Mark Latham Commodity Equity Intelligence Service

Tuesday 31st March 2015
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China eases property curbs as stimulus hopes spark bull run in equities

PBOC slashes down payment for homebuyers after hopes for stimulus measures fuel stock rally

The People's Bank of China yesterday slashed the down payment needed to buy second homes in the country to 40 per cent after expectations of further stimulus measures had earlier powered mainland stocks to a seven-year peak.

The Hong Kong market rang up its biggest daily gain in two months as investors bet on more stimulus by Beijing to re-energise the country's cooling economy.

The PBOC said on its website that all banks "are encouraged to offer commercial support to families to buy their own home … with the down payment not lower than 40 per cent" for second-home buyers from 60 to 70 per cent.

The finance ministry also announced yesterday that sellers of ordinary homes would be exempted from a 5.6 per cent transaction tax after owning the property for two years. The measure will take effect today.

The impact was well anticipated by the stock markets, which were also pricing in a potential cut in interest rates or the official required reserve ratio.

"The possible interest rate cut and relaxation policies by the PBOC as well as [the] China Securities Regulatory Commission's announcement to allow mainland fund houses to invest in Hong Kong under the stock market connect scheme have led investors to speculate that much of the 1.4 trillion yuan [HK$1.77 trillion] in Chinese funds may be invested in the local stock market soon," said Ben Kwong Man-bun, a director of broker KGI Asia. "The bull run is likely to continue in the near future."

MGL: First real action by Beijing we've seen that helps the distressed property market.  There's been a small bounce in rebar prices on expectation of this, but our sense is that there's a strong element in the market which had tattered hopes for much more.


Nigeria's Buhari gains early ground amid vote tally fears

Nigerian presidential challenger Muhammadu Buhari recorded thumping majorities in key northern states on Monday, as the United States and Britain expressed concerns about meddling with the vote count.

Buhari, a 72-year-old former military ruler who has campaigned as a born-again democrat intent on cleaning up the corrupt politics of Africa's most populous nation, won 1.1 million votes in the flashpoint city of Kaduna.

President Goodluck Jonathan, a 57-year-old southern Christian, won 484,000 votes there.

The city, scene of three days of bloodletting after Buhari lost to Jonathan in the last election in 2011, was tense but quiet as the results trickled in, with the roads empty of traffic and many shops and homes shuttered.

Buhari, a northern Muslim, also won 1.9 million votes in Kano against 216,000 for Jonathan, an indication of the political polarisation that has deepened over the last five years under Jonathan's People's Democratic Party (PDP).

Although the economy has been growing at 7 percent or more, scandals over billions of dollars in missing oil receipts and the eruption of an Islamist insurgency in which thousands have died have undermined Jonathan's popularity.

Although the early results will hearten the Buhari camp, they are far from conclusive in an election forecast to be the closest since the end of military rule in 1999.

In Rivers state, in his home Niger Delta region, the volatile and hotly contested home of Africa's biggest oil and gas industry, Jonathan won a massive 95 percent of the vote.

The results coming from states such as Rivers have prompted suspicion among diplomats, observers and the opposition, whose sympathisers took to the streets in protest.

Police fired tear gas at a crowd of 100 female supporters of Buhari's All Progressives Congress (APC) demonstrating outside the regional offices of the INEC election commission.

MGL: Who knows on vote rigging. But all the social media, press and youtube commentary we've seen suggests Nigerian's actually have fond memories of Buhari's radical rule, he is remembered for sending 'lazy' civil servants out into the fields to do agricultural work.  Maybe the country needs a hardliner. Last year's corruption scandal involving "about $21bn" thieved from the state oil company still resonates around the press. The Central Bank governor who had the gall to point fingers and openly complain about the missing money was sacked!


Oil and Gas

Consensus low on Oil??

Image titleImage title2. Oil

Taking a look at past periods when the price of oil has had sharp declines shows a consistent pattern of rapid, not slow, recoveries. Thanks to the work of Evercore ISI, it is clear that over the last thirty years every major drop in the price of Brent has resulted in V-shaped bottoms, including the recession-related selloffs of 2002 and 2009. The bottom takes several months to form. The prevailing view now is that the price of oil will remain low for a prolonged period because of slow world-wide economic growth and increased production. Since the price of oil peaked, the rig count has declined from 1900 to 1300 units. A low rig count usually means that future production will fall off as existing wells mature. The first low in the oil price is usually followed by a test of the price when storage facilities are filled, as they are now, and production continues. The oil has to be sold somewhere. If that pattern is followed, we should see the lowest point soon. A reason for the possible more rapid recovery in the oil price is the continuing increase in demand from the emerging markets, primarily China, India and the Middle East, as well as some modest growth in the developed economies. Only slight economic improvement is expected from the United States, Europe and Japan.

