Mark Latham Commodity Equity Intelligence Service

Thursday 7th July 2016
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    China to reform state firms, help private investors

    China is carrying out a new round of reforms on its torpid state-owned enterprises (SOEs) and pushing local governments to support private firms.

    One key part of the broad reforms would allow employees to hold stakes in SOEs, as mixed-ownership companies are considered more vibrant and efficient.

    "We are working to select a few centrally and locally administered SOEs to pilot the employee stakeholding reform," an anonymous source with the state-owned assets authority was quoted by Xinhua-run newspaper Economic Information as saying on Wednesday.

    High tech companies will be given preference to pilot the reform, said the source, adding that the trials are expected to build experience for future expansion.

    "The second half of 2016 will be a critical period for the employee-stakeholding reform," said Li Jin, chief researcher with the China Enterprise Research Institute (CERI).

    China has more than 150,000 SOEs. They play a pivotal role in bolstering the economy and providing employment, with total assets worth about 125 trillion yuan (nearly 20 trillion U.S. dollars) as of the end of May.

    However, an economic slowdown, which trimmed the country's GDP growth to 6.7 percent in the first quarter, has bitten into SOEs' profitability and left many struggling to keep afloat.

    Combined profits of Chinese SOEs saw a decline of 9.6 percent year on year in the first five months despite warming signs in the broader economy.

    To reverse the situation, policy makers are promoting an overhaul on SOEs, piloting mixed ownership programs, encouraging mergers and acquisitions, and downsizing overstaffed companies.

    President Xi Jinping and Premier Li Keqiang gave written advice on the development of SOEs to a national meeting on SOE reform earlier this week.

    Xi demanded continued efforts to enhance SOEs' vitality, competitiveness and risk resistance, and to establish a modern corporate governance system.

    The premier urged SOEs to slash excess production capacity, boost technological innovation and upgrade traditional industries.

    In fact, many SOEs still have huge investment in lackluster traditional heavy industries and are overburdened by high operational costs and long payrolls, according to Xiao Yaqing, head of the State-Owned Assets Supervision and Administration Commission of the State Council.

    More efforts are needed to improve state-owned asset management and change rigid corporate governance, Xiao said.

    "Further measures will be rolled out to facilitate changes in SOEs, including industry consolidation, improvement in main business and overcapacity reduction," said CERI's Li.
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    Wuhan Floods impact mines?

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    Oil and Gas

    The oil industry is losing the burn of Asian demand

    The oil industry is losing the burn of Asian demand

    After half a year of strong oil price rises, Asian crude demand is slowing and by some measures falling, and many market participants suspect it is not just a cyclical phenomenon, but also a product of more permanent structural changes.

    But an industry that has come to rely on Asia's booming thirst for oil could soon be scratching around for growth.

    Thomson Reuters Eikon data shows that Asian crude oil tanker imports have fallen, albeit from record levels, for four straight months and by 12 percent since March to around 82 million tonnes (20 million barrels per day), slightly below last year's levels.

    Much of the surprise decline is explained by conditions in China, the region's biggest consumer, accounting for 27 percent of Asia-Pacific demand and 13 percent of global demand.

    With its long-term growth outlook now camped perhaps permanently below 7 percent, most analysts expect vehicle sales in China will slow accordingly.

    They have already slipped to 2.1 million at the end of May, down from a peak of almost 2.8 million in December 2015.

    Refiners across Asia said that was starting to hit their business.

    "Asian oil demand growth is slowing down. China, Asia's largest market, is experiencing sluggish demand," said a South Korean refiner.

    As domestic refiners sell off surplus fuel, China's exports of diesel and gasoline, the main refined fuels for industrial and passenger vehicles, have both soared.

    "Asia refiners have already started to pull back ... and there are reports of (oil) cargoes struggling to sell," said Adam Longson of Morgan Stanley this week in a note to clients, adding that demand in the third quarter could fall further.

    Ship brokers say traders have started chartering supertankers to store supplies that consumers can't absorb.

    One key pillar of recent demand is never coming back. Analysts think China has nearly finished building its strategic petroleum reserves (SPR).

    Oil analysts at JPMorgan estimated in a note to clients last week that the SPR was now at 400 million barrels, which they believed was close to capacity.

    "Our model suggests a 15 percent month-on-month decline in China's crude oil net imports in September, or a loss of 1.2 million barrels versus August and 0.8 million barrels less from the 12-month average," they said.

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    U.S. gasoline oversupply pushes crude oil prices lower: Kemp

    U.S. gasoline stocks remain stubbornly high despite record demand from motorists, a situation that will probably force refiners to cut crude processing over the next few months and prioritise production of diesel.

    The prospect of reduced refinery processing rates has intensified the downward pressure on crude oil prices in recent days.

    U.S. gasoline stockpiles have been running above last year's level since January but the year-on-year build-up has increased rather than lessened as the summer driving season arrived (

    Gasoline stockpiles hit a seasonal record 239 million barrels on June 24, an increase of 22 million barrels (10 percent) compared with the previous year, according to data from the U.S. Energy Information Administration.

    The year-on-year stock build has grown from 14 million barrels (6 percent) at the end of April and 10 million barrels (4 percent) in late January (

    The gain in stockpiles has been most pronounced along the U.S. East Coast, where stocks were 13 million barrels (21 percent) higher than prior-year levels and still increasing as recently as June 24 (

    The degree of oversupply is less in other parts of the eastern United States.

