Mark Latham Commodity Equity Intelligence Service

Thursday 25th May 2017
Background Stories on www.commodityintelligence.com

News and Views:

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    Macro

    Sand: rarer than one thinks?

    Sand covers so much of the earth’s surface that shipping it across borders—even uncontested ones—seems extreme. But sand isn’t just sand, it turns out. In the industrial world, it’s “aggregate,” a category that includes gravel, crushed stone, and various recycled materials. Natural aggregate is the world’s second most heavily exploited natural resource, after water, and for many uses the right kind is scarce or inaccessible. In 2014, the United Nations Environment Programme published a report titled “Sand, Rarer Than One Thinks,” which concluded that the mining of sand and gravel “greatly exceeds natural renewal rates” and that “the amount being mined is increasing exponentially, mainly as a result of rapid economic growth in Asia.”

    http://www.newyorker.com/magazine/2017/05/29/the-world-is-running-out-of-sand

    According to CEO Bryan Shinn, though, we're still in the early innings of shale's post-crash growth. 

    We believe our industry will remain tight in the near future due to 3 main factors: First, our industry must add capacity to meet customers' needs. Our internal estimates and current sell side reports estimate industry sand proppant demand to be about 75 million tons here in 2017, growing to over 100 million tons in 2018, with some estimates as high as 147 million tons. Our industry will be short capacity and we cannot let sand become the bottleneck for the completions industry.

    We're short on capacity

    The frack sand business isn't as simple as it sounds. Sure, it's selling a rather raw commodity, but you can't just scoop up sand with an excavator and dump it in a rail car. One thing that producers are particular about today, for example, is mesh size -- a measure of sand grain size. The higher the number, the finer the sand. According to Shinn, demand for more smaller grains means that the overall production capacity of the industry doesn't reflect the amount of sand that can be delivered to customers, and that means the industry is well short on supply.

    [O]il sand is not fungible within that 100-million-plus tons of projected 2018 demand. Unlike many industrial products, there is a lot of friction in the sand market for a variety of reasons, including logistics, quality differences and mesh sizes. Therefore, we're on average to see 20% to 25% more total supply than demand before our markets come into balance. So for example, if 2018 demand is 110 million tons, that implies that supply and demand balance around 135 million tons of effective capacity. Today, even after estimated reactivations of idle capacity, our industry will only have approximately 90 million tons of effective capacity, thus leaving a 45-million-ton shortfall versus projected 2018 needs.

    [E]ven all the likely capacity additions that are being talked about are not enough. We think there could be an additional 10 million to 15 million tons of brownfield capacity added in the next 12 to 18 months, including our own expansions and perhaps as much as 20 million to 25 million tons of greenfield capacity being added locally in the Permian. All of which will be needed, if current demand estimates prove accurate. Even if our estimated 35 million tons of potential brownfield and greenfield additions come online, the market will still be short.

    There is one reason why investors should care about this supply issue: price. If effective capacity is still below total demand, then sand suppliers should have strong pricing power over oil and gas producers. 


    Changing our customer relationships

    Oil and gas producers aren't naive. They see this effective capacity vs. total capacity dynamic playing out and the consequences for prices down the road. So U.S. Silica is taking advantage of this situation by changing its contract structure with customers. Here's Shinn on the changes. 

    [C]ustomers do come in to us to lock in sand supply for the next 3 to 5 years. We're using these discussions to form deeper relationships with the companies that we expect to be the long-term winners. We're also working on the next generation of agreements that can better weather the cycle, both for our customers and for U.S. Silica. And... rapid growth in proppant demand represents a massive opportunity for [U.S. Silica's logistics service] Sandbox. Keep in mind that this new local sand phenomenon is not just an opportunity for U.S. Silica to substantially increase sand sales. All this new capacity has to get to the wellhead and we believe that Sandbox is the ideal delivery solution with an unmatched combination of flexibility, efficiency, and scalability.

    While U.S. Silica's Sandbox logistics service can increase margins on per ton sold. Investors should be most pleased with the idea that customers are lining up to sign 3 to 5 year supply contracts. The idea of having volumes and prices locked in for several years should make U.S. Silica a much more stable company over the long haul. 

    New investment paying off

    U.S. Silica's management believes that the future of its business is supplying both the sand and the transportation & logistics associated with that sand. That's why it bought logistics specialist Sandbox during the downturn and is investing heavily in expanding that business today. According to Shinn, management is already quite pleased with the results and plans to spend even more on this service throughout the year. 

    We also saw very strong growth in both volumes and profitability at Sandbox. In Q1, loads shipped were up 84% sequentially. We now have almost 40 active crews across the major basins and are well on our way to doubling that number by the end of this year.


    A bottleneck coming for the North American oil industry?

    For all the good news in the American oil and gas business today, Shinn did give a word of caution. Growth rates this high can be great, but eventually, they start to expose cracks in the value chain.

    It seems like there are just not enough frac crew horsepower and other services out there right now. And so I think that it's a great opportunity for our service company customers as things starts to catch up a bit here, where we've -- as we've seen the ducts go up, there could be a surge coming. And I think that's the good news. The bad news is it's going to stress everybody's supply chains again, and I think that could lead us into another round of substantial pricing increase as well. So we'll see how that plays out.

    Exploration & production at the $50 a barrel range is the equivalent of walking a tightrope for producers. Many can grow production at today's prices, but that is predicated on lower prices for oil services and commodities like sand. If the industry grows too fast and puts pricing pressure on one component, then well economics could take a turn for the worst rather quickly. Investors should keep an eye on this dynamic in the coming quarters. If we see a quick rise in sand prices or a logistics bottleneck, the industry could be headed for a rapid deceleration.



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    Vedanta Resources FY core profit rises less than expected


    Mining and energy group Vedanta Resources Plc on Wednesday posted a 36.6 percent rise in its full-year core profit, driven by firmer commodity prices, but failed to meet analyst expectations.

    The company said earnings before interest, tax, depreciation and amortization rose to $3.19 billion for the year ended March 31, missing analysts' average estimate of $3.25 billion.

    Shares of the company, which produces iron ore, copper, aluminum, zinc and oil, were down 1.6 percent to 626.45 pence in early trade on the London Stock Exchange.

    Vedanta bounced back this year after it had been hit hard by falling commodities prices that have added to the pressure the company is facing due to its immense debt pile.

    "I am optimistic that the improvement in commodity markets we have experienced this year may be with us for the foreseeable future," Chairman Anil Agarwal said in a statement.

    "Prices in copper, aluminum, zinc, iron ore, oil and gas (markets) have all shown a strong recovery last year, so we approach FY2018 with a cautious optimism and a continuing discipline in our capital allocation."

    Vedanta announced a final dividend of 35 cents per share, bring the total dividend for the year to 55 cents per share, 83 percent higher than the total payout last year.

    The company also said its search for a chief executive to replace Tom Albanese is well underway. In March, the company said it extended Albanese's contract by five months until the end of August.

    Revenue rose 7.3 percent to $11.52 billion, above analysts' average estimate of $11.45 billion, according to Thomson Reuters I/B/E/S.

    Earlier this month, Vedanta Ltd, the Indian unit of diversified energy group Vedanta Resources, reported a quarterly profit compared with a year-ago loss, helped by improved commodity prices and higher zinc volumes.

    http://www.reuters.com/article/us-vedanta-res-plc-results-idUSKBN18K0PW
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    Asian ethylene-naphtha spread sinks to four-month low


    The spread between ethylene and naphtha prices in Asia sank $35.63/mt day on day to be calculated at $601.50/mt Tuesday, the lowest level since January 18, 2017, when it was at $593.88/mt, S&P Global Platts data showed.

    But the spread is still higher than a typical breakeven spread of $350/mt.

    The price spread has been narrowing since early May in tandem with fast-falling ethylene prices.

    On Tuesday, the CFR Northeast Asia ethylene marker fell $40/mt day on day to be assessed at $1,060/mt -- the lowest level since November 30, 2016, when it was assessed at $1,050/mt.

    Margins for some ethylene derivatives turned positive in the middle of May, as spot ethylene prices fell.

    Styrene monomer production margins for one, turned positive on May 17 and remained positive on Tuesday at $12.70/mt, Platts data showed.

    Still, this failed to trigger any significant upside to the spot ethylene market, as persistent deepsea supply from places such as Japan and the US continued to weigh heavily on supply.

    On Tuesday, a spot cargo from Iran was heard sold at a range of $1,030-$1,040/mt on a CFR China basis, lower than a deal done level heard last week at $1,080/mt CFR China.

    Market sources said the Asian ethylene market would likely remain bearish as ethylene production in Asia is seen normalizing after steam cracker turnaround season in the region.

    In South Korea, Korea Petrochemical Industry Co. plans to restart its sole naphtha-fed steam cracker in Onsan around the end of May after completing an annual maintenance that started mid-April, Platts reported earlier.

    During the shutdown, the steam cracker's ethylene production capacity will be raised to 800,000 mt/year from 470,000 mt/year, and propylene output to 500,000 mt/year from 230,000 mt/year.

