Mark Latham Commodity Equity Intelligence Service

Monday 27th April 2015
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News and Views:


Are we consensus on Resources

The global economy is awash as never before in commodities like oil, cotton and iron ore, but also with capital and labor—a glut that presents several challenges as policy makers struggle to stoke demand.

“What we’re looking at is a low-growth, low-inflation, low-rate environment,” said Megan Greene, chief economist of John Hancock Asset Management, who added that the global economy could spend the next decade “working this off.”

The current state of plenty is confounding on many fronts. The surfeit of commodities depresses prices and stokes concerns of deflation. Global wealth—estimated by Credit Suisse at around $263 trillion, more than double the $117 trillion in 2000—represents a vast supply of savings and capital, helping to hold down interest rates, undermining the power of monetary policy. And the surplus of workers depresses wages.

Meanwhile, public indebtedness in the U.S., Japan and Europe limits governments’ capacity to fuel growth through public expenditure. That leaves central banks to supply economies with as much liquidity as possible, even though recent rounds of easing haven’t returned these economies anywhere close to their previous growth paths.

“The classic notion is that you cannot have a condition of oversupply,” said Daniel Alpert,an investment banker and author of a book, “The Age of Oversupply,” on what all this abundance means. “The science of economics is all based on shortages.”

The fall of the Soviet Union and the rise of China added over one billion workers to the world’s labor force, meaning workers everywhere face global competition for jobs and wages. Many newly emerging countries run budget surpluses, and their citizens save more than in developed countries—contributing to what Mr. Alpert sees as an excess of capital.

Examples of oversupply abound.

At Cushing, Okla., one of the biggest oil-storage hubs in the U.S., crude oil is filling tanks to the brim. Last week, crude-oil inventories in the U.S. rose to 489 million barrels, an all-time high in records going back to 1982.

Around the world, about 110 million bales of cotton are estimated to be sitting idle at textile mills or state warehouses at the end of this season, a record high since 1973 when the U.S. began to publish data on cotton stockpiles.

Huge surpluses are also seen in many finished-goods markets as the glut moves down the supply chain. In February, total inventories of manufactured durable goods in the U.S. rose to $413 billion, the highest level since 1992 when the Census Bureau began to publish the data. In China, car dealers are sitting on their highest inventories of unsold cars in almost 2½ years.

Central to the problem is a cooling Chinese economy combined with tepid demand among many developed countries. As China moves away from its reliance on commodity-intensive industries such as steelmaking and textiles, its demand for many materials has slowed down and, in some cases, even contracted.

“This fall in commodity demand is counterintuitive, and we have only seen the tip of the iceberg,” said Cynthia Lim, an economist at Wood Mackenzie.

Not all commodities are in excess. China’s strong appetite for materials such as copper, gasoline and coffee will keep supplies tight in these markets.

For nearly a decade, producers struggled to keep up with the robust demand from China. But with Chinese output now slowing—its gross domestic product is expected to rise 7% this year, down from 10.4% five years ago—no economy has emerged to take up the slack.

The slowdown has caught many producers off guard as inventories continue to build.

The backlog is causing a scramble in many markets to find storage for excess supplies, clobbering commodity prices across the board, and foreshadowing painful output cuts down the road for many producers. Over the past 12 months, a broad measure of global commodity prices, the S&P GSCI, has plunged 34%, leaving prices at 2009 levels.

“These inventories have to be drawn down at least to some extent. At that point, prices will be back up again,” said Jeff Christian, managing director at CPM Group, a commodities consultancy.

Countries facing a demand shortfall often move to juice their economies through deficit spending, especially with interest rates so low. But many nations are queasy about adding to their debt burdens.

The world’s major economies have all continued to add debt in the years since the credit crisis, according to calculations from John Hancock’s Ms. Greene. Government, business and consumer debt has climbed to $25 trillion in the U.S. from $17 trillion since 2008, a jump to 181% of GDP from 167%. In Europe, debt has hit climbed to 204% of GDP from 180%, while in China debts have jumped to 241% of GDP from 134% by Ms. Greene’s measures.

Even if governments have the capacity for more fiscal stimulus, few have the political will to unleash it. That has left central banks to step into the void. The Federal Reserve and Bank of England have both expanded their balance sheets to nearly 25% of annual gross domestic product from around 6% in 2008. The European Central Bank’s has climbed to 23% from 14% and the Bank of Japan to nearly 66% from 22%.