    Gasoline stocks in the Midwest are up by 4 million barrels (8 percent), while stocks on the Gulf Coast are up by 6 million barrels (8 percent) (

    But the East Coast is the pricing point for U.S. gasoline futures which call for delivery to New York Harbor.

    Tankers have been forced to anchor off the harbour, unable to discharge their cargo, because local tanks are full ("Gasoline tankers drop anchor off New York as stocks brim", Reuters, July 4).

    Unsurprisingly, gasoline futures prices and crack spreads have come under pressure as stocks build in the region.

    The crack for gasoline delivered in October has fallen from a peak of almost 30 cents per gallon on May 23 to less than 22 cents on July 5 (

    Futures prices are anticipating even worse oversupply once the peak demand season for gasoline finishes in September.

    In contrast to gasoline futures, crack spreads for middle distillates such as heating oil and diesel, have continued to climb.

    Refiners have only limited flexibility to shift from producing gasoline to distillates in the short term ("Increasing distillate production at U.S. refineries", EIA, 2010).

    So the main response to falling gasoline cracks is likely to come through reduced refinery crude processing, which will cut the output of heating oil as well as gasoline.

    Delta's refinery at Philadelphia has already cut production by 16 percent, according to sources familiar with the plant's operations .

    Run cuts should eventually rebalance the gasoline market but will tighten the distillate market even further, supporting heating oil cracks.

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    Exxon Said to Join Forces With Qatar for Mozambique Gas Assets

    Exxon Mobil Corp. and Qatar Petroleum have teamed up to look at energy assets in Mozambique, home to some of the biggest natural-gas discoveries in a generation, according to four people with knowledge of their plans.

    The companies are considering buying stakes in gas fields owned by Anadarko Petroleum Corp. and Eni SpA, the people said, asking not to be identified because the matter is confidential. They have a strong relationship and often discuss potential investments, though no final agreement has been reached, the people said.

    Mozambique’s discoveries in the Rovuma Basin off its northern coast have attracted oil companies from Europe, the U.S. and China as the southern African country plans one of the world’s largest liquefied natural gas projects. Investment from Exxon and state-owned Qatar Petroleum, which have partnered in joint ventures for at least 15 years, would bring much needed funds for development, not to mention a tax windfall to a nation grappling with a deepening debt crisis.

    Exxon, Eni and Anadarko declined to comment. Qatar Petroleum didn’t respond to a call or e-mail.

    Exxon Presence

    Anadarko operates in Area 1 of the Rovuma Basin, while Eni is in Area 4. Both have plans to export the gas as LNG, though neither has reached a final investment decision.

    Exxon has already established a presence in Mozambique after winning three offshore exploration licenses in October for blocks to the south of the Anadarko and Eni finds. The U.S. company also has a working interest in Statoil ASA’s Block 2 in Tanzania, north of the Rovuma Basin.

    Exxon’s ties with Qatar, the world’s largest exporter of LNG, include the RasGas partnership, which produces and liquefies gas from Qatar’s North field, and the Golden Pass LNG terminal in Texas.

    Acquiring a share of Anadarko’s Area 1 could generate capital gains tax of about $1.3 billion for the Mozambique government, one person said last month, adding that Exxon is also interested in Eni’s Area 4. Rome-based Eni said in May that it’s in talks to sell a stake in its discovery and expects to decide on its LNG project this year.

    Should Exxon and Qatar decide to invest, they would potentially accelerate the realization of Mozambique’s LNG export ambitions amid a looming credit crunch. The country is struggling to balance its books after $1.4 billion of hidden debt was disclosed in April, prompting the World Bank and other donors to suspend aid.
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    Qatar Sees Spike in LNG Exports to South Asia, Middle East

    Qatar’s exports of liquefied natural gas (LNG) to India and Pakistan grew by 50 percent annually over the first half of the year. LNG deliveries to South Asia reached 7,138,785 metric tons from January to June, which is an increase of 46 percent compared to the same period in 2015. Of this, Qatar delivered 6,045,886 metric tons to India.

    The India shipments resulted from a revised contract between India’s Petronet and Rasgas of Qatar. In December of last year, the two companies re-worked a long-term agreement that had stipulated the delivery of 7.5 million metric tons of LNG per year to India. The revision followed Petronet delivering some 30 percent less than the amount it had agreed to deliver up to September 2015.

    According to the new revisions, the volumes not taken in 2015 would be purchased during the term of the contract with 1 million metric tons added to the total contract volume.

    In Pakistan, Petronet delivered some 1,092,899 metric tons of LNG during the first half of 2016. The increase in deliveries was attributed to a new 15-year agreement with Qatargas for the delivery of 3.75 million metric tons per year. That deal was inked in February. Deliveries began in March. During that time, deliveries of LNG from Qatar rose to around three cargoes per month, which was up from one per month for the same period in 2015.

    Qatar gas shipments to parts of the Middle East also saw a spike in the first half of this year. The amount was an increase of approximately 20 percent in the shipments to Dubai, Kuwait, Jordan, and Egypt. Egypt had the lion’s share of deliveries. The country has meanwhile purchased two floating storage and regasification units, which will give Egypt the ability to increase its imports. The units were delivered last year.
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    Pipeline reportedly bombed in Colombia

    A militant group has reportedly bombed an Ecopetrol pipeline in Colombia.

    The incident has halted output and caused an oil spill into a nearby river.

    The Cano Limon pipeline is the second largest in Colombia and trasnfers oil from Occidental Petroleum’s oilfields near the Venezuelan border to the Caribbean port of Covenas.