    In Japan, Asahi Kasei Mitsubishi Chemical Ethylene Corp. plans to restart its 495,000 mt/year naphtha-fed steam cracker in Mizushima on July 3, from an ongoing annual maintenance that started May 10, Platts reported previously.

    https://www.platts.com/latest-news/petrochemicals/tokyo/asian-ethylene-naphtha-spread-sinks-to-four-month-27835524
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    Oil and Gas

    Kuwait says OPEC, non-OPEC could deepen oil cuts


    OPEC and non-member oil producers could deepen output cuts or extend them for a year when they meet in Vienna this week as they seek to clear a global stocks overhang and prop up the price of crude, Kuwait said on Wednesday.

    The top oil producer in OPEC, Saudi Arabia, favors extending the output curbs by nine months rather than the initially planned six months, to speed up market rebalancing and prevent crude prices from sliding back below $50 per barrel.

    OPEC members Iraq and Algeria as well as top non-OPEC producer Russia also said they support a nine-month extension.

    As ministers gathered in Vienna for informal consultations, Saudi OPEC ally Kuwait said discussions included the possibility of deepening the cuts or prolonging them by 12 months.

    "All options are on the table," Kuwaiti oil minister Essam al-Marzouq told reporters.

    The Organization of the Petroleum Exporting Countries meets formally in Vienna on Thursday to consider whether to prolong the deal reached in December in which OPEC and 11 non-members agreed to cut output by about 1.8 million barrels per day in the first half of 2017.

    On Wednesday, a ministerial monitoring committee consisting of OPEC members Kuwait, Venezuela, Algeria and non-OPEC Russia and Oman meets in the Austrian capital to discuss the progress of cuts and their impact on global oil supply. Saudi Arabia, which holds the current OPEC presidency, will also attend.

    Several delegates and ministers including Algeria said they did not believe cuts could be extended to a full year.

    DEEPER CUTS

    Possible surprises could include a deepening of the cuts, but this would likely be minor because the non-OPEC producers that are expected to join the accord for the first time on Thursday, such as Turkmenistan and Egypt, are fairly small.

    A more substantial cut was unlikely, one OPEC delegate said, "unless Saudi Arabia initiates it with the biggest contribution and is supported by other Gulf members".

    OPEC's cuts have helped push oil back above $50 a barrel this year, giving a fiscal boost to producers. By 1029 GMT (6:29 a.m. ET) on Wednesday, Brent crude was up around 0.2 percent at $54.37 a barrel. [O/R]

    But the price rise has spurred growth in the U.S. shale industry, which is not participating in the output deal, thus slowing the market's rebalancing with global stocks still near record highs.

    "This (stocks decline) is a bit tricky as production cuts cause higher prices which will incentivize more production for the U.S. shale oil and reduce the impact of the production cuts. So it's a bit cyclical," said Sushant Gupta, research director for consultancy Wood Mackenzie.

    Algeria's energy minister said he believed stocks remained stubbornly large in the first half of 2017 because of high exports from the Middle East to the United States.

    "Thankfully, things are improving and we started seeing a draw in inventories in the United States," Noureddine Boutarfa told Reuters.

    One industry source close to OPEC said the group could also send a message about tighter exports but it was unclear how that could be presented on Thursday.

    Boutarfa said extending output cuts by nine months would help to ease a global glut by the end of 2017, when inventories should decline to their five-year average: "Before the end of the year, prices may go above $55 a barrel".

    http://www.reuters.com/article/us-opec-oil-idUSKBN18K0W9

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    China's record April crude influx from N America seen set to rise further



    The rising crude stream from North America to China is expected to continue in May and June after it hit a record high of 905,070 mt or 217,820 b/d in April, market sources said Thursday.

    Shipments from the US and Canada totaled 768,002 mt and 137,068 mt respectively in April, up from just 30,383 mt from the US and zero from Canada a year earlier, data released Wednesday by the General Administration of Customs showed.

    The barrels from North America were lured by a narrow Dubai-WTI spread to make the almost two-month voyage to China.

    Independent refineries took around 408,000 mt of the US crude that arrived in China in April, according to S&P Global Platts data.

    Shandong-based independent refiner Wonfull Petrochemical bought 1 million barrels each of the Mars and Thunderhorse cargoes that arrived in April, while Dongming Petrochemical received 1 million barrels of SGC crude from the US.

    Over May and June, Wonfull is due to receive another 1 million barrels of Mars crude from the US each month, while Sinopec's Maoming Petrochemical and Dongxing refinery in southern Guangdong province will share one VLCC each month from the US in both May and June.

    But for July, refiners expect less crude to be available from the US.

    "Refineries there will complete maintenance and need more feedstock to produce gasoline for the peak season in summer," a source from Wonfull said.

    Canadian crude cargoes were also expected to arrive in China in May.

    At least two cargoes totaling 1.71 million barrels (233,290 mt) of Eastern Canadian crude were sold to China in February, of which 1 million barrels have arrived; suggesting the balance 710,000 barrels was en route.

    PetroChina's trading arm Chinaoil took 1 million barrels of Eastern Canadian cargo from Husky in February, when another 710,000-barrel cargo comprising Husky's White Rose and Hibernia was also said to be headed to China, although the buyer was unclear.

    China's crude arrivals from North America displaced volumes from Europe, which slumped 20.5% month on month in April. This was despite its top supplier in the month, Russia, sending 0.6% more crude than in March, at 4.72 million mt in April.

    The decline was due mainly to a slump in arrivals from the North Sea. There were no supplies from Norway, compared with 265,814 mt in March, while shipments from the UK tumbled 69.8% over the same period to 458,032 mt.

    China's supply from OPEC member countries also fell 5.2% month on month, although it was up 5.9% year on year. China's top OPEC suppliers Angola, Saudi Arabia, Iraq, Iran and the UAE posted month-on-month decreases of between 0.9% and 30.3%.

    China's total crude imports in April averaged 8.4 million b/d, down 8.8% from March but up 5.6% year on year.

    https://www.platts.com/latest-news/oil/singapore/chinas-record-apr-crude-influx-from-n-america-27836085
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    Indian oil minister seeks 'preferential treatment' from OPEC

    Indian oil minister seeks 'preferential treatment' from OPEC

    As a major buyer of OPEC crude, India is hoping to leverage its ties with the oil producer bloc to gain "preferential treatment," the country's petroleum minister Dharmendra Pradhan told S&P Global Platts.

    In an interview after attending the second annual OPEC-India Dialogue in Vienna on Monday, Pradhan said that every strategic relationship requires "good terms," and with India's economy driving global demand growth, the south Asian country is seeking to increase its influence with major oil producers.

    "We don't want a mere buyer/seller relationship," he said. "We need energy security as we are giving production security. We are not tied up with anybody. Our strategic relationship is we need good terms. We need preferential treatment."

    India, which relies on OPEC for 86% of its oil imports, started its annual dialogue with the producer group in late 2015.

    Pradhan said its relationship with OPEC was trending in a positive direction but was also keen to emphasize that the country was always "open" to diversifying its crude supplies to other producers and that its options were escalating.

    In June 2015, Pradhan urged OPEC to reduce its premium to Asian countries and provide what he said were fair and reasonable prices. But this time he admitted wanting to go beyond this concept.

    "Today we go beyond an Asian premium," he said. "We got some benefits in previous years with this kind of initiative and I am hopeful OPEC has taken cognizance of a growing market of India, with the kind of reform we are initiating."

    India has made steady policy progress since October 2014, when it deregulated diesel prices. The government then moved to boosting LPG penetration to reduce reliance on subsidized kerosene, while at the same time revamping the LPG subsidy system.

    This was followed by the announcement in March last year of a new upstream policy to attract much-needed investment in exploration and production.

    OPEC Secretary General Mohammed Barkindo, for his part, said the organization was cognizant of India's oil demand growth potential, as the country is expected to increase its oil consumption more than 150% by 2040 to 10.1 million b/d from its current 4 million b/d.

    "With OPEC home to over 80% of the world?s proven crude oil reserves, and with many of its member countries well-positioned for exports to India, it is clear that this relationship will expand further," Barkindo said in prepared remarks before the start of the OPEC-India Dialogue.

    The dialogue came three days before ministers from OPEC and 11 major non-OPEC producers meet in Vienna to review an output cut deal aimed at drawing down oil inventories.

    Pradhan said India was appreciative of the effort to stabilize oil prices, which will hopefully reverse two years of major declines in upstream exploration. The deal, signed late last year, commits OPEC to 1.2 million b/d in production cuts, while the non-OPEC participants agreed to cut 558,000 b/d. Saudi Arabia and Russia, the world's two largest oil producers, have advocated for a nine-month continuation of the deal through March 2018.

    "As a consuming country, we appreciate the energy security," Pradhan said. "If the price will not stabilize, the capex will reduce and ultimately it will affect the supply chain. Rightly, OPEC took this initiative for stability of the price."

    IRAN DISPUTE

    More than half of the OPEC member countries are crucial crude oil suppliers to India, namely Saudi Arabia, Iraq, Venezuela, Nigeria, Iran, Kuwait, UAE and Angola.