In more normal times, this would have been sufficient to get economies rolling again, but Harvard University’s Lawrence Summers is among economists who say interest rates need to fall still lower to reconcile abundant savings with the more limited opportunities for investment, a scenario termed “secular stagnation,” which implies diminished potential for growth.

Not all agree. Former Fed Chairman Ben Bernanke wrote recently that the U.S. appears to be heading toward a state of full employment in which labor markets tighten and inflation will surely follow.

Just as a U.S. economy nearing full employment may help, new demand from emerging markets could help offset China’s waning influence. Enter India. Demand for energy and other commodities from the world’s second-most populous country has been growing rapidly.

But analysts are skeptical if the increased demand is enough to fill the void left by China.

The latest glut also underscores a challenging global trade environment as the dollar appreciates against almost all other currencies.

Exporters in countries such as Brazil and Russia are churning out sugar, coffee and crude oil at a faster pace, as they can fetch more in local-currency terms when it is converted from the dollar.

Producers have their own share of the blame. In a lower commodity price environment, producers typically are reluctant to cut production in an effort to maintain their market shares.

In some cases, producers even increase their output to make up for the revenue losses due to lower prices, exacerbating the problem of oversupply.

“Generally, this creates a feedback cycle where prices fall further because of the supply glut,” said Dane Davis, a commodity analyst with Barclays.

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Oil and Gas

Are we consensus on Oil?

Global oil supply still exceeds demand, but a weaker dollar, military conflict in Yemen and strong stock performances pushed the Brent crude price upward on Friday. Reuters said that Brent crude was trading at $65.80 a barrel, its highest level since December 2014.

Despite oil’s strong recent performance, the supply glut could drive its price down in the coming months.

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CNOOC Limited announces key operational statistics for Q1 2015

CNOOC Limited announced its key operational statistics for the first quarter of 2015.

Total net production in the first quarter of 2015 increased 9.4% year over year to 118.3 million barrels of oil equivalent, primarily due to the production contribution from new projects that came on stream in offshore China since 2014.

In the first quarter, the Company made 3 new discoveries. In offshore China and overseas, the Company made 9 and 3 successful appraisal wells, respectively. In offshore China, the new discovery Penglai 20-2 is expected to drive the joint development with the adjacent Penglai 20-3 oil field. After successful appraisals, the Bozhong 34-9 oil and gas structure is expected to be developed into a mid-sized oil and gas field.

Jinzhou 9-3 comprehensive adjustment project and Kenli 10-1 oil field commenced production as scheduled in 2015, while other projects progressed smoothly.

During the period, the unaudited oil and gas sales revenue of the Company were approximately RMB35.54 billion, a decrease of 39.9% YoY, due to the sharp decline in international oil prices. The Company's average realized oil price decreased by 49.0% YoY to US$53.40 per barrel while the average realized gas price increased by 5.5% YoY to US$6.68 per thousand cubic feet.

Facing the challenges created by low oil prices, the Company continued to lower costs and enhance efficiency, and adjusted its operating strategy by decreasing capital expenditures. In the first quarter, the Company's capital expenditures decreased by 15.7% YoY to approximately RMB15.94 billion.
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Libya closes El Feel oilfield due to strike by security guards

A strike by Libyan security guards over salary payments has forced the closure of the western El Feel oilfield, a spokesman for state oil firm NOC said on Sunday.

On Saturday, a field engineer told Reuters the OPEC producer had closed the field, without citing a reason. El Feel is operated by a joint venture owned by NOC and Italy's Eni .

"The field's security guards are on strike because they complain about a delay of their salary payments," said Mohamed El Harari, a spokesman for NOC.

"NOC paid the salaries to the security forces, but they haven't paid the guards yet," he said.

Libya this year had managed to restart El Feel, which analysts say produced about 100,000 barrels per day (bpd). Libya had to shut the field late last year when a group in the Zintan region, which opposes a self-declared government in Tripoli, closed a pipeline.

Harari did not give any production figure, but the latest closure is likely to reduce national output to well below 500,000 bpd, a third of the volume Libya used to pump in 2010 before an uprising toppled Muammar Gaddafi and sent the country into turmoil.