    According to local reports, the pipeline was hit late on Monday in Boyaca department’s Cubuara municipality.
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    Libya's oil guards back NOC, preparing to reopen fields - spokesman

    Libya's oil guards back NOC, preparing to reopen fields - spokesman

    Libya's oil guard brigades, who control Ras Lanuf and Es Sider, two major export terminals closed since 2014, are working with the unity government's state oil company and preparing to reopen shuttered fields to pump crude again, a spokesman said on Thursday.

    The spokesman for Ibrahim Jathran's PFG forces did not give any details of whether that would include reopening the two ports soon; starting shipments there would restore a potential 600,000 barrels per day of crude export capacity.

    Militant attacks, fighting between rival factions and strikes have kept Libya's oil production at around 350,000 bpd, or less than a quarter of its output before the 2011 revolution that ousted Muammar Gaddafi and began years of instability.

    The National Oil Corporation (NOC) is working with the U.N.-backed government of national accord, led by Prime Minister Fayaz Seraj, who is trying to bring together rival factions whose armed backers have fought for control and oil resources since 2014.

    "The commander of Petroleum Facilities Guards (PFG), Ibrahim Jathran, has announced that oil will be pumped soon and oilfields of the oil crescent (region) will be also prepared to resume work," PFG spokesman Ali Hassi said.

    "Jathran said that we, the PFG of central region, will work with the NOC that belongs to the presidential council of the government of national accord."

    The NOC announced this week that it would merge with a rival energy company set up in the east by Libya's eastern government, a move seen by analysts as a step towards restoring order to the industry.

    The NOC in Tripoli, recognised by the international community, and the eastern NOC had operated in parallel as the rival governments struggled for control. The U.N.-backed government now in Tripoli is meant to supersede those administrations, but hardliners on both sides are holding out.

    The NOC has an ambitious plan to bring Libya's oil production back to pre-revolution levels. But damage to oil pipelines left closed for months, and to ports that have seen fighting, may take years to fully repair.

    Islamic State militants who are fighting in the western city of Sirte have also targeted the oil infrastructure in the past, and Seraj's unity government has yet to fully establish its influence.

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    Tullow issues convertible bonds to attract new investors, shares dive

    Africa-focused oil explorerTullow Oil has issued convertible bonds worth $300-million, a move it said was designed to diversify its investor base, sending its shares to the lowest in nearly three months.

    The bonds, due in 2021 and offered at a conversion price set at a 30% to 35% premium to the average Tullow share price on July 6, will be offered to institutional investors at a coupon between 5.88% and 6.63%, Tullow said on Wednesday.

    "The proposed convertible bond issue will further diversifyTullow Oil's sources of funding and give the company access to a new investor base," said CFO Ian Springett.

    Tullow shares were down 12% at 211.5 pence at 07:55 GMT, the lowest since April 18.

    An initial negative share price reaction had been expected due to bond investors typically hedging their purchases by taking a short position on the share price, a source close to the company said.

    Tullow said it would use the money raised to pay for investments in west and east Africa, where it is developing new oil fields, and general corporate purposes.

    In April, the oil producer announced its lenders had agreed to extend a revolving loan facility by a year and to increase flexibility on another, helping Tullow keep its finances in order amid weak crude prices.

    "The fact that the company needs $300-million after the recent reassessment of its borrowing facilities is a bit of a surprise to us," said analysts at Stifel, who recommend selling Tullow shares.

    Other analysts judged the bond issuance more positively.

    "The dilution should be limited and this is a useful diversification of funding for Tullow," said analysts at RBC Capital Markets, who rate Tullow's stock as 'outperform'.
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    API report show large decline in stockpiles and a gasoline glut on the East coast

    The American Petroleum Institute (API) trade group said its data showed U.S. crude stockpiles fell by 6.7 million barrels last week, declining for a seventh week in a row.

    The profit from turning U.S. crude into gasoline, known as the gasoline "crack," remained at a four and a half month low despite expectations that a record number of motorists would hit the road during the July 4 holiday weekend.

    Gasoline stocks in the U.S. East Coast, home to the New York Harbor delivery point for the fuel, reached a record high of 72.5 million barrels in the week ended June 24. Vessels carrying gasoline-making components could not unload at the harbor this week because of lack of space.
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    U.S. crude oil exports hit record 662,000 bpd in May: Census Bureau

    U.S. crude oil exports rose to a record 662,000 barrels per day in May from 591,000 bpd in April, foreign trade data from the U.S. Census Bureau showed on Wednesday.

    Canada accounted for the most U.S. crude exports at 308,000 bpd, followed by the Netherlands at 110,000 bpd and Curacao at 67,000 bpd. Other prominent destinations were the United Kingdom at 36,000 bpd, Japan at 29,000 bpd and Italy at 23,000 bpd.

    The total export figure was the highest on record since at least 1920, according to U.S. government data.

    U.S. oil exports have risen since a decades-long ban on them was lifted in January. During that time, a number of merchants, traders, producers and even refiners have moved crude to Latin America, Europe, Asia and other locations.

    The Census Bureau publishes its oil export data weeks before the closely watched U.S. Energy Information Administration trade figures. The EIA, which bases its numbers on the Census data, will release its monthly crude figures at the end of July.
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    Cruel summer for U.S. refiners as margins tank

    Summer driving season is in full swing and American motorists are filling their tanks at a healthy clip, but that is not swelling the profit margins as much as usual at U.S. independent oil refiners such as PBF Energy Inc and Valero Energy Corp.