The argument against history repeating itself is that production from shale has changed the outlook. Shale oil was unimportant in earlier cycles, but it is a major factor now and, as the price of oil moves up, more shale oil will come into the market, limiting the rise. Whereas the lifting cost for shale oil was estimated to be $80 three years ago, technological improvements have brought this down to a $50 to $60 range now. Global (non-U.S.) oil production (OPEC and non-OPEC) has been essentially flat since 2004. At present OPEC is producing above its quota, so there must have been some reduction in output from non-OPEC countries. The swing factor has been U.S. shale production, which has risen sharply since 2010. Looking at a survey of the breakeven lifting costs for the major shale formations cited in a recent J.P. Morgan report, most are above $50 (20 out of 26), which is higher than the current market price of West Texas Intermediate oil. As a result, shale production is likely to remain modest until prices rise. A West Texas Intermediate price of $60 would be quite favorable for the shale producers, but that would represent a sharp recovery from the low in the $40s. A recovery to $70 would also go a long way to dispel deflation fears. Another factor which could keep oil prices from rising is the lifting of sanctions on Iran as a result of the nuclear weapons agreement. This could cause an increase in oil imports from that country. Also arguing against the near-term rise in oil price is the sharp rise in the long positions of speculative commodity funds. The last time this happened was when oil was $107. Nonetheless, I’m still looking for oil to rise between now and year-end.


While the White House has been pushing hard for consensus on the framework for a deal ahead of the deadline, Paris has been pushing back. “Repeating that an agreement has to be reached by the end of March is a bad tactic. Pressure on ourselves to conclude at any price,” Gérard Araud, France’s ambassador in Washington, tweeted on March 20. On Tuesday, François Delattre, France’s ambassador to the United Nations, said that Iran’s progress was “insufficient.”

The word from Paris has been equally unsupportive of the U.S. push for a deal. “France wants an agreement, but a robust one that really guarantees that Iran can have access to civilian nuclear power, but not the atomic bomb,” French Foreign Minister Laurent Fabius declared on March 21.

What gives? Is France’s Socialist President François Hollande actually a neoconservative? Has Paris suddenly turned into a hawk among nations?

Not quite. France’s policy is dictated by a set of principles with regard to nonproliferation that have guided administrations on both sides of the political spectrum in the talks with Tehran since 2002. And the tension with Washington is just one expression of a larger disagreement between the two countries over U.S. strategy in the Middle East.

MGL: Byron Wien's surprises  are always a good read, and his follow on comments are worthy of attention when he's right.  But, whereas his NY surprise list was prophetic, this time, on follow on, we have some issues:

1> V shaped Oil patterns are typical of DEMAND shock: the Asian crisis in 2008-9 being the foremost example.
2> Today's Oil market is impacted by SUPPLY shock, and much more reminiscent of the 1986-8 period when Saudi crashed prices in response to the Iran-Iraq war, loss of market share, and the strength of Russian exports. (Saudi intensely dislikes being #2 behind Russia as exporter)
3> Embedded expectations in the equity market already imply the "V" hypothesis, and retail buyers, refinancing and equity issuance has kept the shale oil players solvent for another year, at the same time the crash in rig utilisation implies a severe cut in rig pricing, and thus a general drop in breakevens.

The Iranian situation is receiving much airplay, both in press, and in the markets. 

We want to look at the situation from the Iranian perspective:

Option one: capitulate. 
Likely result: Add 1mbpd of supply, and crash the Oil price, some more!

Option two: talk, talk and hope some low hanging fruit falls from the political tree as the politicos seek a graceful exit.
(Very much the pattern of Iranian behaviour until now)
At which point the French harden western sinews and the result seems to be an endless set of extensions to the talks.

Why should Iran alter its present behaviour? So far the easy low hanging fruit they have culled are as follows:
a> Visible friction between the US and its Middle East allies, Israel and Saudi.
b> Forced Saudi into a military posture in Yemen, always a good distraction and disruptive.

Its all supposed to come to a head today, and our suspicion is the end result is a fizzle.  Our critical observation: Iran has little to gain from exporting 2m bpd at $20 vs 1mbpd at $40.  As of today the Oil market cannot absorb those barrels, and Saudi is in no mood to gracefully allow Iranian barrels into the market at the expense of their own.