On the bright side, eastern Libyan state firm AGOCO, a unit of NOC, is producing 270,000 bpd, a company spokesman said on Sunday.
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BP and Shell to report 60% collapse in first-quarter profits

BP and Shell will this week report a collapse in first-quarter profits of around 60% on the same period of 2014 underlining the financial damage being inflicted by low oil and gas prices.

Analysts predict BP will be hit the hardest, putting further pressure on chief executive, Bob Dudley, as he tries to steer the company back to full health amid continuing fallout from the Deepwater Horizon accident.

A consensus of 22 analysts expect BP’s underlying replacement “costs profits” – an oil industry accounting measure that incorporates fluctuations in the price of oil – to be down to $1.3bn (£850m) from $3.2bn in the first three months of 2014.

“There will be a huge drop in earnings for all the large integrated oil companies but especially BP. It will be the worst set of results for everyone since 2009,” said Fadel Gheit, veteran analyst with the Oppenheimer brokerage in New York.

Iain Armstrong, analyst with investment manager Brewin Dolphin in London, said BP would be most exposed to the particularly large fall in US natural gas prices slightly tempered by stronger refining margins.

“Upstream (exploration and production) earnings will be most affected, although there could be the initial positive impact of the planned cuts in capital expenditure and the ongoing layoff programme,” said Armstrong.

Gheit believes BP income could fall by as much as 70% while Shell will be down by 68% and Exxon Mobil by 67%. But he also predicts losses for the second tier of oil companies such as Anadarko Petroleum, Apache Corporation and ConocoPhillips.

Gheit believes the “devastating” losses of the oil sector will increase the likelihood of more merger and acquisition activity following the $70bn takeover plan unveiled earlier this month by Shell on BG.

Gheit believes US domestic oil and gas producers will be the hardest hit with financial losses continuing throughout the year. “If there is not a bounce back (in oil prices) they could be even worse next year because they will not be so protected by a hedging strategy.”
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Galp net profit more than doubles to 121 mln euros

Portugal's Galp Energia said adjusted first-quarter net profit more than doubled from a year earlier, in line with expectations, thanks to a sharp increase in refining margins and higher oil output.

Galp had a net profit of 121 million euros ($132 million) in the quarter, up from 47 million euros a year earlier. Earnings before interest, taxes, depreciation and amortization (EBITDA) rose 50 percent to 398 million euros. The results are adjusted to reflect changes in the company's stocks of crude.

Analysts polled by Reuters had forecast, on average, an adjusted net profit of 122 million euros and EBITDA of 376 million euros.

The benchmark Brent crude price fell in January to its lowest since 2009, helping lift refining margins in Europe.

Galp's refining margin soared to $5.9 per barrel in the period from just $0.9 a year earlier. Galp, which owns both Portugal's refineries, remains heavily reliant on that side of itsbusiness despite having expanded in crude production with projects in Brazil and Africa.

Galp said its oil output soared almost 43 percent to 38,400 barrels per day in the quarter and it refined 34 percent more oil and gas.

Still, higher output only offset part of the impact of low world oil prices as EBITDA at its exploration and production division fell almost 10 percent to 94 million euros.
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India seeks first cut in LNG imports under Qatar deal -source

India is in talks with Qatar to import at least 10 percent less liquefied natural gas (LNG) under a long-term deal after a slide in spot prices has cut demand by local buyers, an Indian government source with knowledge of the negotiations said.

New Delhi would for the first time use a 10 percent reduction permissible under a 25-year contract with Qatar's RasGas to import up to 7.5 million tonnes a year of the super cooled fuel, said the source.

"We want to lift as little volume as possible under the contract," the source told Reuters, adding that India intended to use a tolerance limit of 10 percent in 2015.

"But we are negotiating for cuts deeper than 10 percent. All LNG terminals are running at lower capacity as customers are not lifting volumes," said the source, who declined to be identified due to the sensitivity of the issue.
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Oil at $65 seen freeing 500,000 barrels from shale fracklog

Oil needs to recover to $65 a barrel for U.S. drillers to tap a pent-up supply locked in shale wells and unleash more crude on markets than is produced by Libya.

Dipping into this “fracklog” would add an extra 500,000 barrels a day of oil into the market by the end of next year, Bloomberg Intelligence said in an analysis on Thursday. Producers in oil and gas fields from Texas to Pennsylvania have 4,731 idled wells at their disposal.