    But there are some signs that Indian state refiners are beginning to cut Iranian crude purchases due to a political row over the impasse on the development of the Farzad B gas field, which has still not been finalized after more than two years of negotiations.

    The minister reiterated that Iran should award the development of the 18.75 Tcf Farzad B gas field to an Indian company, given India's support during Western-backed sanctions that hobbled Iran's oil exports until they were lifted in January 2016.

    "There are [no issues] in our relationship but India is a sovereign country and we will be looking in our best economic interest," Pradhan said. "We expect Iran to reciprocate because during difficult and challenging times, India stood by Iran. We continuously imported their oil to our refineries and paid we paid back every penny."

    He added that since ONGC Videsh (OVL), the overseas arm of India's state-run Oil and Natural Gas Corp., discovered the field, he was hopeful that it would be awarded to an Indian company with a viable business model.

    The consortium of OVL, Oil India Ltd and Indian Oil Corp. discovered the Farzad B gas reserves in 2008. OVL and IOC each hold a 40% interest in the block, and OIL 20%.

    "Not only in Farzad B but in total we want to have mutual business good terms with Iran," Pradhan said.

    Iranian President Hassan Rouhani committed in 2015 to Indian Prime Minister Narendra Modi that the Farzad B gas field would be excluded from any potential overseas investment other than from India.

    Initially, both the countries aimed at concluding a deal by November 2016, but agreed to reschedule the deadline to February 2017, after they could not finalize OVL's $10 billion development proposal that included a gas liquefaction plant.

    OVL subsequently submitted a revised $3 billion plan earlier this year that excluded the liquefaction plant, but it has yet to be approved.

    Iranian exports to Asia have actually been falling sharply in the past few months, with shipments to its biggest customers, China and India, dropping 28% month-on-month in April.

    Exports to India in April fell by almost 300,000 b/d from the previous month as this row raises the risk of Iran losing one of its biggest oil consumers.

    https://www.platts.com/latest-news/oil/vienna/interview-indian-oil-minister-seeks-preferential-27835408
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    U.S. lawmakers gear up to block Trump plan to slash oil stockpile


    A Trump administration plan to sell off half the U.S. emergency crude oil stockpile to help balance the budget faces opposition in Congress, with lawmakers from both parties worried the proposal would undermine the drilling industry and make the country vulnerable to supply shocks.

    The White House's 2018 budget proposal, sent to Congress on Tuesday, proposes raising nearly $16.6 billion by 2027 by gradually selling millions of barrels from the reserve, which now holds about 688 million barrels of oil in underground caverns in Texas and Louisiana. News of the proposal had briefly sent oil prices tumbling on concern it would oversupply the market, but prices recovered and finished slightly higher on hopes that OPEC and other countries would extend supply cuts.

        "We should not be selling oil from the Strategic Petroleum Reserve now," said Senator John Hoeven, a Republican from North Dakota, a leading oil producer state. "We should use the SPR for emergencies, and selling now would disrupt the markets."

    The SPR sell-off plan is part of a broader White House proposal to balance the U.S. budget that is meant as starting point to debate policy with Congress - which will ultimately pass its own version.

    Whether the SPR proposal will survive the budget process could depend in part on Republican Senator Lisa Murkowski of Alaska, a member of the appropriations committee and the head of the chamber's energy panel. In 2015, when Congress was considering selling a modest amount of oil from the reserve to help fund a transportation bill, Murkowski opposed the idea, saying the reserve should not be used as an ATM.

    Murkowski did not directly address the SPR plan in a statement on Tuesday, but she said "a President's budget is more of a vision than anything else." Efforts to reach Murkowski on Tuesday were not successful.

        Murkowski's Democratic counterpart on the energy panel, however, raised concerns that liquidating half of the reserve would run counter to the original purpose of the facility, which Congress created in 1975 to protect against global oil disruptions that could harm the U.S. economy.

        "We are not going to let Donald Trump auction off our energy security to the highest bidder," Senator Maria Cantwell of Washington said in an email.

    The Arab oil embargo of the early 1970s led to chaos at U.S. filling stations and fears of long-term damage to the economy.

    Much has changed since then: U.S. oil production has surged in recent years and supply from Canada has increased, displacing a large portion of the imports from some less stable Middle Eastern suppliers.

    U.S. oil imports from the producer group OPEC have fallen to less than 3.2 million bpd in 2016 from more than 5.4 million barrels per day in 2008, according to the U.S. Energy Information Administration.

    Richard Newell, a former head of the EIA, noted that the plan could cause the United States to break its obligation as a member of the International Energy Agency to hold 90 days’ worth of oil imports on reserve. Currently, the SPR holds about 145 days’ worth of oil imports.  

    "There are a number of possible scenarios under which reducing the SPR to the levels proposed would violate our IEA treaty obligations," he said.

    JOBS AND SECURITY

    Lawmakers from both parties also said releasing oil from the SPR could dampen crude prices and hurt drilling companies still recovering from a price crash in 2014. Trump had campaigned on a promise to revive the drilling industry.

    "Putting that much oil on the market, you will see a lot of layoffs in the energy business," said Representative Gene Green, a Democrat from Texas.

    Mick Mulvaney, the head of the Office of Management and Budget told reporters on Tuesday, however, there are ways to tap the SPR slowly and "telegraph it over the course of time" to avoid having a dramatic impact on prices.

    Representative Pete Olson, a Texas Republican, said the SPR infrastructure needs improvement because tanks and other equipment are constantly exposed to corrosive salt air. But he did not rush to embrace a sell-off of oil, saying that the larger budget deserves careful scrutiny.

    Some oil industry representatives also came out against the proposal. Randall Luthi, President of the National Ocean Industries Association said the plan to cut the SPR in half threatened national security. He added he also opposed a proposal in the budget to cut federal oil royalty payments to U.S. Gulf Coast states - funds meant to help them defend their coasts from hurricane damage.

    http://www.reuters.com/article/us-usa-budget-energy-idUSKBN18J35Z

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    Summary of Weekly Petroleum Data for the Week Ending May 19, 2017


    U.S. crude oil refinery inputs averaged 17.3 million barrels per day during the week ending May 19, 2017, 159,000 barrels per day more than the previous week’s average. Refineries operated at 93.5% of their operable capacity last week. Gasoline production increased last week, averaging over 10.2 million barrels per day. Distillate fuel production increased last week, averaging 5.2 million barrels per day.

    U.S. crude oil imports averaged 8.3 million barrels per day last week, down by 296,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.2 million barrels per day, 8.1% above the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 725,000 barrels per day. Distillate fuel imports averaged 101,000 barrels per day last week.

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.4 million barrels from the previous week. At 516.3 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories decreased by 0.8 million barrels last week, but are near the upper limit of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories decreased by 0.5 million barrels last week but are in the upper half of the average range for this time of year. Propane/propylene inventories increased by 1.5 million barrels last week but are in the lower half of the average range. Total commercial petroleum inventories decreased by 3.5 million barrels last week.

    Total products supplied over the last four-week period averaged 20.2 million barrels per day, down by 0.8% from the same period last year. Over the last four weeks, motor gasoline product supplied averaged over 9.4 million barrels per day, down by 1.9% from the same period last year. Distillate fuel product supplied averaged over 4.2 million barrels per day over the last four weeks, up by 3.6% from the same period last year. Jet fuel product supplied is up 10.4% compared to the same four-week period last year.

    Cushing down 700,000 bbl

    http://ir.eia.gov/wpsr/wpsrsummary.pdf

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    Lower 48 production up 20,000 bbld


                                                      Last Week  Week Before Last Year

    Domestic Production '000.......... 9,320           9,305        8,767
    Alaska ............................................... 505               510            502
    Lower 48 ....................................... 8,815           8,795        8,265

    http://ir.eia.gov/wpsr/overview.pdf
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    Crestwood boosting Permian gas infrastructure with processing plant, pipeline


    Eight months after forming a pact with Royal Dutch Shell to feed a new natural gas gathering system in the Permian Basin, midstream operator Crestwood Equity Partners is building a processing plant and pipeline that will attract flows from that system and a second one.

    The new infrastructure will provide producers in the region greater access to markets in the US West, along the Gulf Coast and Mexico.

    In search of higher returns and boundless growth opportunities, billions of dollars are being pumped into the shale play that stretches across West Texas and southeastern New Mexico. While some analysts have cautioned the basin is at risk of becoming saturated, which could drive up costs, the flurry of activity has continued, with investors securing acreage, bolstering drilling operations and adding new facilities.

    Crestwood, a master limited partnership based in Houston that is involved in the gathering, processing, storage, transportation and marketing of natural gas, NGLs and crude oil, said Wednesday that its 200 MMcf/d processing plant will be constructed near Orla, Texas, through a joint venture with private equity firm First Reserve.

    The project also includes a 33-mile, 20-inch pipeline connecting its existing Willow Lake gathering system in Eddy County, New Mexico, to the Orla plant, which will offer liquids handling and multiple residue and NGL interconnects. The expansion, with an initial capital budget of $170 million, is expected to be in service in the second half of 2018.