Qatar’s natural gas revenue could plunge 34% by 2026

Qatar will likely collect far less money in the coming decade from the sale of natural gas, the main funding source of its rapid development in recent years, according to a recent forecast.

The prediction was made in a report published by the Columbia Center on Global Energy Policy (CGEP), and comes as Qatar continues to spend heavily on new roads, rail lines as well as power and desalination plants to meet the needs of its growing population and to prepare for the 2022 World Cup.

These public expenditures have largely been paid for with proceeds from natural resources sales, as Qatar has grown to be the world’s largest liquefied natural gas (LNG) supplier.

The CGEP says Qatar’s annual revenues from LNG sales totaled US$56.5 billion in 2013. However, it expects that new LNG development projects around the world, particularly in Australia and North America, will cause Qatar’s pricing power to decline and its revenues to take a hit.

Under one scenario put forward by the CGEP, Qatar’s LNG revenues could plunge 34 percent to $37 billion in 2026.

MGL: Consultants are guilty of extrapolating the present into the future. So we're actually describing the state of play NOW; LNG prices on index contracts have a lag, but are descending inexorably down below that critical $12 level which provides the IRR for most of these plants.  We would argue that it was Qatar massive expansion in the late 2008-2010 period that broke the LNG pricing model in the first place, everything else since then has just been reiteration of the theme: excess returns on LNG investment a decade ago provoked a veritable inundation of capacity.  Add in that shale gas transformed the US from being a major importer to being a potential low cost exporter, and excess supply is in the order of 50-100%. Worse yet, buyers have really only conformed to the "great gas growth" story at low prices, leaving demand much feebler in Asia than the rosy spectacled analysts had expected. 


Gazprom says 2014 net income under Russian rules down 70 pct

Gazprom's net profit, calculated under Russian Accounting Standards (RAS), fell 70 percent last year to 189 billion roubles ($3.3 billion), Russia's top natural gasproducer said on Monday.

Gazprom's net profit under RAS is attributed to the parent company only and not its subsidiaries such as Gazprom Neft or its power business. Gazprom uses the profit figure as a base for dividend payout calculations.

The company also said it had acquired stakes in the $40 billion South Stream gas pipeline project, which Russia scrapped at the end of last year, citing EU objections.

The pipeline was supposed to deliver gas to southern Europe without crossing Ukraine. However, Moscow instead named Turkey as its preferred partner for an alternative pipeline.

Gazprom said it had bought Eni's 20 percent stake in the South Stream charter capital for 22.42 billion roubles ($388 million), Wintershall's 15 percent for 16.85 billion roubles and EDF's 15 percent for 16.82 billion roubles.

The company also said it had booked reserves of 22.3 billion roubles for possible writedowns on the Shtokman project, which was supposed to produce offshore gas in the Barents Sea. The company scrapped the plans due to cost overruns.

MGL: Gazprom trades 2.8x eps, 0.2x book, 1.8x cashflow, it has a 5% yield. The bulls have completely surrendered on this once totemic Russian grandee. The Kremlin has surrendered, and favours Rosneft or Novatek. All we need now is for the company to just stop spending money on projects that make little sense, and Shtokman cancellation is really the first evidence we've seen that event may be beginning. 

The EU still wants to exit its dependence on Gazprom, and China is eyeing cheaper imports via LNG than Gazprom's contracted volumes to China. Domestic pricing forces Gazprom into likely losses. So, yes the descent from grace, has been a five year bear, but nothing in the fundamentals is positive.


Sinopec, PetroChina persevere with shale gas as drilling costs fall

China's top two state-owned companies PetroChina and Sinopec are pushing ahead with efforts to commercialize their dedicated shale gas projects in China, mainly because drilling costs have fallen.

Speaking at the company's annual results briefing, Sinopec Chairman Fu Chengyu said shale gas and unconventional gas will continue to be a strategic point of growth for the company, despite falling oil prices and a 12% cut in its capital budget to $22 billion.

This is primarily because gas prices are largely divorced from global oil prices.

"There is no one price in the world for natural gas. Natural gas is priced by location," he said, adding that in China, gas prices are at a healthy level and are able to sustain development.

Sinopec's main focus is on its Fuling shale gas project in southwestern Chongqing municipality.

The company said it has made progress in the first phase, with production capacity of 5 Bcm/year, while daily output of all its producing wells exceeded their design targets last year.