    In April, executives shrugged off the industry’s lousy first quarter as an aberration that would be remedied this summer.

    “We still are bullish gasoline and bullish octane," PBF CEO Tom Nimbley told investors in an earnings call back then. “The driving season really hasn't hit that hard yet.”

    Nimbley was right about the surging summer demand. But refiner margins are still being squeezed as gasoline and diesel inventories stubbornly sit well above five-year averages.

    Summer gasoline demand usually fattens margins for refiners with seasonally high levels for the crack spread, the premium of a barrel of gasoline over a barrel of crude oil.

    That will not happen this year, said analysts who expect the situation to remain bleak in the weeks ahead unless there are large drawdowns in inventories.

    Late on Wednesday, the American Petroleum Institute, an industry group, assuaged some of those concerns, reporting a 3.6-million-barrel drawdown in gasoline stocks. Yet inventories remain much higher than they were last year at this time, and analysts have slashed earnings estimates for big U.S. refiners who report second-quarter results in coming weeks.

    The situation is so dire that U.S. East Coast refineries have been cutting production. Refiners on the East Coast, known as "PADD 1" by the U.S. Energy Department, are typically the first to feel a profit pinch, because their margins tend to be thinner than those of other regions.

    PADD 1 is a holy mess,” said Andrew Lebow, senior partner at Commodity Research Group in Darien, Connecticut. “It is very unusual. If a market becomes extremely oversupplied, like PADD 1, they are going to have to cut runs.”

    The U.S. gasoline crack spread 1RBc1-CLc1, a proxy for refiner margins, has dropped 34 percent in two weeks. On Wednesday, it hit a five-year low for this time of year of $13.10 a barrel. That is less than half the crack spread of $28 a barrel at this time last year.

    "An RBOB crack trading 13 bucks in the middle of driving season is unheard of," said one trader.

    East Coast gasoline stocks hit a record 72.4 million barrels, about 17 percent higher than the same time last year, data from the U.S. Energy Department showed last week. Overall, U.S. gasoline stocks were at 239 million barrels in the week to June 24, nearly 10 percent higher than last year and 15 million barrels more than the five-year average.

    The glut is so extreme that several tankers full of products were forced to sit idle in New York Harbor recently, waiting to unload.

    Inventories have grown despite evidence that U.S. motor travel continues to surge. Analysts noted that U.S. refiners switched to maximum gasoline mode earlier than usual during a fleeting moment of high margins in the early part of 2016. Imports also have been higher than normal in recent weeks, adding to the glut.

    John Auers, executive vice president at Turner, Mason & Co, a Dallas-based consultancy, said he remains bullish on gasoline demand and refining margins this summer, noting that gasoline and diesel inventories can draw down just as fast they fill up.

    “I think we will see some significant drawdowns in July and August, and that will help margins,” Auers said. “I think $50 a barrel for crude oil will be the high water mark, so gas prices will remain low and we will have a record driving season this summer."

    He warned that if inventories remain historically high at the end of the summer, refiners could be forced to cut production significantly to account for weaker seasonal demand.

    The 10 largest independent U.S. refiners booked a combined net income of $944 million in the first quarter, down 74 percent from a year earlier, a Reuters analysis showed. That put profits on track to be much less than the annual level of more than $10.6 billion in the past five years.

    Auers estimated that second-quarter margins would come in as the lowest for this normally profitable quarter in at least five years. Over the last 30 days, estimates for second-quarter earnings have fallen 17 to 20 percent for four of the major U.S. refiners, Phillips 66, Valero Energy, Marathon Petroleum and Tesoro, according to Thomson Reuters StarMine.

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    Alberta oil sands producers will eye new projects at $55-$60/b WTI: execs

    Investments in additional oil sands production capacity in Alberta will be boosted with a WTI price hovering between $55/b and $60/b even as producers spare no effort to reduce their capital costs, executives said Wednesday.

    "It is still tough out there, but in the past year we have dropped operating and capital costs by 17% and 30%, respectively, with our focus still being on consolidation and optimization," Lyle Stevens, Canadian Natural Resources executive vice president, told the 2016 TD Securities Energy Calgary Conference.

    CNR is adding 23,000 b/d of oil equivalent of heavy and light oil output in Western Canada over the coming six months at a cost of C$17,000 ($13,120)/flowing barrel and is also three months away from adding 45,000 b/d of bitumen output at its Horizon facility in northern Alberta, he said.

    Flowing barrel costs include construction costs and sustaining capital and operating expenditure.

    "We're feeling a lot better this year than last year and have also been successful in cutting costs by 40% primarily due to the application of new technologies and deflation in the service sector," Harbir Chhina, executive vice president of oil sands development with Cenovus Energy, told attendees of the same event.

    Cenovus will restart three projects that were put on the backburner last year due to low oil prices. But the company would seek "price sustainability" before taking a final investment decision, Chhina said.

    "We are going to design this [oil sands] business at WTI $55/b," Chhina said, without naming the three projects that would likely be sanctioned for development.

    No decision has been made yet about the restart of deferred projects as oil prices move higher, Cenovus spokesman Brett Harris said separately in an email, adding that the earliest an update on capital allocations would likely be available was in the company's second-quarter earnings later in July.


    Fellow producer, MEG Energy, which is producing at less than C$10/b, could "very quickly turn on" a few bite-sized oil sands projects typically of 10,000 b/d to 15,000 b/d if prices were to rise to $60/b, company spokesman John Rogers said at the same event.

