the sector, which is suffering from a supply glut, the sources said.

    Shifting the assets would boost Chinalco's capacity to more than 7 million metric tons a year of primary metal, making it the world's biggest producer, ahead of Russia's Rusal.

    But while talks have been going on for the past two months, progress has been slow, with one stumbling block being Chinalco's reluctance to take over high-cost smelters, said a source familiar with SPI.

    The State-owned Assets Supervision and Administration Commission, which manages SOEs on behalf of the central government, was considering the issue and would back the move if it did not dent Chinalco's profits, the sources said.
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    Steel, Iron Ore and Coal

    Australian bank against funding Adani's mine

    Image Source: Business StandardBusiness Standard reported that following the lead of all top American and European banks, which have refused to fund Adani Group’s controversial coal mining project in Australia, the National Australia Bank (NAB) has also decided to steer clear of lending to the group.

    Mr Adrian Burragubba, the spokesperson for the W&J Traditional Owners Family Council, welcomed the move and said the Council was deeply heartened that NAB has ruled out any involvement, now or in the future, in financing this disastrous project.

    Mr Burragubba said that “Today, NAB has acted with moral authority and in accordance with the principles of corporate social responsibility to which it is signatory. Its decision brings this disastrous project one step closer to its demise.”

    A spokesperson for group declined comment. The Adani group has invested close to USD 1 billion in developing the mine, but over the last few months has decided to withdraw all contractors who were preparing the site for mining. The company had hoped to invest as much as USD 15 billion in the project.
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    Vale sees iron ore market at best point in two years on China import dependency

    Brazil's Vale, the biggest iron ore miner in the world, sees the market for the steelmaking raw material at its best point in the last two years, according to CEO Murilo Ferreira.

    He sees smaller iron ore suppliers exiting mines and delaying projects in China, Mexico, Canada and Brazil, leaving open a more consolidated marketplace for the biggest and more efficient miners to capitalize on, according to comments he made in a local newspaper interview confirmed by the company Friday.

    The outlook for iron ore is much better than four months ago when prices dipped, with many adjustments made in supply, Ferreira told Valor Economico.

    Platts IODEX 62% fines index was steady in the mid $50s/dmt CFR range for much of August, assessed at $56.75/dmt Friday. The benchmark fell into the $40s/dmt range first in April and later in July before the market rallied.

    China is expected to see domestic iron ore production fall to around 200 million mt/year, he said, suggesting a sharp adjustment and growth in import substitution from the second half of 2015.

    Increasing reliance from China on seaborne imports is expected by the industry, although remaining domestic mines had kept up share as steel output fell earlier this year, based on trade data.

    Vale should ramp up output further next year, guiding somewhere between the forecast for 2015 of 340 million mt and the previous 2016 target of 376 million mt, with more emphasis now on quality and margins than outright volumes.
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    BHP Billiton inches ahead of Rio Tinto in race for title of lowest-cost exporter

    BHP iron ore president Jimmy Wilson. BHP is now the lowest-cost exporter to China. Photo: Sergio Dionisio

    BHP Billiton has overtaken arch rival Rio Tinto to become the world's lowest-cost exporter of iron ore to China, less than a year after iron ore president Jimmy Wilson threw down a challenge to claim Rio's coveted mantle over the "medium term".

    That is the state of play according to UBS mining analyst Glyn Lawcock, who says BHP has inched ahead of Rio by reducing its break-even to as low as $US28 ($40.50) a tonne, putting it about $US1-$US2 ahead of Rio.

    However, Mr Lawcock says it is "a game of inches and cents" between Rio and BHP.

    While BHP has claimed the lowest-cost-exporter mantle in the past three to four months, that is likely to keep changing as both miners drive their costs lower, he said.  


    "The biggest driver of who wins on all-in delivered costs is not cash costs – they are very similar now – it  is sustaining capital, which is $2 higher for Rio,"

    "But they are very close, it's a game of cents that's fluid and can change quickly."

    The new UBS figures show Brazil's Vale and Gina Rinehart's Roy Hill mine as having the next-best break-evens, both at $US39 a tonne. Fortescue is put at $US42 a tonne, higher than the $US39 guided by the miner.

    In May, when UBS last ran the iron ore cost curve numbers, BHP and Rio's break-evens –  the price at which they are not making or losing cash – were about $US30 with BHP starting to push ahead. Both still make fat margins at current iron ore prices of $US55 a tonne.

    Since then, the premium for iron ore sold in lump form, has fallen about $5 a tonne. A slightly greater proportion of Rio's product is sold in lump form than BHP's, so it has taken a bigger hit. However, that can change quickly.

    "The tyranny of distance is also a headwind for Rio. Their mines are further from the coast than BHP and their mines will get further away from port, and that will put pressure on their costs," Mr Lawcock said.

    Rio's sustaining capital costs are $7 a tonne, $2 a tonne greater than BHP because Rio needs to keep opening new mines to hold its volumes, and eventually hit and maintain its 360mtpa target, Mr Lawcock said.

    "Rio's mines tend to be smaller scale and smaller life than BHP's, which has said it doesn't need to open a new mine for eight years, or a new mining hub for 20 years."

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    Rio Tinto credit outlook downgraded by S&P

    Rio Tinto plc , a metal and mining company, has lost more than 35% of its market capitalization over the past year, as a commodity market downturn has weakened its earnings. Several commodities, which include crude oil and copper, are trading at multi-year lows, as China experiences an economic slowdown.