    Production capacity is expected to reach 10 Bcm/year by 2017. Fuling gas is currently piped into the company's 8.5 Bcm/year Sichuan-Eastern China gas pipeline network, which also transports gas from its conventional Qingxi, Puguang and Yuanba fields to cities in the eastern region.

"Fuling shale gas project can give good returns. Our investment will not stop," Fu said. The executive noted that costs for each well at Fuling have fallen to Yuan 80 million ($13 million) from Yuan 100 million previously and are set to decline to Yuan 60 million or less in the next two years.

He said costs continue to fall partly due to efficiency and technological advances, but also because the initial spending on infrastructure such as roads has been sunk so subsequent wells will have different cost structures.

PetroChina management echoed similar sentiments on Thursday.

MGL: All good stuff, but in the scheme of China's grand plans 10bcm pa is a drop in the bucket, (400-500bcm pa by 2020, depending on your favourite gas analyst), and its not really material for either Sinopec or Petrochina. 


Qatar Companies to Invest $5 Billion in China for LNG Projects

Two Qatari companies agreed to pay about $5 billion for a 49 percent stake in Shandong Dongming Petrochemical Group to help the Chinese business build an LNG receiving terminal and expand into retail gasoline sales.

The investment by Hamad bin Suhaim Enterprises and Qatra for Investment and Development will pay for the construction of a receiving terminal for liquefied natural gas, with a capacity of 3 million metric tons a year, and an LNG storage facility, Ibrahim El-Tinay, Qatra’s chief executive officer, told reporters Monday in the Qatari capital Doha. Shandong Dongming will also use the money to built 1,000 gasoline filling stations in six provinces south of Beijing, he said.

“We hired a financial adviser and expect to close the deal before the end of the year,” El-Tinay said, declining to identify the adviser. Shandong Dongming plans to select operators for the gas stations in the fourth quarter, he said.

Qatar, an OPEC member and the world’s biggest exporter of liquefied gas, has been expanding investments in China and Asia, where it already sells most of its oil and LNG. The emirate and its sovereign wealth fund, the Qatar Investment Authority, plan to invest as much as $20 billion in Asia by 2020. China is the world’s largest energy consumer.

Shandong Dongming, which operates an oil refinery processing as much as 450,000 barrels a day, expects to sell about a third of its output through the new gas-station network, the company said in a joint statement with the Qatari investors. It generated an operating income of $7.5 billion in 2013, according to the statement.

MGL: Qatargas owns Milford Haven in the UK, Golden Pass in the US,  so adding a Chinese LNG port to their integrated chain makes eminent sense. 


Italy's Saipem says needs more money to finish Poland's LNG terminal

Italian firm Saipem will complete the delayed construction of Poland's liquefiednatural gas (LNG) terminal this summer, but only if it receives further payment, Polish daily Rzeczpospolita said, quoting Saipem's spokeswoman.

Saipem is leading the consortium which is building the terminal in the Baltic city of Swinoujscie.

"The LNG terminal will be ready to take the first loads in the summer, assuming that the consortium receives appropriate support from Polskie LNG and that financing of the terminal's full operations in the following months will be provided," Camilla Palladino told Rzeczpospolita.

Polskie LNG, which is owned by Poland's gas grid Gaz-System and is responsible for the investment, declined to comment, Rzeczpospolita said.

The terminal is Poland's flagship project in its plan to cut dependence on gas imports fromRussia.

Poland said earlier this month it would not increase payments for the construction, which was supposed to be completed by the end of 2014 for a total of 2.4 billion zlotys ($636 million).

MGL: The contractors accuse the gov't of changing the law, which required mid construction modifications, and delayed the project almost an entire year. Poland's long term index linked deal with Qatar- at 16% of Oil- is one of the highest index deals we've seen, and reflects Polish desire to move away from Gazprom. Right now that Gas would arrive at $8.50, vs $7.10 at spot. Muddying the water here is a summer election. I cant believe they wont resolve these issues, and complete this port, its too strategic for Poland. 


Niko Announces Favourable Judgement From Indian Court

Niko Announces Favourable Judgement From Indian Court

Niko Resources Ltd. is pleased to announce that the High Court of Gujarat in India has issued a favourable judgement on the retrospective application of the definition of undertakings and whether or not mineral oil includes natural gas for the purposes of the income tax holiday claims for the Company’s fields in India.

MGL: Niko, the largest independent to make discoveries in India, (partnered with Reliance),  is fighting for its very life with $510m of debt, and very little cashflow. Niko's enormous Indian portfolio lies wasting away as the gov't slowly rolls out decisions on gas prices, taxes, allowable capex, and every detail of the development plan. Modi's gov't has so far done little to help Niko, indeed the reversal of gas price increases we're hearing about from the Indian press could well be the kiss of death here. Reliance may pick up the pieces for a song.