    But Suncor Energy, which is on track to produce first oil in late 2017 from its 180,000 b/d Fort Hills development, will be less proactive in loosening its purse strings, the company's executive vice president for refining and marketing, Kristopher Smith, said.

    "We need some very strong signals on prices before we sanction new projects beyond Fort Hills and Hebron," Smith said.

    Hebron is a heavy oil development in offshore Newfoundland and Labrador that is due to start up in late 2017 and is being developed by operator ExxonMobil Canada along with Suncor, Chevron, Statoil Canada and Nalcor Energy.

    In 2015, Suncor reduced its costs by $1 billion, with a target of doing so again by C$500 million in 2016, Smith said.

    "This is not a crash diet, but a life-cycle change. With cash operating costs of just north of C$24/b, managing costs will be a focus and a challenge and there is a need for a structural change," Smith said.

    While the oil sands sector will likely receive the bulk of the planned investments, availability of financing will decide the future growth of tight oil production in Alberta and Saskatchewan, MEG Energy's Rogers said.

    "For an oil sands project, we spend 20% of our cash on maintaining the facility while the remaining 80% is available for growth. But for tight oil, it is just the reverse," Rogers said.

    Tight oil output in Western Canada is forecast to decrease 13% by 2019, the Alberta government said in a report in April.

    Compared with production of some 560,000 b/d in 2015, output will decline to 529,000 b/d this year and 524,000 b/d in 2017. In 2018 and the following year, production is forecast to be 506,000 b/d and 486,000 b/d respectively, it said.
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    Southwestern Exceeds Goal in New Stock Offering, Raises $1.2B

    Last week MDN reported that Southwestern Energy, a major Marcellus/Utica driller, was floating up to 86 million shares of new stock looking to raise $1.1 billion

    If you do the math, it worked out to ~$12.75 per share. The stock offering is done and dusted.

    Southwestern ended up selling 98.9 million shares for $1.247 billion, or $12.60 per share. Not too shabby in a down market where investors have been reluctant to continue funding oil and gas companies…
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    Rex Energy’s $190M Borrowing Base Reaffirmed by Bankers

    Rex Energy, now a pure play driller focused on the Marcellus/Utica, announced yesterday that its bankers have reaffirmed (or continued) the company’s $190 million borrowing base.

    A company’s borrowing base is the value of its assets–in this case the value of the leases and oil/gas wells Rex owns. Those assets are used as collateral to back up loans and IOUs.

    Rex has plenty of both. Rex announcement that its bankers will continue to value Rex’s assets at $190 million…
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    Alternative Energy

    S. Korea to invest $36 bln on renewable energy industries by 2020

    South Korea will spend about 42 trillion won ($36 billion) on renewable energy industries by 2020, the country's minister of Trade, Industry and Energy Joo Hyung-hwan said at a meeting for future energy strategy committee on July 5.

    According to the minister, South Korean government will invest in new energy industries such as solar and wind powers and eco-friendly power plants by taking all available policy measures, promising deregulations and various assistances to develop the new energy sectors as new growth engine for exports.

    Some 33 trillion won will be spent on the development of renewable energy resources in the next five years, with 4.5 trillion won to be invested in energy storage system and 2 trillion won in eco-friendly power plants.

    By focusing on renewable energy developments, Seoul aims to secure 13 million kilowatts of energy from the eco-friendly power plants. It is equivalent to the electricity that 26 coal-fired power plants can produce.

    The government raised the required ratio of renewable-energy power generation to 5% by 2018 and 7% by 2020, expecting the new energy sectors to create about 30,000 jobs by 2020.

    Meanwhile, about 2.5 trillion won would be spent on developing smart meters, an electronic device enabling both electricity consumers and suppliers to remotely connect the power meters and communicate with each other.

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    Australia to get 52GW of solar capacity in dramatic energy transformation

    The Australian infrastructure market is participating in a global energy transformation that will have a profound effect on our economy and financial markets.

    We are fast approaching a tipping point in the transformation of energy markets from fossil fuels to renewables. This transformation will not be orderly, rather will be a disruptive transition that will produce significant winners and losers.

    The Australian solar industry will experience unprecedented growth, from 4GW currently to 52GW of capacity in the National Electricity Market by 2040. This will require an investment of approximately $40bn or $3bn per annum over this period in solar alone.

    Global financial markets are not fully pricing the impact of climate change. The impacts of climate change will have far-reaching consequences for carbon intensive industries and global financial markets.

    The Electricity sector is responsible for more than a third of Australia’s greenhouse gas emissions. Fossil fuel energy producers and carbon intensive industries have been providing some disclosure to financial markets about emissions, which to date has been mostly voluntary. Regulators have been slow to ensure this data is presented on a consistent, comparable and understandable basis. Financial markets are not fully informed and are therefore not fully pricing climate change risks into equity and bond markets.

    Many institutional investors are now actively divesting fossil fuel exposures in favour of non fossil fuel exposures and investment in renewable energy. These investors have long accepted the moral argument for divestment, however are now persuaded by the economic argument that investment in a non fossil fuel portfolio is likely to produce outperformance over the long term.

    This is a very deliberate strategy, which is taking time and careful consideration to execute. President of the US$860 million Rockefeller Brothers Fund, Stephen Heintz recently presented the keynote address at the Divest Invest conference in Sydney. Heintz acknowledges that the carbon-fuelled capitalism of the 20th century has brought immense prosperity to the developed world, but at a huge cost. The Fund supports the scientific contention that in order to achieve the 1.5 degree Celsius target reduction agreed in Paris in 2015, that 60–80% of known fossil fuel reserves must remain in the ground.