Prices are rebounding from a six-year low after drillers idled half the nation’s oil rigs, slowing the shale boom that boosted production to the highest in four decades. The number of wells waiting to be hydraulically fractured, known as the fracklog, has ballooned as companies wait for costs to drop. That could slow the recovery as firms quickly finish wells at the first sign of higher prices.

“Once service costs come down and drillers begin to work through their higher-than-normal backlog, the market should start to price in that supply coming online,” Andrew Cosgrove, an energy analyst for Bloomberg Intelligence in Princeton, New Jersey, said by phone. “It may act as a cap on prices.”

U.S. oil futures tumbled by more than $50 a barrel in the second half of last year amid a worldwide glut of crude. West Texas Intermediate for June delivery fell 26 cents to $57.48 a barrel in electronic trading on the New York Mercantile Exchange at 11:29 a.m. London time.

Oil production in the lower 48 states would rise to 7.67 million barrels a day in the fourth quarter of 2016 if drillers start shrinking their fracklogs by 125 wells a month in October and put some rigs back to work, Bloomberg Intelligence models show. The U.S. fracklog has more than tripled in the past year, with oil wells making up more than 80 percent of the total.

“One of the big reasons why production is finally falling is because of these fracklogs,” Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said by phone on Thursday. “That’s an overhanging bearish fundamental.”

The Permian Basin, which covers parts of Texas and New Mexico, had the biggest collection of unfracked wells as of February, with 1,540 waiting to be completed. The count totaled 1,250 in Texas’s Eagle Ford formation and 632 in North Dakota’s Bakken shale.

Last week, Raoul LeBlanc, an oil analyst with Englewood, Colorado-based consultant IHS Inc., pegged the U.S. fracklog at around 3,000 wells. Halliburton Co., the world’s second-biggest provider of oilfield services, estimated there are about 4,000 uncompleted wells, citing “third party estimates.”
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U.S. producers idle 31 more oil rigs

The number of U.S. oil rigs fell once again this week, Baker Hughes said Friday, as producers kept cutting drilling in the face of low crude prices.

The Houston oil field services company counted 31 fewer oil rigs and eight more active gas-drilling rigs this week, a net drop that left 932 U.S. rigs standing  – down 50 percent from a year ago.

More than half of the oil rigs idled this week were in in Texas, as the state’s rig count fell by 19 to 393 — down from 894 a year ago. Of that number, a dozen were sidelined in the Permian Basin in West Texas.

Oil traders have watched the weekly rig count for months now, waiting for signs U.S. oil production may fall and ease a global glut in crude supplies. The Energy Information Administration’s latest monthly drilling report shows U.S. output growth is set to decline by 57,000 barrels a day.
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Cabot Oil & Gas Earnings Top As Output Keeps Growing

Cabot Oil & Gas reported first-quarter results above analyst estimates as production increased despite the drop in oil prices.

The exploration and production company's Q1 earnings fell 54% to 12 cents per share, but that was still well above the 3 cents that analysts polled by Thomson Reuters were expecting. Revenue fell 9% to $464.8 million, above views for $417.3 million.

"Our robust production levels were predicated on higher base-load volumes in the Marcellus during the quarter, driven by increased seasonal demand and favorable natural gas sales contracts for the winter heating season," said CEO Dan Dinges in the earnings release.

"However, as we have communicated in the past, our plan is to reduce production levels beginning in the second quarter in response to the current environment throughout Appalachia."

Total production rose 43% while liquids production (crude oil/condensate/natural gas liquids) jumped 132%. Cabot's net production in the Eagle Ford Shale during Q1 rose 145% vs. the year-ago quarter, and production in the Marcellus was up 43%.

In February, Cabot lowered its 2015 capital spending budget to $900 million from an earlier outlook of $1.53 billion to $1.6 billion in October. It now sees production growth of 10% to 18% vs. an earlier estimate of 20% to 30% growth.

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Southwestern Energy Q1 Earnings In Line, Revenues Miss

Independent natural gas operator, Southwestern Energy Company (SWN - Analyst Report) reported first-quarter 2015 adjusted earnings of 22 cents per share, in line with the Zacks Consensus Estimate. The bottom line decreased from the prior-year quarter’s earnings of 66 cents.

Quarterly operating revenues of $933 million missed the Zacks Consensus Estimate of $945 million and decreased from $1,113 million in the first quarter of 2014.  