Harvest Natural faces cash crunch, considers restructuring

Oil and gas producer Harvest Natural Resources Inc said it was facing a severe cash crunch and would consider restructuring if it failed to obtain sufficient funding.

Harvest said the Venezuelan government's decision to withhold the sale of thecompany's assets in the country, the failure to pay dividends and other contractual breaches resulted in liquidity constraints.

The company's fourth-quarter net loss widened to $179.7 million, mainly due to the write-down of its investment in Petrodelta, its joint venture with state-owned Petroleos deVenezuela SA.

Harvest has tried twice to sell its interests in Venezuela. In 2013, a deal with Indonesian oil company Pertamina was rejected by the Venezuelan government and a similar sale attempt to a unit of Argentina's Pluspetrol was also unsuccessful.

MGL: No debt here. Harvest has simply had no sales from its Venezuelan unit for some 5 years now.  Harvest owns 20m boee odd in Venezuela, and some early stage exploration efforts outside the country.


BP says paying a fraction of oil spill bill could put its U.S. unit in trouble

BP says fines above $2.3 billion for the Deepwater Horizon disaster would threaten the solvency of its U.S. oil business and drain the unit’s cash this year, even if U.S. crude returned to $100 a barrel.

That’s less than a fifth of the environmental penalties U.S. prosecutors want BP to pay for the oil spill that fouled the Gulf of Mexico five years ago.

BP’s assessment of the U.S. unit’s financial state emerged in court papers Friday as the British oil giant, the U.S. government and Anadarko Petroleum Corp. expanded on arguments they made in January and early February during the third and final phase of the New Orleans civil trial over the spill. Eleven workers were killed in an explosion on BP’s leased Deepwater Horizon rig on April 20, 2010, and BP’s blown-out Macondo well off the coast of Louisiana spewed more than 3 million barrels of oil into the ocean over 87 days.

U.S. District Judge Carl Barbier in New Orleans could level fines as high as $13.7 billion against BP and possibly more than $1 billion against Anadarko, a minority owner in the Macondo well, after the parties file final reply briefs in late April. The Justice Department has appealed a ruling that cut BP’s potential fines down from $18 billion.

In the court papers Friday, BP argued for much lower fines, reiterating that its multibillion-dollar response to stem the environmental impact of the spill and “herculean” efforts by its workers merit a smaller penalty. Prosecutors said that response work just shows how big the spill was from April to June 2010.

But the London oil company again turned to the debate over whether it has the financial muscle to pay the maximum fines. It said the equity of its Houston-based U.S. oil business, the unit legally tied to the spill and that manages its Gulf of Mexico operations, fell to $5 billion in December amid low oil prices.

MGL: This is desperate.  Which lawyer dream't this  one up?  Barbier, the judge has so far refused to take nonsense from either side in this case. US gov't absurd estimates of the spill size were thrown out, and Bp's attempts to wriggle off the hook have equally been thrown out. 

Texas natural gas, oil production down in latest reporting periods: regulator

In the commission's final production estimate for January, the state produced 81 million barrels of oil and 536.3 Bcf of natural gas. The commission's final production estimate for December was 83.7 million barrels of oil and 553.2 Bcf of natural gas. The commission's final January 2014 production estimate was 69.9 million barrels of oil and 566.5 Bcf of natural gas.

January's production came from 167,203 oil wells and 91,150 gas wells, the commission said. December's production came from 160,670 oil wells and 90,448 gas wells. January 2014's production came from 161,533 oil wells and 92,269 gas wells.

The commission said Texas produced 914 million barrels of oil and 8.2 Tcf of natural gas over the past 12 months, compared with 724 million barrels of oil and 7.8 Tcf of natural gas over the comparable period of 2013-2014.

The commission issued 924 original drilling permits in February, down from 1,682 in February 2014. This February's total included 827 permits for new oil and gas wells, seven to re-enter existing well bores and 90 for re-completions.

This February, operators reported 1,521 oil, 210 gas, 245 injection, and three other completions, the commission said. In February 2014, the commission said operators reported 2,768 oil, 232 gas, 131 injection, and 11 other completions.

MGL: Texas production already being revised down, and the implied damage in the 4q must have been around 1mbpd, that's consistent with other numbers we've seen. 

Note also 89% of drilling permits are for refracs on existing holes. 