    This means that companies owning those reserves lose material value, which provides investors the economic justification to support the moral case to divest these exposures. The Rockefeller Brothers Fund, since 2014, has been divesting its 7 percent exposure to fossil fuels and by 2017 through its divest campaign, is expecting to deliver a zero exposure to fossil fuels.
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    Lynas shares soar on production report

    Shares in Australia-based rare-earths producer Lynas surged 17% on Wednesday as the company reported that it had exceeded its production target of 3 840 t of neodymium-praseodymium (NdPr).

    During the 12 months ended June 30, Lynas produced 3 911 t of NdPr.

    As a result of exceeding its production targets, Lynasmanaged to reduce the interest rate under its Jare senior loan facility from 6.5% a year to 5.7% a year. The loan facility specified NdPr production targets for each six-month period from July 1, 2015, to December 31, 2017.

    Lynas shares closed at A$0.07 apiece on Wednesday, up 17.24% from the previous day’s closing price. The company had a market capitalisation of A$237.21-million.

    Lynas owns the Mt Weld mine, south of Laverton, in Western Australia, the Mt Weld concentration plan, near the mine site, and the Lynas Advanced Materials Plant, in Malaysia.
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    Sweden’s Vattenfall and CS Wind UK ink deal

    Swedish wind farm developer Vattenfall and turbine specialist CS Wind UK will today ink a deal to co-operate on future projects.

    The Memorandum of Understanding means Vattenfall will give the UK firm the opportunity to tender for tower supply contracts for onshore wind farm projects.

    Later this week CS Wind UK is due to break ground on a £27 million investment to expand its Machrihanish facility. The investment will increase production volume and allow for the fabrication of larger towers.

    Vattenfall’s potential development projects in Scotland would require in excess of 100 of these towers. The firm is also due to start the planning process on a 1.8GW wind farm in the southern North Sea.

    Scottish Energy Minister Paul Wheelhouse said: “I warmly welcome this important collaboration which will help to deliver on our aim to capture, for Scottish engineering and the wider renewables supply chain, a far greater share of the economic value arising from the construction phase of wind energy projects.”

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    Precious Metals

    Dominion Diamond to focus on developing core assets, share buyback

    Dominion Diamond Corp said it would focus on developing its core assets in Canada's Northwest Territories and on buying back shares, months after a group of investors urged the diamond miner to take steps to boost its share price.

    Dominion also said Chief Financial Officer Ron Cameron would step down on July 15 and Vice President Group Controller Cara Allaway would take over as interim CFO.

    An investor group led by hedge fund K2 & Associates said in December that it believed Dominion's share price had "suffered excessively and unnecessarily" as a result of "misguided policies and missed opportunities."

    The diamond miner, whose Toronto-listed shares had lost a third of their value in 2015, had said then that it would engage in talks with the group.

    Dominion will focus on developing the Sable and Jay projects at its majority-owned Ekati mine and a fourth pipe at its Diavik mine, among other core assets, it said on Wednesday.

    Both Diavik and Ekati mine sites are located in the Lac de Gras region of the Northwest Territories.

    Dominion is also selling its office building in downtown Toronto. The sale is expected to be completed in the third quarter of fiscal year 2017, the company said.

    Reuters reported in December, citing sources, that Dominion was working with Rothschild & Co to find ways to boost shareholder value, including a potential sale.

    Dominion's U.S.-listed shares closed at $9.11 on Tuesday.

    Up to Tuesday's close, the stock had fallen more than 35 percent in the past 12 months.
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    Russia starts sale of stake in diamond producer Alrosa

    Russia on Wednesday launched the sale of a stake in diamond producer Alrosa as part of a privatisation programme to help to bolster government finances which have been hit by weak oil prices.

    Alrosa is the world's largest producer of rough diamonds in carat terms. Together with Anglo American's unit De Beers, they produce about half the world's rough diamonds.

    Russia, trying to keep its budget deficit within 3 percent of gross domestic product, is also planning to sell stakes in other companies, including Rosneft and Bashneft and VTB Bank.

    Alrosa said the process to sell 10.9 percent of its ordinary shares owned by the government had been launched, confirming what sources had told Reuters earlier.

    Alrosa's market capitalisation is up around 23 percent so far this year as the diamond market has improved. As a result, the market value of the 10.9 percent stake is around 55 billion roubles, based on Reuters' calculations.

    Diamond sales stagnated in 2015, hit by a slowdown in the Chinese economy. But producers are seeing scope for recovery. Alrosa forecasts global demand for diamonds rising by up to 2 percent in 2016.

    The government has previously said it aimed to get more than 60 billion roubles ($928 million) from selling 10.9 percent of its 44 percent stake in Alrosa.

    Economy Minister Alexei Ulyukayev said proceeds from the sale would contribute to general budget expenditure.

    Two financial market sources said the books on the Alrosa share placement were expected to close on July 8 but that they could close earlier.

    One source said the deal's organisers expected the shares being sold would start trading on July 11.

    Shares in Alrosa fell 1.3 percent in Moscow on Wednesday to close at 68.71 roubles per share.

    Two sources, one financial and one familiar with the process, said the Russian Direct Investment Fund (RDIF) together with foreign funds could buy part of the stake.

    Russian pension funds and some of Alrosa's current minority shareholders could also buy shares, the financial source said.

    The government of the Yakutia region and its districts, where Alrosa's main producing assets are based in Russia's far east, will keep their 33 percent stake in the company.