Production and Realized Prices

During the reported quarter, the company’s oil and gas production grew 28% year over year to 233 billion cubic feet equivalent (Bcfe) driven by increased Appalachia production.

The company’s average realized gas price for the quarter, including hedges, fell to $2.99 per thousand cubic feet (Mcf) from $4.19 per Mcf in the year-ago period. Oil was sold at $30.90 per barrel, down from the year-earlier level of $100.43 per barrel. Natural gas liquids were sold at $10.35 per barrel, down from $50.16 in the year-ago period.  

Segmental Highlights

Operating income from the company’s Exploration and Production (E&P) segment was $78 million for the first quarter of 2015 compared with $352 million for the comparable quarter in 2014. The decrease was primarily due to lower realized natural gas prices and increased operating costs from higher activity levels. This was partially offset by the revenue impacts of higher production volumes.

On a per-Mcfe basis, lease operating expenses were 92 cents, lower than the prior-year quarter level of 93 cents. Also, general and administrative expenses per unit of production decreased to 24 cents from 25 cents in the prior-year quarter.

Operating income for the company’s Midstream Services segment was $88 million compared with $83 million in the prior-year quarter. At Mar 31, 2015, the company’s midstream segment was gathering approximately 2.3 Bcf per day through 2,029 miles of gathering lines in the Fayetteville Shale.
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Alternative Energy

China scrapping rare earth export tax will boost demand — Lynas

China’s decision to eliminate its export tariffs on rare earths and other metals may boost frozen demand for the products, according to Australia’s Lynas Corp.

In an interview with Bloomberg, the company’s chief executive, Amanda Lacaze, said most customers have been living off inventories while awaiting clarity over China’s policy on rare earths export. “[Now] they’ll come back and start placing orders.”

Her comments follow China’s decision Thursday of killing the controversial policy that caused adiplomatic row and international trade dispute, while driving rare earth prices up.

The country’s Ministry of Finance said tariffs to be removed beginning May 1 include those related to shipments of ferroalloys, indium and aluminum rods and bars, Reuters reported.

Earlier this year, Beijing eliminated its export quotas for rare earths and other metals after the World Trade Organization (WTO) ruled the nation had failed to show the export quotas were justified.
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Base Metals

Southern Copper boosts Q1 copper output by 8.9%

Southern Copper's copper production total increased 8.9% year on year in the first quarter of 2015 as a result of higher output from its Buenavista mine in Mexico.

Southern's copper output rose 8.9% to 177,616 mt in Q1, the Phoenix-based company said Friday. The company's molybdenum production increased 5.2% year on year to 5,856 mt, while its silver output fell 6.5% to 3.2 million oz and zinc production dropped 27% to 15,195 mt.

Southern said it sold copper at $2.66/lb on Comex in Q1, down 17.9% from a year earlier. Silver prices dropped 18.4% to $16.70/oz and molybdenum fell 15.3% to $8.41/lb, while zinc rose 2.2% to 94 cents/lb.

The company cut its cash costs net of by-products to 98 cents/lb in Q1 from $1.02/lb in the year-ago period. Its capital expenditure fell 27% year on year to $245.8 million, with the bulk of spending on the $3.4 billion Buenavista expansion.

The Buenavista expansion is 96%-complete and scheduled for completion in the third quarter, the company said. Testing is complete at a new 120,000 mt/year, $524.5 million SX-EW plant and work is 67%-completed at the $340 million Quebalix heap leaching project.
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Callinex Mines Drills 44.2 Meters of 4 Percent Copper Equivalent at Pine Bay

Callinex Mines has completed phase 1 of a previously announced 4,000 meter drill campaign. Two of the five holes drilled intersected high-grade copper mineralization, with one hole intersecting 18.1 meters of 5.5 percent copper equivalent over a broader interval of 44.2 meters of 4 percent copper equivalent.

As quoted in the press release:

A total of five holes were completed for 1,425m in the vicinity of the Pine Bay deposit. The drilling campaign was successful in intersecting high-grade copper mineralization along with verifying the Company’s recently compiled geological database. These results, combined with recently verified historic work, will be valuable in the expanded Phase Two drilling campaign to be conducted this summer.