Not only do we have substantive and significant data supporting the existence of a large Texan 'fracklog', but also evidence that the industry is bearing down on cost. 

I am willing to bet that we'll see some shale operators begin to report breakevens falling below that critical $50 level over the next few months.

That begs the question of where the inventory build at Cushing is being produced, if Texas is down 1mbpd in recent months, we must have 1mbpd coming from somewhere else.

Canadian export data is showing a sharp fall in values, but if you correct for Oil prices, volumes would appear to lifted substantially, and that may well be the impact of the large completions at the tail end of last year to southbound pipeline capacity. (Chicago to Cushing). We did argue last fall that Canadian crude arriving in Houston in volume would pressure prices, it was formerly islanded in Canada, and not really 'visible' tot the market. 


Alternative Energy

China plans huge solar power station in space

China plans to build a huge solar power station 36,000km above the ground in an attempt to battle smog, cut greenhouse gases and solve energy crisis, much on the lines of an idea first floated in 1941 by fiction writer Isaac Asimov, state media reported on Monday.

If realized, it will surpass the scale of the Apollo project and the International Space Station, and be the largest-ever space project.

The power station would be a super spacecraft on a geosynchronous orbit equipped with huge solar panels. The electricity generated would be converted to microwaves or lasers and transmitted to a collector on Earth, staterun Xinhua news agency reported.

Wang says the electricity generated from the ground-based solar plants fluctuates with night and day and weather, but a space generator collects energy 99% of the time.Space-based solar panels can generate ten times as much electricity as ground-based panels per unit area, says Duan Baoyan, a member of the Chinese Academy of Engineering."If we have space solar power technology", hopefully we could solve the energy crisis on Earth," Duan said. Wang says whoever obtains the technology first "could occupy the future energy market." However, many hurdles lie ahead: A commercially viable space power station would weigh 10,000 tons. But few rockets can carry a payload of over 100 tons to low Earth orbit. "We need a cheap heavy-lift launchvehicle," says Wang, who designed China's first carrier rocket more than 40 years ago. "We also need to make very thin and light solar panels."

Li Ming, vice-president of the China Academy of Space Technology, says, "China will build a space station in around 2020, which will open an opportunity to develop space solar power technology."

MGL: Trust the Chinese to seize on this idea. Its plausible, and right up Beijing's street.  No dissent allowed on microwave radiation in the back garden either. (Naysayers fret on what happens if the powerful microwave beam should accidentally incinerate downtown San Francisco, where the likes of Google and Musk think, plan and machinate on this piece of engineering)



Floods halt Chilean lithium, potash and iodine production

Freak rainfall has caused Chile's SQM, the world's largest producer of lithum, to suspend some of its Atacama desert salar plants as a precautionary measure. Other companies with assets in the region, such as Albermarle, may follow suit if weather conditions continue to hinder operations, while Argentinian lithium projects are also rumoured to have been affected.

The torrential rain has prompted the Chilean government to declare a state of emergency

MGL: Chile's weather is now disrupting Copper, Lithium and Potash deliveries.  For Lithium, Chile represents about 10% of the global market at 45k mt pa.

Precious Metals

China gold flows to hit Q1 record

Withdrawals from the Shanghai Gold Exchange (SGE) remain exceptionally high despite being expected to drop following the Chinese New Year holiday. In the three weeks of trading since the holiday’s end, withdrawals from the exchange have totalled 149 tonnes which would seem to belie other reports that demand is slipping.

The latest figure from the SGE is for the movement of 53 tonnes out of the Exchange during week 11 (ended March 20), following 51 tonnes a week earlier and 45 tonnes in week 9. Total to March 20 is thus already 561 tonnes. So withdrawals from the SGE appear to be rising week on week at a time when they would normally expect to be falling back after the holiday buying spree has ended. Should the gold flows out of the exchange continue at this kind of rate, then the Q1 total figure will be of the order of 620-630 tonnes – comfortably a new Q1 record.

Even at the lower end of the likely Q1 flow level this would be 10% up on the previous highest Q1 withdrawal amount, which was 564 tonnes (this has almost been reached already with flows for seven working days yet to be announced) recorded a year ago when the full year figure was 2,102 tonnes. QI withdrawals will thus undoubtedly set a new record.

If this increase figure is indicative of the year ahead the China gold flows, as represented by SGE withdrawals, could this year reach a new record 2,300 tonnes or more – getting on for 75% of new mined supply assuming this is flat this year – CPM suggests, though, it will actually be 4.6% higher as recent new projects and expansions reach full capacity.