    Alrosa's free-float is currently at 23 percent. In 2013, Russia sold a 16 percent stake in it to the market, raising $1.3 billion.
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    Base Metals

    Copper’s $149bn mine pipeline stalls as deficit nears

    Producers are counting on expansions and the development of new operations to meet supply shortages they forecast arriving toward the end of the decade. The plans are fraying as reluctant lenders, political wrangling, technical obstacles and a  lack of water and electricity push back project deadlines from  Papua New Guinea to  Peru.

    Only six major projects to build new mines or expand existing operations will be completed by 2020, with two of that total still at risk of potential delays, according to researcher CRU Group. That compares with a global slate of about 80 planned developments, according to Bloomberg Intelligence.

    Freeport-McMoRan, the largest publicly listed copper producer, forecasts an end to the metal’s current surplus from next year as demand improves and output drops. Chile’s state-owned Codelco, the top producer, is predicting a deficit by 2018, while BHP Billiton, operator of the world’s biggest copper mine, sees a shortage from 2019.

    “Our project pipeline has thinned considerably over the last year as we have factored in further delays,” said ChristineMeilton, principal consultant on copper supply and raw materials at CRU in London. While the industry is confident about an emerging deficit, it remains difficult to raise financefor projects as low prices deter investors, she said.

    Capital spending by 35 major producers will shrink to about $41-billion next year, down from $104-billion in 2013, and mine output last year tumbled by more than 20%, company data compiled by Bloomberg Intelligence show. Even with a project pipeline with forecast capital expenditure of about $149.4-billion, according to the data, the mining industry faces challenges to deliver new supply in time to meet the deficit.


    Rio Tinto Group’s $5.8-billion expansion of Mongolia’s Oyu Tolgoi won’t be completed until 2027, while BHP, the world’s largest mining company, says it will be “a little bit late to the party", under a plan for a major expansion at Australia’s largest copper mine from about 2025, the site’s asset president, Jacqui McGill, said in May.

    “The mid-2020s is when we are targeting,” Justin Bauer, BHP’s head of resource planning and development forOlympic Dam, said in an interview at an Adelaide laboratory where the producer is testing processing technology. “We’d like to find a way to expand it, and find a viable way for quite a large expansion, a cheaper way of processing ore is a really important step for us.”

    About 25 global copper projects have been delayed by up to two years, a further 21 for as long as four years and about nine developments face hold-ups of between four and six years,Codelco said in a presentation to a Florida conference earlier this year.

    Codelco’s plan to covert the Chuquicamata pit in Chile into an underground mine, a program the company said in May was about 29% complete, is among projects CRU sees at risk of delays beyond this decade. Targets for First Quantum Minerals’s mine in Panama are also considered under doubt, according to CRU. First Quantum, which forecasts a rise in production at its Cobre Panama site from 2018, didn’t respond to a request for comment.

    Projects on track to deliver at least 100 000 t a year of new supply by 2020 are Qulong in China’s western TibetAutonomous Region, Southern Copper’s Toquepala in Peru,Freeport’s expansion at Indonesia’s Grasberg and Myanmar’s Monywa Letpadaung operation, according to CRU.

    Copper demand was weaker than expected in the first four months of 2016 and slower growth in consumption poses risks to forecasts on both the market balance and prices, RBC Capital Markets analysts wrote in a June 9 note. A deceleration in global growth, in particular in China, remains the key risk to the demand outlook, the analysts wrote. The country accounted for 47% of global consumption last year.

    Still, any new disruptions to projects could deliver a deficit earlier than predicted, CRU’s Meilton said in an e-mail. “It will also have implications for the next decade, when the supply gap is expected to widen,” she said.

    New delays could also spur prices further, RBC said in the June note. Copper prices may rise more than 40% through 2020, the bank forecasts.

    That’s why OZ Minerals is accelerating work on a A$975-million project in Australia, seeking to deliver new output in 2019, according to CEO Andrew Cole. “When you realize the copper price is high it’s too late, you’ve missed the boat,” Cole told the Sydney Mining Club in a June 2 speech.

    Attached Files
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    Peru's Kuczynski to try to reopen shuttered La Oroya smelter

    Peru President-elect Pedro Pablo Kuczynski vowed on Wednesday to make his "strongest effort" to reopen the polymetallic smelter La Oroya, part of his goal of wringing more value out of the country's key mineral exports.

    The former operator of the smelter, Doe Run Peru, owned by U.S.-based Renco Group Inc, halted operations at La Oroya in 2009 when it ran out of money to buy concentrates. The company also lacked financing needed to finish an environmental clean-up and to pay for upgrades to curb pollution.

    Now controlled by Doe Run's former creditors, the smelter faces liquidation on Aug. 27 unless a new buyer is found.

    "La Oroya is dying and we have to change that. We have to give it oxygen, oxygen from investors," Kuczynski said in televised comments before a crowd in the town of La Oroya, where former workers have held rallies to demand operations resume.

    "You have my word that I'll make my strongest effort to push this out!" Kuczynski said to cheers. The former investment banker, 77, takes office on July 28.

    Kuczynski asked La Oroya residents to march to Lima to help him press the incoming opposition-controlled Congress to extend the liquidation deadline. He did not say what he would do to make the smelter, which opened in 1922, more attractive.

    Kuczynski's party will have just 18 lawmakers in the 130-member Congress, threatening his proposed reforms as the party of his defeated rival, Keiko Fujimori, will hold 73 seats.