The Phase One drilling campaign focused on confirming historic mineralization and testing targets in the immediate vicinity of the Pine Bay deposit. After the first four holes were completed the Company postponed drilling several high priority targets along the favorable Sourdough Trend. The decision to postpone further drilling was due to safety concerns over ice thickness in the Sourdough Bay area of Athapapuskow Lake. The successful confirmation holes and validated geological database will be instrumental in moving forward on plans to complete a NI 43-101 Technical Report and Resource Estimate at the Pine Bay Project.

… The expanded Phase Two drilling campaign will consist of approximately 10 holes totaling a minimum of 2,500m. The objective will be to test prospective land-based targets at the Pine Bay and Flin Flon projects. The geology of the targeted areas consists of several mineralized horizons[IP1] that are similar to host rocks of the historic Flin Flon mine, where more than 60 million tonnes of ore have been mined. The Company is currently conducting ground geophysics to further evaluate the most prospective targets for drilling.
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Company plans $2.8b Indonesian ferro-nickel smelter facility

China's Tsingshan Group plans to invest $2.8 billion to set up a high-capacity ferro-nickel smelter plant in Indonesia by mid-2017, with the aim of producing 2 million tons of stainless steel per year.

The plant's projected annual capacity will be equivalent to 40 percent of the capacity in Europe and 5 percent of the world's, says Huang Weifeng, vice-chairman of the board at Tsingshan.

Based in Wenzhou, Zhejiang province, Tsingshan is the largest producer of ferro-nickel-an alloy of nickel and iron - and the second-largest stainless steel producer in China. Tsingshan began investing in Indonesia in 2009, in the China-Indonesia Industrial Investment and Cooperation Zone on the eastern Indonesian island of Sulawesi, covering an area of 1,364 hectares.

"The establishment of a ferro-nickel smelter in Indonesia is beneficial for us, as it will help us to reduce our transport costs and enhance our competitiveness," said Huang, who also is chairman of Shanghai Decent Investment, a unit of Tsingshan.

The first phase of the project was completed in March with an investment of $630 million, according to Huang, who also oversees the group's industrial park in Indonesia. It has an annual production capacity of 300,000 tons of ferro-nickel for export. The company also is building a 130,000-kilowatt power plant in the park.

Construction of the smelter project's second phase - with a total investment of $1.02 billion and a projected annual capacity of 600,000 tons of ferro-nickel - is underway and expected to be completed by the end of this year.

The third phase will reach an annual production capacity of 2 million tons of stainless steel. With a total investment of $970 million, the 300,000-kW facility is scheduled to be completed by mid-2017.
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Steel, Iron Ore and Coal

Indonesia's 2015 coal output may slide 24 pct as low prices hit - association

Coal production in Indonesia, the world's top exporter of seaborne thermal coal, could drop by up to 24 percent this year as producers stop ramping up output and concentrate on business stability, the country's main coal association said.

A global oversupply has cut benchmark Asian coal prices by more than 20 percent over the past 12 months, pushing more and more firms into the red.

Previously, producers increased output to maintain cashflow and service debt, exacerbating the oversupply and the downward pressure on prices, but the picture is changing, said Pandu Sjahrir, newly appointed chairman of the Indonesian Coal Mining Association.

"People are no longer chasing cashflow, or increasing their EBITDA figure on income statements. Now they are more focused on guarding business stability - where they have to have enough cash in hand," Sjahrir said.

"What this means is that most of the players have started to reduce production - all the more so if that production is not profitable."

Coal production could drop to between 350 and 400 million tonnes in 2015 from 458 million in 2014, Sjahrir said. That would be the second year in a row that output has declined after rising for at least 30 years.

Stripping ratios and the removal of overburden - the amount of dirt miners remove to expose mineral deposits - have declined by 15 to 20 percent, indicating further output declines can be expected. "You can see a lot of players have reduced their stripping ratio by about 15 percent overall."

Annual domestic coal demand in Southeast Asia's largest economy is currently around 90 million tonnes, Sjahrir said, noting the industry was now monitoring a government programme to build 35 gigawatts of new power stations by 2019.

"In the next six to nine months, we'll know what Indonesian demand will be like. Even if only half of it happens - 17 gigawatts - let's say around 60 percent of that would be coal. That means 150 million to 200 million tonnes of extra coal would be needed."

If firms sign power purchase agreements this year, their power plants would take 2 to 2-1/2 years to complete, Sjahrir said.