MGL: China's wealthy, who are largely associated with Jiang Xemin's faction, are fleeing China in record numbers, and taking gold with them.  We are more and more convinced that China's gold demand is a direct response to the new Politburo. Prior to 2011 China was simply not a factor in gold demand worldwide. The trouble is, these figures pick up one side of the trade. What happens when the refugee arrives in, say, Singapore and starts selling the bullion back to the market?


Gold Shorts at record.

Hedge funds are betting that gold’s recent rally won’t last and are holding the biggest wager ever that prices will decline.

The net-long position in gold dropped by 9.9 percent to 31,653 futures and options in the week ended March 24, according to U.S. Commodity Futures Trading Commission data published three days later. That was the lowest since December 2013. Short holdings rose for a seventh straight week to 84,022 contracts, the highest since the data begins in 2006.

Even as futures climbed for two straight weeks, some investors have shied away from the metal. Global holdings in exchange-traded products backed by bullion declined every week in March. The dollar is headed for the longest run of monthly advances since at least 1967 against a basket of six currencies, lowering demand for gold as an alternative investment.

“Most of the hedge funds are relying on dollar strength as being the primary determining factor in decreasing positions,” Jeff Sica, who oversees $1.5 billion as president and chief executive officer of Circle Squared Alternative Investments in Morristown, New Jersey, said by telephone March 27. “As long as we see dollar strength, you’re going to see the hedge funds get progressively less bullish.”Image title

MGL: Last fall we shifted our view on gold from outright bear, to 'boring trading range', sort of $1150-$1300. Today we're looking at a world full of nasty potential macro accidents (Brazil: corruption; Russia-Ukraine; Middle East muslim civil war, China crackdown, and the list goes on.), and looking at junior valuations (what few are left trade below any reaonable NPV, which is unusual.), now we add this arrow to our bullish quiver. 

Everyone is  a bear on gold. 

We add Kaminak to the buy list.
Mcap $192m
Capex required $303m

All resource open at depth and on margins.


Base Metals

Copper Rebound as Miners Struggle on Output

Copper will rally this year on continued supply constraints and robust demand amid economic recoveries in the U.S., Europe and Japan, according to Barclays Plc.

The metal, used by investors as a gauge of global economic strength, will average $6,313 a metric ton in 2015, with prices climbing the most in the quarter through June, analysts including Suki Cooper said in a report dated March 30.

Copper declined 3.4 percent this year, extending its worst annual loss since 2011, as a property slump in China sapped demand in the world’s biggest consumer. Prices won’t follow the slump in oil or iron ore, which fell more than 40 percent last year, as those raw materials “underwent revolutions on the supply side” while copper producers struggle to boost output, Barclays said. Commodities fell to a 12-year low this month as crude oil tumbled amid rising supply.

The metal “is continually constrained on the supply side, and that is unlikely to resolve itself in the near future,” the bank said. “Prices have sold off by 9 percent over the past six months, which has prompted the question, is copper the next iron ore or oil in 2015? We believe the answer is no.”

Periodic disruptions including labor disputes and accidents limit supplies, while declining ore grades increase costs and decrease output, the bank said. The amount of supply disruption so far this year is within the bank’s range of allowance, while more may occur.

Global economic expansion this year will support growth in demand for refined copper, of which a third is used in construction for pipes and wires and a third in industrial machinery, Barclays said. China accounted for 46 percent of the market in 2014, with Europe, North America and Japan taking 32 percent, the bank estimates.

“Because we believe the fundamentals of the copper market show a tight market, we remain bullish for the year,” it said.

MGL: We're reverting to first principles here:

1> Supply disruptions tend to stop commodities falling.
2> DEMAND makes them go up!

Plat/Gold says demand is weak:

Image title

Tax breakthrough at Rio Tinto's Mongolia copper mine -source

Image titleRio Tinto and Mongolia have made a breakthrough in a tax dispute that has been among issues stalling development of the $6.5 billion Oyu Tolgoi copper mine, according to an official familiar with the government's position.

Disputes over costs and taxes have delayed an expansion of the mine that would extend its life beyond an estimated 15 years.

"Misunderstandings and issues surrounding the tax climates have been resolved," the official told Reuters, without specifying the terms of an agreement or what other issues needed to be resolved for the next underground phase of the project to go ahead.

"The parties are working towards agreeing on the commercial terms of the underground project," added the official, who asked not to be named because no announcement had been made yet.

Last year, Rio handed Mongolia a proposed memorandum of understanding that would provide consent to move forwards with the expansion project.