    Crestwood's goal is to "create a supersystem that spans over 2 million acres located in the heart of the most active development counties" in the Permian's Delaware Basin sub-territory, said Robert Phillips, CEO of the operator's general partner.

    The latest project follows Crestwood's announcement in September that it was partnering with oil and gas major Shell on a deal in which Crestwood would build a new gathering system that would serve gas production across a large acreage position of Shell's in Loving, Reeves and Ward counties, Texas. Crestwood said at the time that system would be designed for output of about 250 MMcf/d and was targeted to be in service by July 1 of this year.

    The Nautilus system is expected to support the new Orla processing plant, which will also draw volumes from producers that supply the Willow Lake system, including Concho Resources and ExxonMobil.

    "The Orla plant will provide needed incremental processing capacity and enhanced netbacks to producers through improved connectivity to the best NGL and residue gas takeaway options out of the basin," Crestwood said in a statement.

    Crestwood is among a crowded field of midstream operators seeking to increase processing and takeaway capacity out of the Permian amid a surge in exports from the Gulf and pipeline deliveries to Mexico, which relies heavily on US gas supplies to meet its power needs. While the Permian is sought after for its abundant oil, it also is rich with associated gas.

    Just this week, Lucid Energy completed an expansion of the Red Hills natural gas processing facility in New Mexico, boosting capacity there to 310 MMcf/d. Last month, private equity firm Blackstone Group announced a $2 billion purchase of EagleClaw Midstream Ventures, which serves oil and gas producers in the Permian.

    And, in January, Targa Resources said it would pay up to $1.5 billion to Outrigger Energy to expand its oil and gas gathering and processing capability in the Permian.

    https://www.platts.com/latest-news/natural-gas/houston/crestwood-boosting-permian-gas-infrastructure-21831901
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    Kinder Morgan prices Canadian IPO at C$17 per share: term sheet


    U.S. pipeline company Kinder Morgan Inc (KMI.N) has priced its Canadian initial public offering at C$17 per share, according to a term sheet of the deal seen by Reuters on Wednesday.

    The company's pricing, which fell below its initially projected range of C$19 to C$22 per restricted voting share, suggests that demand from investors was not as strong as previously expected. Kinder Morgan has been looking to raise capital to fund a project to expand its Trans Mountain pipeline.

    Kinder Morgan now plans to offer 102.94 million shares, raising C$1.75 billion ($1.3 billion) in gross proceeds, the term sheet, which was dated Wednesday, showed.

    Kinder Morgan spokesman Dave Conover declined to comment.

    The move comes during a period of political uncertainty in British Columbia, with election results in the province expected to weigh on Kinder Morgan's Trans Mountain pipeline expansion plans. The pro-pipeline Liberals failed to win a majority and voters in the province may elect a minority government that includes parties that oppose the project.

    Election results are still being tallied, including a recount in three key districts. An unfriendly provincial government could pose obstacles to Trans Mountain, which runs through British Columbia, even though the federal government has approved it

    http://www.reuters.com/article/us-kindermorgan-canada-ipo-idUSKBN18K2TX
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    US Northeast DUCs to continue boosting gas output


    The puzzling drawdown in US Northeast inventories of drilled-but-uncompleted wells -- in sharp contrast to the broader industry trend -- is likely to continue buoying regional gas production in the near term as risk-averse producers cash in on recent infrastructure expansions and elevated gas prices.

    DUC counts in the Northeast have continued falling this year through April, according to the latest data available from the US Energy Information Administration.

    In the Marcellus, producers have added just three new wells to inventory since December. Over the same period, inventories in the Utica have fallen by 14 and are now at their lowest on record dating back to late 2013. Over the last five months, that drawdown lifted regional production by more than 2% to a record-high average of 23.7 Bcf/d in May to date, according to Platts Analytics, compared with output around 23.2 Bcf/d in December.

    In the EIA's other five production-reporting areas, well inventories continue to rise, led by the Permian where operators have cataloged 476 new DUCs this year alone.

    And while the motivation behind the recent builds in the Permian, Eagle Ford, Haynesville, Bakken and Niobrara likely vary by producer and basin, the Northeast drawdown in DUCs appears to be driven by a single factor -- uncertainty.

    "It makes more sense to bring wells online right now than to put them into inventory," says Breanne Dougherty, head of natural gas research at Societe Generale.

    "Forward prices for 2018 are below $3/MMBtu and there's a lot of uncertainty about capacity expansions due to pipeline construction delays," Dougherty said in a recent interview.

    Chief among those uncertainties is the fate of the greenfield 3.25 Bcf/d Rover Pipeline. While developer Energy Transfer Partners has maintained its targeted in-service date of July for Phase I of the project, a recent order from the Federal Energy Regulatory Commission -- putting a stay on about half of the project's remaining horizontal directional drilling -- has raised serious doubts about the proposed timeline.

    E&PS ARE CASHING IN ON PRIOR INVESTMENTS

    Looming uncertainty over future prices and upcoming capacity expansions are making now a good time for exploration-and-production companies to cash in on earlier investments, says Dougherty.

    In 2016 alone, some 12 new expansion projects in the Northeast added over 4.1 Bcf/d of new pipeline capacity. While all of those projects are helping to relieve regional pipeline constraints, four projects in particular have boosted production takeaway capacity by nearly 1.5 Bcf/d, including the Utica Access Project, the Gulf Markets Expansion, Rockies Express Zone 3 Capacity Enhancement and Lebanon West II.

    Those new expansions have allowed producers to bring online old, uncompleted wells that they've long planned to bring into production, according to Dougherty.

    "This has been a long-anticipated part of the drilling evolution in the Northeast," she said.

    RECENT CAPACITY EXPANSION BOOSTING PRICES

    Beyond promoting production growth, recent capacity expansions have also allowed prices to rise as incremental demand reaches long-sequestered hubs such as Dominion South.

    The Rockies Express project specifically, which added 800 MMcf/d of new production takeaway capacity upon entering service last December, has fundamentally transformed supply-demand dynamics at the hub.

    On Monday, the 12-month forward price curve at Dominion South stood at a 50-cent/MMBtu discount to Henry Hub gas, according to S&P Global Platts data. As recently as November, the 12-month forward curve was trading at nearly $1.25/MMBtu discount to benchmark prices. "Northeast producers have been under price and infrastructure pressure for a long time and I think that the current environment is being looked on favorably," Dougherty said.

    By late 2017, elevated prices and recent capacity expansions are expected to provide sufficient incentive to lift Northeast production to nearly 25 Bcf/d, Platts Analytics forecasts show.

    https://www.platts.com/latest-news/natural-gas/denver/us-northeast-ducs-to-continue-boosting-gas-output-21817900
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    U.S. oilfield service firms lag shale recovery; old deals hold


    U.S. oil services companies have been doing a lot more work as recovering oil prices have lifted the shale industry from a two-year slump, but producers have been pocketing much of the new cash generated by rising output and squeezing service providers to keep costs down.

    Oil service companies that provide the crews, labor and technology used to drill, construct and operate wells are lagging the recovery in U.S. shale producers. The lopsided situation could chill the production rebound or keep it from spreading to more shale fields, executives of services companies said.

    Rising demand for certain services means raising salaries to attract workers and refurbishing equipment, while often being paid under fixed contracts signed during harder times, these companies said. That has pressured margins, leading to further losses. Law firm Haynes and Boone LLP said the U.S. oilfield sector experienced 127 bankruptcies between 2015 and April 2017.

    Among the 10 largest oilfield service providers, just five were profitable last quarter, the same number as a year ago. In contrast, seven of the top shale oil producers posted a first quarter profit, up from just one a year ago.

    "Both of us have to be able to earn a return and give something back to our shareholders," David Lesar, chief executive officer of Halliburton Co (HAL.N), the world's second-largest oilfield services company, said in an interview.

    The sector is struggling to change onerous contract terms set when oil prices were much lower. Service companies agreed to those prices out of necessity; they needed cash flow to cover expenses. Those contracts, some of which extend into next year, are contributing to losses, preventing some companies from adding equipment or moving it to oil fields where it could be put to use.

    The expiration of those contracts should allow prices for high-demand services to rise, oilfield services executives said.

    Even so, some of the changes that shale oil producers made during the downturn are likely to stick, making it harder for service firms to drive up prices.

    Oil producers have better returns today because of those cost controls, winning greater favor among investors.

    "Many of (oil producers) have reduced capex spending and are increasing capital returns to investors," said Tom Bergeron, a senior fund manager for Frost Investment Advisors.

    Shale firms have demanded deals that unbundle the functions of service providers, allowing them to spread the work out among more companies, who then have less leverage to raise prices.

    Those practices allowed shale producer profits to start rebounding just a few months after oil prices began to recover from the $26 a barrel nadir of February 2016 Clc1. But it left services companies without a way to immediately benefit from the U.S. crude benchmark's return to about $50 a barrel.