"Indonesia is the biggest swing factor in the world. If Indonesia's demand can increase from 90 million tonnes to 200 or 250 million tonnes, that could influence Newcastle prices, but that's a big if," he said, referring to the Asian coal benchmark.
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China specifies coal resource tax favourable policies

China has specified favourable policies concerning coal resource tax, in a bid to raise resource recovery rate and ease burden for struggling miners, according to a document jointly released by the State Administration of Taxation (SAT) and National Energy Administration (NEA).

The move followed the government’s reform on coal resource tax to value-based from previous quantity-based from December 1 last year, which included favorable policies on coal from resource-depleting mines or mined in the form of backfilling.

For resource-depleting mines, the operator should register them to local taxation administrations to enjoy the favorable policy, and resource depletion evaluation shall be performed on an individual mine rather than all the mines operated by a company, the document said.

The resource tax for resource-depleting mines – with mineable reserves no more than 20% of the designed mineable reserves or mining life less than five years – would be cut by 30%; if designed mineable reserves are not available for a mine, resource depletion evaluation should be based on its mining life.

The resource tax for coal mined in the form of backfilling would be halved, it said. Backfilling refers to the coal mining technology of refilling an excavated working face with gangue and other materials.

The two ministries also specified calculation method for the volume of coal mined in the form of backfill. For mines installed with metering equipment in the backfilled working face, the coal volume shall be recorded by the equipment; for mines with no such equipment, the coal volume shall be the product of backfill materials’ volume and backfilling ratio, according to the document.

China’s coal miners are battling with sluggish demand and an excess of supply that have reduced prices of the fossil fuel back to a nine-year lowest since mid-2006. The government’s reform of coal resource tax has to some extent increased miners’ cost burden, due to slow progress in clearing of unreasonable local government charges.
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Germany to review jobs impact of coal levy before decision

Germany will make no decision on a proposed coal levy before a review is conducted regarding possible job losses, Economy Minister Sigmar Gabriel has told energy unions in a letter seen by Reuters on Friday.

Germany is looking to safeguard its energy supply while reducing its C02 emissions by 40 percent by 2020 and exiting nuclear power two years after that.

The government has proposed penalties for the oldest and most polluting coal-fired power plants to help cut emissions.

But energy companies and German states fear the measure will damage coal generation and cost jobs. Mining unions plan mass demonstrations on Saturday in Berlin against the proposed coal levy, which union IG BCE says could put 100,000 jobs at risk.

Germany's largest power producer, RWE, and other energy groups have said the levy would lead to the immediate closure of RWE's lignite-fired power plants.

"We need certainty about the numbers and consequences," Gabriel said in the letter to IG BCE and another union Verdi dated April 24. "Nothing will be decided prior to that."

Gabriel said he had commissioned a review into the impact of the proposals on electricity prices, CO2 emissions targets as well as on the operations of power stations and mines.

"Should this in fact confirm the misgivings expressed by IG BCE and Verdi of an industry meltdown with a considerable loss of jobs, then the Economy Ministry will of course change its proposals to achieve its climate targets," Gabriel said.

Rainer Baake, state secretary for energy in the Economy Ministry, proposed linking the levy on C02 produced by coal plants above a certain level to the electricity price.

Under this scenario, the levy would increase when the electricity price is high and fall when the electricity price sinks below a level of 40-42 euros per megawatt hour, he said.
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Vattenfall faces delay in German lignite sale -sources

Swedish utility Vattenfall is facing delays in the planned sale of its brown coal assets in Germany, three people with direct knowledge of the matter said, pointing to concerns over a proposed coal levy that could threaten any deal.

Memos to potential buyers were originally meant to be sent out in April, the people said, adding this was now expected only later in the year and may take until the end of the European summer.

"The deal is delayed, on hold," one of the people said.

Vattenfall, which is scheduled to present first-quarter results on April 28, declined to comment.

Scandinavia's biggest utility last year announced plans to divest roughly 9,000 megawatt (MW) worth of lignite-fired plants in eastern Germany, responding to mounting writedowns on past acquisitions that pushed it deep into loss.

The company, which posted an after tax loss of 8.3 billion Swedish crowns ($966 million) for 2014, has said it aims to complete a deal this year.
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China Iron ore mine support in 2015

China will see less iron ore mine closures in 2015 thanks to government support to the industry, which has been suffering from low prices, global rating agency Fitch said Friday.