Walsh added that there "are issues we're working through with the government, and I'm hopeful we'll bring to resolution."

MGL: The tax issue was small beer compared to the $2bn bill Mongolia faces if RTZ moves ahead on phase 2. So options:

1> Swap equity for an NSR: RTZ has said they dont like this one.
2> RTZ lends Mongolia the money to fund the expansion, and recovers it as the mine produces. 
3>Mongolia borrows the money. 

We're not sure it matters. TRQ, the quoted entity that owns Oyu Tolgoi, is trading at five year lows. Its a huge deposit. Expectations have collapsed.

Any deal will be a boon to Turquoise shareholders. The intersting question becomes whether the equity market is in such a foul mood with the miners that it simply ignores the good news. That would be bullish, and imply that finally, mining equity is in the right place to consider some buys.


Alcoa to shut Sao Luis smelter in Brazil

Aluminium maker Alcoa Inc said on Monday it would shut the remaining 74,000 metric tons of capacity at its Sao Luis smelter in Brazil due to weak metal prices and high costs.

The refinery at Sao Luis will continue normal operations, Alcoa said.

The company said on March 6 that it would evaluate 500,000 metric tons of smelting capacity and 2.8 million metric tons of refining capacity for possible curtailment, closure or sale.

Once smelting is stopped at Sao Luis on April 15, Alcoa will have idled about 740,000 metric tons, or 21 percent, of its smelting capacity, the company said.

Alcoa idled 97,000 tons of smelting capacity at Sao Luis in 2014.

MGL: Between Rusal and Alcoa alone we have 1.4m mt of Al idled now, thats some 3% of global capacity between these two companies.


Steel, Iron Ore and Coal

Iron ore price level dips to unheard level on opening of Week 14

Week began with the worst fears coming seemingly getting closer with spot iron ore price level dipping by another 2%. Demand and supply imbalance continuing to haunt the market hopes of any revival kept dwindling with each passing day.

Benchmark 62 percent grade iron ore for immediate delivery to China .IO62-CNI=SI fell 2.2 percent to USD 52.90 a tonne on Monday. The figure is a record low since The Steel Index began releasing the data near the end of 2008.

The price of iron ore, for immediate delivery at the port of Qingdao in China, dropped 4% on Friday to USD 53.14 per tonne, according to Metal Bulletin – the lowest level since the daily pricing index began in 2009.

Iron ore futures for September delivery on the Dalian Commodity Exchange closed down 2.4 percent at CNY 409 per tonne, the lowest since it was launched in October 2013.

Much in line with the market trend and slow buying Stockpiles of imported iron ore at China's major ports reached 100.130 million tonnes by March 27 significantly higher than the previous week.

MGL: Thats $43 or less in Australia. Fortescue begins to loose money, and only BHP, RTZ, and Vale actually enjoy cash returns. Iron ore bear enters the long painful end of the bear market.  Iron ore begins to look like coal, not really much further downside (unless the dratted Indian capacity actually stages a return!), but its hard to bull with Beijing's current policy mix. 


Baosteel executive under investigation for corruption

A top executive of China's Baosteel Group, the parent of Baoshan Iron & Steel, is being investigated for "serious disciplinary violations", China's corruption watchdog said on Tuesday, as Beijing intensifies its war on deep-seated graft.

President Xi Jinping has warned that corruption threatens the survival of China's ruling Communist Party and his two-year anti-graft campaign has brought down scores of senior officials in the party, the government, the military and state-owned enterprises.

"Serious disciplinary violations" is the term usually used to refer to corruption in China.

The graft watchdog, the Central Commission for Discipline Inspection, named the Baosteel official as Vice President Cui Jian but gave no further details in a short statement.

A spokesman for Baosteel, China's second-largest steelmaker and the world's fourth largest, said the company was aware of the investigation and was watching developments but had no further immediate comment. Cui could not be reached for comment.

The commission's anti-graft efforts at state firms coincide with the imminent roll-out of ambitious new guidelines to overhaul China's inefficient state sector.

The party has targeted 26 major state-owned firms for inspections this year, includingChina National Petroleum Corporation, Sinopec Group, China National Offshore OilCorp, Shenhua Group, China National Nuclear Corp, China Southern Power Grid andChina Power Investment Corp.

MGL: Anti corruption efforts seem to proceed SOE reform. In Baoshan's case it is associated with merger gossip with Wuhan, and thats a radical change in long held policy. Formerly the big 4 were used to rescue the small fry, but with 2 of the big 4 maybe merging, we're thinking 'consolidation'.

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