    Service companies hope they can raise prices by the second half of this year, but for now there is limited scope to pass along costs, Chakra Mandava, an operations executive at Nabors Drilling USA, (NBR.N), said at an energy conference this month in Houston.

    Nabors blamed its first quarter loss on an inability to offset costs for new staff and equipment.

    Keane Group (FRAC.N), which supplies pressure pumping services, one of the highest demand services in the shale patch, reported a first-quarter loss due largely to long-term, fixed price contracts, despite a 59 percent jump in revenue from the fourth quarter.

    One proposal that might resolve the disconnect between oil price moves and contract changes is to tie deals to the cost of crude.

    Apache Corp (APA.N), which plans to drill some 250 wells this year in the Permian Basin, is looking to tie what it pays for services to the U.S. crude benchmark CLc1 - converting fixed service costs to a variable cost in order to cushion the hit to earnings of future oil-price changes.

    That way, if crude prices rise, Apache could afford to pay more for services, but would pay less if oil drops. Chevron (CVX.N) also is tying some of its contracts to indexes in a bid to remain competitive, the company said at a recent security analysts meeting.

    "We're just opening up the business model to what's possible," Michael Behounek, a senior drilling advisor for Apache, said in May at a drilling conference in Houston. "We want to put a dampener in place."

    "They [service companies] don't want to ride the roller coaster either. If we go down this route, it might be good for both parties."

    http://www.reuters.com/article/us-shale-oilservices-cost-analysis-idUSKBN18L0H5

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    Shell, ConocoPhillips oil sands share selloff risks flooding market


    Canadian equity markets risk being swamped with oil sands company shares this year as Royal Dutch Shell (RDSa.L) and ConocoPhillips (COP.N) prepare to offload C$6.8 billion ($5.1 billion) worth of stakes in two domestic producers, just months after acquiring them.

    The two firms acquired shares in Canadian Natural Resources Ltd (CNQ.TO) and Cenovus Energy (CVE.TO) as part of deals struck earlier this year to sell off oil sands assets.

    Sources told Reuters on Tuesday that Shell has decided to sell its C$4.1 billion stake in CNRL while ConocoPhillips has said it is not a long term investor in Cenovus.

    The plans to flip the stakes within months of acquiring them is raising fresh doubts about investor confidence in the world's third-largest crude reserves. Shell's decision to sell is a "surprise and not immaterial" to CNRL, a source familiar with CNRL's thinking said. The Canadian producer declined to comment on Wednesday.

    Shell owns roughly 8.8 percent of CNRL and has not said whether sales would be done via public offering or IPO.

    Foreign companies have sold $22.5 billion worth of Canadian oil sands assets this year alone, due to depressed global crude prices, high operating costs and limited pipeline access to market.

    The latest planned stake sales are more gloomy news for a region struggling to compete with cheap U.S. shale plays.

    With Canadian producers spending heavily this year on buying up the fleeing majors' assets, there is also a limited list of potential domestic buyers for the sale.

    Shell's quick exit may also make it difficult for other majors contemplating an exit, including BP (BP.L) and Chevron, to propose share-based structures, that take part of the consideration in stock and rest in cash, as they prepare to sell their Canadian oil sands business, people working on energy deals said.

    "I would be very cautious about investing in more traditional oil production like the oil sands on a longer-term basis," said David Cockfield, managing director of Northland Wealth Management, which holds some Canadian Natural stock on behalf of clients. "The game plan is just not working anymore."

    These shares could attract interest from hedge funds, private equity and institutional investors if priced at a discount to the market price, energy sector analysts said.

    Asian oil companies could also potentially be interested in owning oil sands assets without the risk of operating them themselves, according to Wood Mackenzie analyst Peter Argiris.

    Canadian Prime Minister Justin Trudeau's government is seen as more open to Chinese investment than its predecessor though the oil sands will prove the big test.

    CNRL shares closed down 0.6 percent on the Toronto Stock Exchange, while Cenovus shed 1.2 percent. Year-to-date CNRL is down 4.1 percent and Cenovus has fallen 37 percent.

    Under the terms of the deal to sell most of its oil sands business to CNRL, Shell has to wait four months from closing, which has not happened yet, to sell the shares.

    ConocoPhillips' sale of Cenovus shares is likely to have a bigger impact given the U.S firm owns nearly one-fifth of the Canadian company, a stake worth around C$2.7 billion.

    "The share overhang is one of the reasons we should not expect much movement upward in the Cenovus‎ share price," said Len Racioppo, managing director of Coerente Capital Management, a Cenovus shareholder that in April asked Canadian regulators to halt the deal.

    ConocoPhillips has to wait six months from the close of the deal, which occurred last week, for a lock-up period on the shares to end and will look to liquidate its position over time, Chief Financial Officer Don Wallette said on a conference call in March, adding the company will do it an orderly way as it is in their best interest.

    "There are such big tranches of stock coming out we run the risk of flooding the market," said Colin Cieszynski, chief market strategist at CMC Markets. "If two of them hit in the same week, or even the same month, it could be an issue because there's so much money involved."

    http://www.reuters.com/article/us-shell-divestiture-canada-analysis-idUSKBN18L014
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    Alternative Energy

    Beijing's 88% heating demand fuelled by clean energy



    Clean energy now accounts for 88% of heating supply in China's capital Beijing, as the government calls for energy saving and emissions reduction, showed one research report.

    China's coal consumption have been dropping for three consecutive years, said the report on clean heating in the Beijing-Tianjin-Hebei and neighboring areas, released by China Economic Information Service.

    Beijing has dismantled coal-fired boilers in central districts, while coal-powered heating system in Tianjin, Hebei and Henan has been replaced by electricity, gas, clean coal, geothermal and other clean energies, according to the report.

    By 2020, China will use industrial waste heat to substitute 50 million tonnes of coal consumption for heating supply, and replace 10 million tonnes of coal with shallow geothermal energy (annually), said Zhao Huaiyong, a senior official of the National Development and Reform Commission in summit on clean heating on May 18.

    http://www.sxcoal.com/news/4556470/info/en
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    China to operate Asia's first commercial carbon capture and storage project


    Asia's first commercial carbon capture and storage project will begin to operate in northwestern China's Shaanxi province next year, said an executive of Shaanxi Yanchang Petroleum (Group) Co Ltd.

    Yanchang Integrated Carbon Capture and Storage Project, with an annual capacity to capture 360,000 tonnes of carbon dioxide, is projected to increase the company's oil recovery of low permeability fields by about 8%. The average level was currently between 14% and 15%.

    CCS captures carbon dioxide emissions generated by power stations and steel companies, then transports and pumps them deep underground. The captured carbon could also be used to produce beverage-grade CO2.

    Two projects boosted the company's capacity to capture CO2 by a total of 1.3 million tonnes per annum.

    The government has made efforts in recent years to capture millions of tonnes of carbon dioxide generated by power stations and steel companies.

    http://www.sxcoal.com/news/4556472/info/en
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    Stunning new lows in cost of large-scale solar and battery storage


    A new contract signed by a utility in Arizona has set a new low price for large-scale solar power in that country, but more importantly has also smashed expectations of the combined cost of large-scale solar and battery storage.

    Tucson Electric Power (TEP) this week announced it would buy solar energy from a new 100MW solar plant at the historically low price of less than US3c/kWh – less than half of what it had agreed to pay in similar contracts over the last few years.

    The project will also include 30MW/120MWh of battery storage, and the company says that the power purchase agreement for the combined output is “significantly less” than US4.5c/kWh – nearly two-thirds cheaper than the previous such contract struck in Hawaii, and well below the cost of a gas-fired peaking plant.

    “This new local system combines cost-effective energy production with cutting edge energy storage, helping us provide sustainable, reliable and affordable service to all of our customers for decades to come,” said Carmine Tilghman, senior director of Energy Supply and Renewable Energy for TEP.

    According to Utility Dive in the US, the solar and storage array – to be built by NextEra – represents a major cost reduction for combined solar and storage facilities since the signing of the last significant PPA — which was a $US0.11/kWh Hawaii contract signed only in January this year.

    The development is significant because it is confirmation that dispatchable renewable energy can compete with peaking gas-fired generators on price.

    This is believed to be already the case in Australia, although it is yet to be tested because no large-scale storage arrays have yet been built. Two auctions are currently underway in Victoria and South Australia.

    Still, Tony Concannon, the head of Reach Solar, which is building a 220MW solar farm in South Australia, and the former head of the Hazelwood brown coal generator, says solar and storage is already cheaper than gas-fired generation and the combined cost would soon be “well below” $A100/MWh.

    AGL has also agreed that renewables plus storage are cheaper than gas, meaning that gas will no longer serve as the “tradition fuel” because it is not cheap enough. A report from Reputex also said that solar and storage is now cheaper than peaking gas plants in Australia. The Victorian government also agrees, saying renewables and storage are cheaper than gas.

    ITK analyst and RenewEconomy contributor David Leitch says while the exact prices for the storage component in the TEP deal in Arizona have not been provided, it appears that the underlying price for the combined solar and storage is less than $A100/MWh unsubsidised.