    Standard & Poor's analysts have expressed their concerns in a note published on Friday. They believe that the “continued weakness and volatility in commodity prices” could weaken the company’s credit metrics. As a result, the rating agency has revised down its outlook for Rio Tinto, from Stable to Negative, and warns of a potential downgrade.

    A major reason to revise the outlook to Negative were the lowered commodity price assumptions. Weak market conditions, combined with the Chinese economic slowdown, have contributed to expectations that commodity prices will be “highly volatile.”

    Over the next year and a half, S&P could downgrade Rio Tinto’s rating by a notch, if its adjusted funds from operations-to-debt ratio stays “meaningfully” below 35% during 2016-17, or if its discretionary cash flow after dividends for 2016 is “more negative” than expected.

    Long-term and short-term credit ratings have been affirmed at A- and A-2, respectively. The current ratings reflect S&P’s view on the company’s “robust” operational performance. This can be partially accredited to cost-cutting initiatives introduced this year.

    S&P pointed out that Rio Tinto’s net debt-to-capital ratio, a gearing measure, is in the 20-30% range, which supports the current ratings. At the end of second quarter of fiscal 2015 (2QFY15), Rio Tinto’s net debt-to-capital ratio was 21%. The agency believes that Rio Tinto’s business risk profile is “strong,” and is supported by a low-cost and long-life asset base.
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    Second phase of expansion of Robe River iron ore JV completed

    Second phase of expansion of Robe River iron ore JV completed

    Nippon Steel & Sumitomo Metal Corporation announced completion of second phase of expansion of iron ore export capacity and West Angelas mine expansion in Robe River Joint Venture in Western Australia. As a result, the annual export capacity of Cape Lambert Port will increase to more than 200 million tons and the annual production capacity of West Angelas mine will increase to 35 million tons.
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    China Aug steel sector PMI rebounds for 2nd straight month

    The Purchasing Managers Index (PMI) for China’s steel industry witnessed a second monthly straight rebound of 3.7 to 44.7 in August, in the wake of a 3.6 rise in July, indicating a small recovery in the sluggish market, showed the latest data from the China Federation of Logistics and Purchasing (CFLP).

    However, the index has stayed below the 50 mark for 17 straight months, signaling a persisting conflict between supply and demand in this sector.

    The output sub-index rose 6.5 from July to 47.5 in August, the 12th consecutive month below the 50 mark though hitting a new high in the past four months.

    Daily crude steel output of China’s key steel producers rose 2.46% from ten days ago to 1.72 million tonnes over August 11-20, a second straight ten-day rise, showed data from the China Iron and Steel Association (CISA).

    The new order sub-index rebounded 3.3 from July to 39.9 in August, but the new export order index fell 1.6 from July to 54.5 in August – the third consecutive month above the 50 mark, reflecting improved buying from home and abroad.

    The sub-index for steel products stocks decreased 1.3 to 49.8 in August, the lowest since January 2014, said the CFLP.

    As of August 20, total stocks in key steel mills stood at 15.45 million tonnes, dipping 1.24% from ten days ago and down 7.15% from July, indicating a slight relief in steel supply.

    Steel mills would resume production after the military parade in Beijing, probably leading to an increase in market supply. Meanwhile, the recovery of northern construction sites may also boost the demand for steel products. Steel price is likely to fluctuate in the short run.
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    ThyssenKrupp cuts costs by 1 bln euros - CFO in paper

    German industrial group ThyssenKrupp has cut costs by more than 1 billion euros ($1.12 billion) this year, beating its target, and plans to press ahead with renewed savings efforts, its chief financial officer told a German newspaper.

    The company's "Impact" efficiency programme had aimed for 850 million euros in savings in the current fiscal year ending Sept. 30.

    "We had also announced 850 million euros last year and reached 1 billion in the end; I don't think we'll do less than that this year," Guido Kerkhoff told Boersen Zeitung newspaper.

    ThyssenKrupp will continue to work on efficiency improvements in the years ahead, he said. "There is still a lot we could improve. We've just gotten started."

    These savings are expected to make a considerable contribution to earnings growth in the future, helping to boost group earnings before interest and taxes (EBIT) to well above 2 billion euros, he said, declining to give a firm timeline for the improvement.

    The company has said it wants to reach an annual EBIT of at least 2 billion euros in the coming years and aims to achieve this goal as quickly as possible.

    In its third quarter results published on Aug. 13, ThyssenKrupp stuck to its target of adjusted EBIT of 1.6-1.7 billion euros for the year to end-September, up from 1.33 billion a year earlier, although it also said it would probably reach the upper end of the range.

    Kerkhoff played down the impact of slackening growth in China, where ThyssenKrupp makes about 6 percent of sales.

    The group's Elevator Technology business was stable with a share of around 10 percent in China, where 60 percent of the world's elevators are installed.

    "If this market has a stable level, you can't really say that's a bad thing," he said.

    The company was also working to expand its business supplying parts to Chinese car makers and the wind energy sector.

    In Brazil, ThyssenKrupp was still dealing with the impact of sharply falling steel prices on its business. The company has been trying to sell its Brazilian steel mill, known as CSA, which has struggled with losses due to cost overruns and operational challenges.

    "We will decide on a sale based on valuation considerations and will wait for the right moment," Kerkhoff said.

    "However, given the current price of steel in the Brazilian market, no one is thinking about any value-creating transactions," he said.
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