The domestic iron ore market faces high smelting costs and insufficient production. A slew of mines were forced to close as a result of the price drop of iron ore in 2014, which increased China's dependance on imported iron ores. Now only about 60 percent of iron ore firms are in production.

Support from the government will provide a lifeline to keep domestic supply in the market longer, Fitch said.

Resource tax on domestic iron ore producers will be reduced to 40 percent from 80 percent as of May, the State Council announced earlier this month.

Fitch expects more subsidies will be offered to support iron ore miners.

Data from the China Iron and Steel Association (CISA) shows that a record high of 933 million metric tonnes of iron ore was imported in 2014, up 13.8 percent from a year earlier. About 78.5 percent of iron ore was imported last year.
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BHP faces A$522 mln tax bill on Singapore marketing hub

BHP Billiton is contesting A$522 million ($409 million) in Australian tax bills on its Singapore marketing operations up to 2010, after having paid almost no tax in Singapore since 2006, the global miner told an Australian Senate panel.

The figures were released on Monday by a Senate committee that is investigating corporate tax avoidance. BHP was forced to send written responses to the panel after refusing to disclose the figures at a hearing on April 10.

The company revealed that between 2006 and 2014 its Singapore marketing businessearned profits of $5.7 billion, on which it paid just $121,000 in tax in Singapore.

"The Singapore Government has granted BHP Billiton Marketing AG a tax incentive for its marketing activities. BHP Billiton Marketing AG was awarded this incentive for its contributions to the development of Singapore's commodities sector," the company said in its response to the Senate inquiry.

However BHP highlighted that its Singapore marketing hub is 58 percent owned by BHP Billiton, which is dual-listed in Australia and Britain, and paid tax on those earnings also in Australia.

"It is important to note that 58% of the profit which BHP Billiton Marketing AG earns in Singapore from the on-sale of commodities acquired from Australian entities controlled by BHP Billiton Limited is subject to tax in Australia at the company tax rate of 30%," BHP said.

The company paid A$945 million in tax in Australia on its Singapore marketing operation earnings between 2006 and 2014.

The A$522 million in tax bills it faces from Australia include contested tax plus interest and penalties owed on transfer pricing, the price at which BHP's Australian entities sell commodities they mine to the Singapore marketing business.

It also includes tax, interest and penalties the Australian government says is owed from the marketing hub under controlled foreign company rules.
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Big China steel thrives, stoking export fears

Plunging iron ore prices are providing a lifeline for some of China's biggest steel mills, but raising the prospect of a rising tide of exports and increased friction with the European Union and countries such as India.

Even as China's domestic steel demand shrinks and the industry battles chronic overcapacity, lower iron ore prices have helped many large mills post better earnings in 2014 than a year earlier, supported by record exports.

That doesn't bode well for struggling steelmakers elsewhere in the world, which have been hoping for a shake-out of the industry in China, the world's top steel producer.

"(Cheaper ore) obviously encourages Chinese steelmakers to still produce because their costs are lower, and because of the overcapacity there's a strong incentive to still export," said Jeremy Platt, an analyst at London-based steel consultancy MEPS.

China boosted exports of the alloy by some 50 percent last year to a record 94 million tonnes, and western industry bodies see little sign of a major rationalisation of the industry.

The latest batch of Chinese steel earnings shows just three of 18 big mills to report so far suffered losses in 2014, down from five the year before. Six of the 13 profit-making mills in 2013 increased profits last year.

"Big Chinese integrated coastal mills are among the most competitive in the world as they have benefited the most from sharp falls in imported iron ore prices, helping them to gain growing market share both at home and abroad," said Zhao Chaoyue, an analyst with Merchant Futures in Guangzhou.

Big Chinese mills are able to ship in cheaper seaborne ore direct to their coastal steelmaking operations, selling to customers nearby or shipping steel overseas.

The iron ore price fall also encouraged large mills - those with an annual output of more than 10 million tonnes - to buy more from the spot market, winning benefits once garnered mainly by more flexible private mills.

Despite the scrapping of tax rebates for exports containing boron that had helped boost sales, Chinese exports rose 41 percent in the first quarter, increasing concerns from rival producers around the world.

Baoshan Iron & Steel will start production at an integrated coastal plant this year, while Wuhan Iron & Steel is building a similar coastal production base.
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