    “It’s nice to see some transactions that confirm our underlying expectations,” Leitch says. “It also shows the advantages of a low cost of capital and the fact that the ITC is available in the USA for storage as well as the underlying energy production.”

    It is the first time in the US that a solar contract has fallen below US3c/kWh, although it has already occurred in Dubai (which holds the record low of 2.54c/kWh), Chile and Mexico. The prices in those countries are unsubsidised, and the US price includes the benefit of a 30 per cent tax credit, which pushes the unsubsidised price back up to near US4c/kWh.

    TEP has already added three battery storage systems to its local energy grid this year, including a 10MW NextEra facility, also owned and operated by an affiliate of NextEra Energy Resources.

    It says these batteries can boost power output levels more quickly than conventional generating resources to maintain the required balance between energy demand and supply on our grid. But it says it cannot replicate all the abilities of peaking gas plants.

    TEP says that the new solar and storage array, along with a planned 100MW wind farm, will provide enough power to serve the annual electricity needs of nearly one out of every three Tuscon homes.

    However, TEP is likely to further raise the ire of rooftop solar advocates because it is arguing that the falling cost of utility-scale solar is a reason to slow down the uptake of rooftop solar.

    It, and other utilities in Arizona have already won approval to replace “net metering” – where solar homeowners got the prevailing retail cost of electricity for any exports of excess solar power into the grid – to a new formula based around the cost of wholesale electricity and unavoidable costs.

    TEP this week used the record low price of large-scale solar to justify the reduction in feed-in tariffs, and to argue that rooftop solar should only be allowed in a “responsible and equitable” manner.

    “TEP’s customers currently pay nearly four times as much for most excess energy from rooftop solar power systems,” the company says. “While the cost of power from large-scale solar arrays has fallen nearly 75 percent over the last five years, the rate at which TEP compensates rooftop solar customers for excess solar energy has risen to historically high levels.”

    “Focusing our resources on the development of cost-effective community scale systems allows us to provide more solar energy to more customers for less money,” Tilghman said. “The best way to help solar grow in our community is by planning and siting systems in an organized, responsible and equitable manner.”

    In a recent filing, TEP proposed a solar export rate of US9.7c/kWh, compared to current rates of US11.5c, and proposed new  grid-access and demand charges and a $4 meter-reading charge for solar customers.

    http://reneweconomy.com.au/stunning-new-lows-in-cost-of-large-scale-solar-and-battery-storage-13929/

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    Base Metals

    Iluka flags zircon price surge


    Mineral sands miner Iluka on Wednesday flagged an increase in its zircon reference price of $130/t, to $1 100/t, effective from July this year.

    The reference price is the benchmark against which a range of Iluka’s zircon products are priced, with the miner telling shareholders that its weighted average received price could and does vary from this, reflecting specific customer arrangements, market channels, geographies and productmix.

    Iluka in April this year reported a 118.5% increase in revenues for the three months to March, as sales volumes increased, with revenues reaching A$218.5-million during the quarter.

    http://www.miningweekly.com/article/iluka-flags-zircon-price-surge-2017-05-24

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    Steel, Iron Ore and Coal

    Indonesia's revenue needs override coal curbs as oil take drops


    Indonesia will miss coal production targets as the government needs to lean on revenue from the fuel to make up shortfalls from its take from oil and gas output, ensuring the country keeps its top coal exporter status, officials said.

    Southeast Asia's largest economy will need to boost coal shipments as revenues from the sector are critical for the government. This will undermine planned coal production curbs seen as crucial to Indonesia's policy of using the fuel as the backbone of its electric power development plans.

    Indonesia is targeting a 20 percent increase in non-tax revenues from the mining sector, which includes coal, in 2017 to 32.48 trillion rupiah ($2.44 billion), up from 27.15 trillion rupiah in 2016, to replace declining oil returns, according to Agung Pribadi, director of coal business at the mining ministry.

    This target will make it very difficult for the mining ministry to limit output, he said.

    "Oil (revenues) have declined, (so) the government needs additional revenues and they also hope for an increase from coal," Pribadi said on the sidelines of a conference last week.

    Non-tax revenues from oil and gas roughly halved in 2016 to 44 trillion rupiah ($3.31 billion) from 78.2 trillion rupiah in 2015. That same year, mining revenues were 29.3 trillion rupiah. The coal sector contributes about 80 percent of the mining non-tax revenues.

    Growth has slowed in resource-rich Indonesia as exports, investment and citizen's purchasing power have all declined following a plunge in commodity prices.

    Indonesia's coal production is expected to climb 5 percent in 2017 and 2018 from an estimated 440 million tonnes in 2016, as miners ramp up output due to improved prices.

    Those gains are more than the targets of 413 million tonnes for 2017 and 406 million tonnes for 2018 set by the National Development Planning Agency. The agency has set a production cap of 400 million tonnes from 2019 onward in an effort to secure domestic supply.

    Indonesia's coal consumption is expected to increase to 101 million tonnes this year from 90.6 million tonnes in 2016, and the government is concerned that Southeast Asia's largest economy could exhaust reserves unless output controls are enforced.

    Indonesia's ambitious 35 gigawatt power development program, of which around 40 percent is now under construction, is expected to roughly double the country's demand for coal used for power by 2024 to 151 million tonnes from 73.2 million tonnes in 2016, according to state power utility Perusahaan Listrik Negara (PLN).

    "Coal ... will be part of the backbone of (Indonesia's) energy sovereignty," said Satry Nugraha, a staff expert to the energy and natural resources minister, at the conference. "On the other hand this country still needs non-tax revenue from the coal industry."

    Among other issues complicating efforts to curb coal output, enforcing production and export controls on miners holding permits from provincial governments is proving difficult, Pribadi said.

    "These businessmen have exploration permits, and at the same time have rights to produce," said Pribadi. "Once I've completed exploration and I want to increase production no one can stop me, right?"

    http://www.reuters.com/article/us-indonesia-coal-supply-idUSKBN18K0QJ
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    Vietnam set to approve coal-fired power plants worth $7.5 bln


    Vietnam expects to grant investment licences for three coal-fired power plants worth a combined $7.5 billion in early June, the country's investment minister said.

    Although Vietnam wants to boost renewable energy output amid resources scarcity and environmental issues, it has been mostly reliant on coal-fired and hydro power plants to meet its annual electricity demand growth of around 11 percent.

    The projects by Japanese, South Korean and Saudi Arabian investors are expected to receive licences ahead of Vietnamese Prime Minister Nguyen Xuan Phuc's visit to Japan next month, investment minister Nguyen Chi Dung told Reuters on Tuesday.

    Details provided by the ministry showed South Korea's Taekwang Power Holdings Co. and Saudi Arabia's ACWA Power would invest $2.07 billion for a 1,200-megawatt thermal power plant.

    Each investor would have a 50-percent stake in the plant and commercial operation is expected to start in 2021.

    Japan's Marubeni Corp and Korea Electric Power Corp would invest $2.79 billion in a 1,200-megawatt plant, with operation expected to start in 2021. The investors will also share half of the investment each.

    Japan's Sumitomo Corp would invest about $2.64 billion into a 1,320-megawatt plant, with an expected starting date of 2022, the ministry said.

    http://www.reuters.com/article/vietnam-energy-idUSL4N1IQ3V1
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    India assures domestic coal supply to plants based on imported feedstock


    India’s Coal Ministry has laid down rules to ensure coal supply to thermal powerplants that were constructed based on imported coal as part of a strategy to achieve ‘zero dependency’ on coal imports over the next three years.

    Rules and guidelines for supplying the thermal powergeneration sector require Coal India Limited (CIL) to commit assured supplies to all independent power producers (IPPs), which have constructed plants based on imported feedstock, a Coal Ministry official said.

    The move was in line with the India’s government’s target that all government owned and operated power companies would achieve ‘nil imports’ of coal by March 2018, he added.

    In the case of IPPs, the Coal Ministry stated that all the thermal power plants, which had power purchase agreements (PPAs) based on pricing and economics of imported coalwould be offered coal supply linkages through the auction route.

    A significant benefit offered to IPPs through replacement of imported coal with domestic supplies was that while powercompanies would have to mandatorily pass on any cost benefit accruing from lower costs of domestic fuel, the powerproducers at the same time would have the freedom to revise power tariff upwards in case of any rise in price of domestic coal, the official said.

    This would offer a leeway to IPPs based on imported coal that had been hit by a recent Supreme Court order. In a verdict last month, the court overturned a decision of the Appellate Tribunal for Electricity (APTEL) permitting powercompanies like Adani Power and Tata Power to charge higher tariff than that stipulated in their respective PPAs.

    Tata Power and Adani Power had sought  higher tariffs from APTEL in view of a rise in the cost of Indonesian coal and the tribunal had ruled in favour of the companies saying that rise in cost of imported coal was force majeure. The Supreme Court subsequently overruled the verdict of the tribunal, leaving these power companies without feedstock for their plants or the option to import coal and offset higher costs by hiking electricity tariffs.