    Kuczynski wants Peru to become a refining and smelting hub to boost its copper, zinc, tin, gold and silver exports as slumping prices drag on growth. His first trip abroad as president will be to China to talk with officials about potential partnerships on refineries.

    La Oroya, some 140 kilometers (87 miles) from Lima in central Peru, could process concentrates from several nearby mines, Kuczynski said. Toromocho, operated by Chinese miner Chinalco Mining Corp International, is the biggest copper deposit near the La Oroya smelter.

    "When minerals are refined here, their value will go up. There's a margin of about $400 million that we can recover," Kuczynski said.

    The smelter was once the world's most diversified - churning out gold, silver, lead, zinc, copper and a dozen specialty metals. But it turned La Oroya into one of the 10 most polluted places in the world, according to a 2007 report by the environmental group the Blacksmith Institute organization.

    Attached Files
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    Japan's spot aluminium torn between stable demand, tight LME spread

    Japan's spot aluminium premiums were assessed Wednesday at $80-$85/mt plus London Metal Exchange cash CIF Japan, unchanged since June 21 as the market appears to be torn between stable demand and tight futures contract spreads.

    Demand outlook for the third quarter has risen from the previous outlook, said Japanese buyers who have decided to increase their purchase volume for the third quarter from producers on annual contracts.

    There is no sector clearly outgrowing earlier expectations but there is a spreading feeling of relief as there is no sector that has underperformed either, sources said.

    "Demand is holding stable and as we have better visibility for the next month or so, I am feeling more comfortable," said one consumer, who has increased his Q3 purchase volume.

    "Japanese domestic demand is stable but we need to be competitive to be awarded sales," said a Japanese trader.

    Tight LME spreads were discouraging buyers, added a producer.

    Cash-three months were $10/mt in contango Wednesday during Asian hours, up from $6/mt on Monday.

    "People don't want exposure to risks and there is no appetite to take positions," said one international trader.

    "People will buy less and there will be less trades, and there will be more pressure for lower spot premiums," said the producer.

    Several Japanese traders said one international trader was offering at $85/mt plus LME cash CIF Japan.

    One Japanese trader said it was for a volume greater than 500 mt for August loading, origins either Australian, South African, Middle Eastern or Brazilian.

    The trader said he had rejected the offer and decided not to engage in spot trades due to tight LME spreads.

    S&P Global Platts, however, has not been able to confirm with the seller.

    The two-tier market structure, comprising of a producer price and a trader price persisted, sources said.

    A producer said he was offering to a spot buyer in south Asia $90-$93/mt plus LME cash CIF, following Japanese third quarter contract premiums settlement at this level. The volume was less than 1,000 mt and loading was for either July or August.

    The international trader said he would offer $65/mt plus LME cash CIF, if he received an inquiry from a buyer from the same country.

    Producers had only monthly production to sell, while traders had abundant stocks, creating a gap in the price levels, sources said.

    Attached Files
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    Huntsman Corp. closing its African titanium dioxide plant

    The Woodlands-based Huntsman Corp. chemical giant said Wednesday it will close its only plant in Africa by the end of the year to cut costs.

    Closing the titanium dioxide plant in Umbogintwini, South Africa, will mean the loss of 140 jobs, but the plant is Huntsman’s smallest and oldest in its pigments and additives business. Huntsman plans to spin off or sell a stake in the pigments division.

    The business unit includes titanium dioxide, a chemical that can be used as a pigment for everything from food coloring and paints to sunscreen. Huntsman is the world’s second-largest producer of the chemical, often called TiO2.

    Last year was termed a transition year for Huntsman after the purchase of $1 billion of assets from Rockwood Holdings in late 2014. But Huntsman’s biggest financial drag is its titanium dioxide plants, some of which came from Rockwood. Huntsman President and CEO Peter Huntsman expressed long-term optimism for titanium dioxide in a conference call this year. “People feel the (titanium dioxide) market is as bad as it’s going to get,” he said, noting that some improvements are expected this year. “Let’s not panic.”

    On Wednesday, Simon Turner, Huntsman president of pigments and additives, said its profit margins remain well below historic norms despite some recent recovery.

    “It is critical that we continue our successful cost reduction and synergy program to combat such conditions. We have sufficient capacity across our production network to allow us to close our smallest facility, still meet our customers’ needs and improve our overall competitiveness,” Turner said in a statement.
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    Steel, Iron Ore and Coal

    China June steel sector PMI further slides to 45.1 amid sluggish steel market

    The Purchasing Managers Index (PMI) for China’s steel industry fell 5.8 to 45.1 in June, the lowest level this year, showed data from the China Federation of Logistics and Purchasing (CFLP).

    It was the second straight month of downward, indicating an apparent contraction in China’s steel industry.

    In June, the steel industry output sub-index was 42.5, the lowest level this year, plunging 11.2 from 53.7 in May.

    As of June 24, only 48.47% steel mills across the country made profit, down from 65.03% a month ago.

    Meanwhile, the new orders sub-index reached the lowest level year to date at 43.3, lower than 52.7 in the previous month.

    Besides, the purchase price index fell dramatically from 60.9 in May to 50.4 in June, indicating increased support to steel prices, despite high cost at steel mills.

    Steel prices were volatile in June, mainly due to price plunge in May and low stockpiles. As of June 30, the Tangshan steel billet price stood at 1,990 yuan/t, up 170 yuan/t on month.

    China's steel market is likely to be strongly fluctuated in the short run, affected by macroeconomic factors, given weak demand and insufficient supply.
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