    Ministry officials however pointed out that while CIL supplies would be a bailout for power producers stranded without coal, the government had a long-term goal of stopping all imports, which could potentially save the country $6.2-billion a year.

    According to latest data released by Central Electricity Authority (CEA), Indian power producers imported 4.84-million tons of coal during April 2017, down 15% over corresponding month of previous year. Total coal imports by power companies during 2016/17 have been estimated at 65-million tons, down 19% over previous financial year.

    http://www.miningweekly.com/article/india-assures-domestic-coal-supply-to-plants-based-on-imported-feedstock-2017-05-24

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    Iron ore price drops to 7-month low


    After recovering some of the losses suffered at the beginning of May in recent days, the iron ore price turned sharply lower again on Wednesday with a surprise downgrade spooking markets in top consumer China.

    The Northern China import price of 62% Fe content ore fell 4.2% to $59.30 per dry metric tonne, the lowest since mid-November according to data supplied by The Steel Index. Benchmark prices are down a whopping 37% from their February highs.

    Lower grade ore with 58% iron content declined to $43.80 a tonne, while 65% Fe dipped to $71.50, also a seven month low.

    The weakness comes on the back of fresh worries about the health of the Chinese which consumes nearly three-quarters of the world's seaborne ore.

    On Wednesday ratings agency Moody's downgraded the country's sovereign debt for the first time since 1989, citing concerns about  diminishing returns from Beijing's debt-fuelled economic stimulus programs and the country's overheated property and building markets.

    While China's output of steel reached record daily rates in April, record high stockpiles of nearly 140m tonnes have sparked concern over the actual strength of end-user demand.

    According to data from Steelhome so far in 2017 inventories at the country's major ports have risen by just over 2 million, surpassing the 20.8 million added over the whole of last year.

    Elevated stocks have not dampened importer enthusiasm however with total imports for the first four month of the year climbing nearly 9% to 353 million tonnes.

    Bloomberg quotes Axiom Capital Management's Gordon Johnson as saying port stockpiles are mainly lower grade and following a recent slump in coking-coal prices, Chinese steelmakers "will probably shift toward this, and away from high-grade material":

    "As this dynamic takes hold, we expect iron ore prices to sharply correct lower," Johnson said in an email.

    Trading at $153 on Thursday premium hard Australian FOB met coal has now halved since hitting a mid-April peak of $314 a tonne according to TSI data. The coking coal correction was expected as exports in Queensland return to normal following cyclone outages.

    Scrap supply

    Another headwind for iron ore demand is increasing use of scrap in China.

    In the past low pig iron prices and little recycling meant scrap did not play much of a part in the domestic industry, especially when compared to places like Europe where steelmakers charge up to around 18% scrap in basic oxygen furnaces (around 20% scrap is a technical limitation).

    Platts reports basic oxygen steelmaking plants in China have nearly doubled their use of scrap to as much as 17.5%.

    Chinese steel companies are retooling to take advantage of a slump in scrap (typically around 90% Fe content) prices "amid a glut resulting from a nationwide crackdown on induction furnaces, an official at China Baowu Steel Group said this week":

    Assuming output of 700 million mt/year of hot metal, an increase in scrap charge rates to 15% from 9% would see additional hot metal output of 42 million mt, displacing 70 million mt of iron ore, the Baowu official said after the event.

    http://www.mining.com/iron-ore-price-drops-7-month-low/
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    Blow to iron ore price as Chinese steelmakers opt for scrap


    World Steel Association data showed a 5% year-on-year jump in global steel production in April to 142.1m tonnes. It's a continuation of robust growth in the industry which increased output by 5.1% during the first four months of the year of 2017 to 550.5 million tonnes.

    The 50-year old industry body estimates that steel production in China, which is responsible for just shy of half the global total rose a healthy 4.9% year on year in April climbing from an average of 4.6% during the first quarter.

    We expect lower construction activity in coming months as the government’s measures to take the heat out of the property sector have an impact

    We expect lower construction activity in coming months as the government’s measures to take the heat out of the property sector have an impact. What’s more, in early May, Tangshan City in China’s key producing region, Hebei, launched a clampdown on mills that fail to meet emission standards which could curb output this month.

    In the past low pig iron prices and little recycling meant scrap did not play much of a part in the domestic industry, especially when compared to places like Europe where steelmakers charge up to around 18% scrap in basic oxygen furnaces (around 20% scrap is a technical limitation).

    Platts reports basic oxygen steelmaking plants in China have nearly doubled their use of scrap to as much as 17.5%.
    An increase in scrap charge rates to 15% from 9% would displace 70 million tonnes of iron ore


    Chinese steel companies are retooling to take advantage of a slump in scrap (typically around 90% Fe content) prices "amid a glut resulting from a nationwide crackdown on induction furnaces, an official at China Baowu Steel Group said this week":

    Assuming output of 700 million mt/year of hot metal, an increase in scrap charge rates to 15% from 9% would see additional hot metal output of 42 million mt, displacing 70 million mt of iron ore, the Baowu official said after the event.

    The Northern China import price for 62% Fe iron ore fines was $61.90 a tonne on Monday, down more than 20% year-to-date on growing fears of an oversupplied market.


    http://www.mining.com/blow-iron-ore-price-chinese-steelmakers-opt-scrap/

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    Australia's Fortescue rolls over discount for June term cargoes


    Fortescue Metals Group, Australia's third-largest iron ore producer, has rolled over the discount for its flagship products to its contract customers for loading in June, FMG's term customers said Tuesday.

    The discount for FMG's 56.7%-Fe Super Special fines loading in June was 30%, they said, unchanged from May.

    For its 58.3%-Fe Fortescue Blend fines, the discount is 25% for May-loading cargoes, unchanged from the month before. For 57.3% Kings fine, the discount remained constant at 10%.


    These products are priced using Platts 62%-Fe IODEX assessment with an adjustment for iron content.

    A term customer of the miner said demand for low grade Australian fines were stronger as mills were looking to blend them with high grade materials from Brazil.

    "If you use Carajasfines to blend with Super special fines, it is more economical than just using Newman, Pilbara Blend or MAC fines," the customer said.

    The customer said it used Fortescue blend and King fines in its furnaces and that constituted about 30% of their steel feedstock in their furnaces.

    "[A] 30% discount is steep enough for their term customers to fulfill their contractual agreement in June," said the mill source.

    FMG was not available to comment.

    Sources said FMG typically offers contract customers two pricing periods based on Platts 62%-Fe IODEX assessments -- a monthly average or a five-day period before and after the date on which the NOR was issued at the discharge port.

    https://www.platts.com/latest-news/shipping/singapore/australias-fortescue-rolls-over-discount-for-26742286

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    Miner thinks small to resurrect big Canadian iron ore mine


    Champion Iron Ltd is thinking small with its plans to bring Quebec's giant Bloom Lake iron ore mine back to life. Chief Executive Michael O'Keeffe intends to slash costs while cutting millions of tonnes from a planned production expansion. The strategy runs counter to the traditional economy of scale formula, which bumps up production for proportional cost savings.

    It may prove a prescient approach as iron ore prices pull back from 30-month highs in February. The recovery sparked signs of life for a handful of hibernating miners in Canada's metal-rich Labrador Trough, straddling the provinces of Quebec and Newfoundland and Labrador, including Champion, Alderon Iron Ore and Tata Steel Minerals Canada.

    Champion is taking a different tack with Bloom Lake than its previous owner and North America's biggest iron ore producer, Cliffs Natural Resources, beginning with the price tag.

    Cliffs paid $4.9 billion for the mine in 2011, near the top of the market. Later it launched a $1.2 billion expansion to make the mine viable by doubling output to 16 million tonnes in a bid to help bring costs down.

    But as prices slumped, Cliffs suspended the money-losing operation. It sold the mine to Champion for C$10.5 million in 2015, a year when spot prices bottomed at $37 a tonne, from $190 in 2011.

    O'Keeffe, a former Glencore executive, believes other miners looking to buy Bloom Lake made calculations using Cliff's high-volume blueprint and were spooked by the costs.

    Walking "every inch" of the property, O'Keeffe told Reuters that he and Champion's chief operating officer David Cataford looked for ways to reconfigure operations that would squeeze costs to $50 per tonne of delivered concentrate from over $91.

    Rather than trucking ore in 240-ton trucks for processing, for example, the mine will use a 3.8 kilometer (2.36 mile) conveyer belt to move the steelmaking ingredient, Cataford said.

    And instead of trucking some 12 million tonnes of tailings waste to on-site storage each year, that material will move through pumps, said Cataford. A new recovery process and more efficient equipment, used to sift through iron particles, will goose recovery rates to 80 percent from 68 percent, explained O'Keeffe, and cut production costs by some $12 a tonne.

    "We had a view which was quite contrary to everyone else," said O'Keeffe: scrapping the growth project underway and matching costs with the "big guys."

    "What was in everyone's head was the only way to do this is expand. But your mining costs would have been more, and you'd have to spend a massive amount of capital," added O'Keeffe, who may be best known for building Riversdale Mining from a A$7 million ($5.23 million) coal explorer in Mozambique into a producer that Rio Tinto paid nearly A$4 billion to buy.

    Champion's board has yet to vote on a C$326.8 million mine restart plan, but the company said in a feasibility study it intends to be operating by the first quarter of 2018.

    The miner forecasts revenue of C$15 billion over a 21-year mine life, producing 7.4 million tonnes of concentrate annually. A lower stripping ratio - the amount of dirt removed to expose mineable ore - helps squeeze costs to $44.62 per tonne, while the high-grade concentrate price is seen at $78.40.

    At 66.2 percent iron content, the ore earns a premium above the industry standard 62 percent.

    Market jitters over rising low-cost global production, coupled with an oversupply of Chinese steel, have pushed spot prices down to $63.19 a tonne, from $94.86 in February.

    Clarksons Platou analysts said the consensus price among Asian steel industry companies they recently polled was $60 per tonne, though several expect a decline to mid-$50 before a longer-term climb above $60. Signs of cooling Chinese demand is another factor at play, with BMI Research recently cutting its forecasts to $50 from $55 a tonne in 2018.

    Even at prices in the mid-$50s, Champion is comfortable that it can repay debt and "keep our heads above water," O'Keeffe said. But he expects demand to skyrocket for Champion's "clean" concentrate, which will allow Chinese steelmakers to reduce emissions and pursue high-grade steel production.

    O'Keeffe, who recently announced C$40 million in bridge financing to restart the mine and a supply deal with Japanese trading company Sojitz Corp, acknowledges his opportune acquisition.

    "Cliffs were on the road to do this, they just ran out of time and money," O'Keeffe said. "So it's easy for us to come along and pick up and build all of this and implement a lot of the changes that Cliffs were already going to do."

    http://www.reuters.com/article/champion-iron-bloomlake-idUSL1N1IE0YW

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    US steelmakers seeing light at end of tunnel: Nucor CEO


    As steel has taken on a more prominent role in Washington in 2017, it's leading to a more positive outlook for US steel producers, according to Nucor CEO John Ferriola.

    "We can actually see a light at the end of the tunnel, and this time it's not a freight train coming at us," Ferriola said at the American Iron and Steel Institute and Steel Manufacturers Association joint 2017 general meeting, held Tuesday in Washington. "Things are looking up."

    Ferriola, who on Tuesday was elected to serve a second term as AISI chairman, said having a trade team in place under President Donald Trump's administration that includes members that have worked in or closely with the steel industry, including Wilbur Ross, Robert Lighthizer and Peter Navarro, will likely help steelmakers see some relief from issues that have dogged the US steel industry for years.

    "The Trump administration continues to show commitment to the steel industry and, very importantly, manufacturing as a whole," Ferriola said.

    Trump's recent executive orders have addressed issues that specifically affect steel, Ferriola said, and most notably, under Ross' leadership the US Department of Commerce in April announced it was conducting a Section 232 investigation regarding the US steel industry and the impact of steel imports on national security.

    "We welcome last month's 232 investigation that was initiated by President Trump and Secretary Ross because it sends a strong signal to China and other countries that this administration is serious about cracking down on trade abuses," Ferriola said.

    Additionally, steelmakers stand to benefit from the administration's decision to freeze new Clean Power Plan regulations and repeal rules adopted during the last eight years, he said.

    "The Obama administration imposed a number of major regulations, particularly targeting energy and the environment, that would have driven up our energy costs tremendously," Ferriola said. "Regulatory reform will be a positive step forward and encourage other manufacturing investment in the US.

    https://www.platts.com/latest-news/metals/washington/us-steelmakers-seeing-light-at-end-of-tunnel-21817918
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    ArcelorMittal agrees on concessions to seal delayed $897 million India joint venture


    ArcelorMittal, the world's largest steel producer, said on Wednesday it has agreed to make concessions to Steel Authority of India on technology transfer to seal a delayed $897 million automotive joint venture.

    The two companies are close to ironing out key commercial terms to close the deal, including non-compete and exit clauses as well as finalizing policy on arbitration, three sources with direct knowledge of the negotiations told Reuters.

    "In the interest of the strategic partnership, some concession from ArcelorMittal on technology has been extended," a company spokeswoman told Reuters, without giving further details.

    India's Steel Minister Chaudhary Birender Singh said on Monday the talks between ArcelorMittal and SAIL were in the "final stages", after a preliminary understanding signed in May 2015 lapsed on Sunday. Government officials said the timeline for the venture would get an official extension.

    Talks between the two companies had hit a roadblock over disagreement on revenue-sharing as well on technology transfer fees.

    The deal would help SAIL, which has been in the red for at least seven straight quarters, compete with local private rivals such as JSW Steel and Tata Steel who have foreign partnerships to make auto-grade steel.

    The proposed joint venture is also crucial for ArcelorMittal as India is the only big steel market where demand is rising fast and government policy is increasingly favouring locally made products.

    http://www.reuters.com/article/us-india-arcelormittal-sail-idUSKBN18K17G
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    Japan's chrome-moly steel demand robust despite slow car output: sources


    Demand for chrome-molybdenum alloy steel sheets, used for automotive components, has been robust in Japan despite major automakers cutting domestic production in the second quarter, market sources said Wednesday.

    "Demand [of chrome-moly alloy steel] has been firm since the start of the year, it has been continuing for almost six months," said one ferroalloy trader.

    Ferroalloy trade and supplier sources attributed strong Japanese exports of chrome-molybdenum alloy steel sheets, used for mufflers and other components, to Asian countries, as demand booster, despite some Japanese automakers cutting down output in the April-June quarter from the previous quarter.

    Domestic production at Japan's largest automaker Toyota Motor May is around 12,500 vehicles/day in May, dipping from 13,000-13,500 vehicles/day in January-March period, said one auto components maker source.

    S&P Global Platts could not confirm the near-term output plan with Toyota Motor, as the automaker does not usually comment on the current or the future output levels.

    "Toyota's output plan for June-July is 12,500 vehicles/day, and will probably remain at this level for August-September," said the source.

    "Steelmakers supplying alloy steel to Toyota Motor however, have been at full rate and has been keeping themselves very busy, thanks to export demand," said the trader.

    Japan's specialty steel exports, excluding stainless steel and construction steel, were 1.6 million mt over January-March, up 4% year on year, according to customs data. Further export breakdown by steel type could not be obtained.

    Strong chrome-moly alloy steel production has lead to an increase in spot demand for moly oxide and ferrochrome, traders said.

    "Some customers who have long-term moly contracts may have used up their options to increase volumes, and are coming to the spot market. Spot high-carbon ferrochrome inquiries have increased as well," said the trader.

    One specialty steelmaker was said to have bought over 10,000 mt of high-carbon ferrochrome, possibly of South African origin, through a spot tender two weeks ago, according to a second Japanese trader.

    There is a possibility of a large spot moly tender for over 40 mt in the coming weeks, said a third Japanese trader.

    Strong Japanese spot ferroalloy demand, however, has not contributed to higher moly or chrome prices as global markets elsewhere, notably China, stay dull, sources added.

    https://www.platts.com/latest-news/metals/tokyo/japans-chrome-moly-steel-demand-robust-despite-27835580
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    U.S. steelmakers argue for broad import protections on defence grounds


    U.S. steelmakers argued on Wednesday that products from oil drilling pipe to concrete-reinforcing bars need broad protection from imports on national security grounds, while foreign governments and firms argued that the industry is adequately meeting U.S. defence needs.

    The comments came at a U.S. Commerce Department hearing for a national security investigation into steel imports that could lead to broader tariffs or import quotas than the anti-dumping and anti-subsidy duties now in place on dozens of steel products.

    Commerce Secretary Wilbur Ross told the hearing he hoped to complete the review under a Cold War-era trade law by the end of June, much sooner than the 270 days allowed under the statute.

    American steel industry executives argued that a flood of imports has dangerously eroded their profitability and thus their ability to continue meeting very broadly defined national security needs.

    "Unfortunately, global overcapacity and unfairly traded imports threaten our ability to invest. Production overcapcacity in the steel industry has reached crisis levels," said John Ferriola, chief executive of top U.S. producer Nucor Inc.

    The executives said this not only applies to highly engineered armor plate for tanks and ships but to more mundane products such as steel tubing and "rebar," considered a commodity steel rod product used in construction of concrete buildings, roads and bridges.

    Commercial Metals Co (CMC.N) President Barbara Smith called rebar "a product of critical importance to this nation's infrastructure."

    AK Steel (AKS.N) Chief Executive Roger Newport said imports threatened the company's production of electrical steel used in power generation and transmission, potentially making the U.S. electrical grid dependent on imports.

    Gu Yu, first secretary of China's Ministry of Commerce, said there was no evidence that steel imports threatened U.S. national security, noting that dumping orders had sharply curtailed imports from China. He said U.S. needs "can be and are readily satisfied by U.S. domestic production."

    Some steel buyers said restricting certain imports would hurt their businesses because there were few or no domestic suppliers for certain products.

    Tracey Norberg, general counsel for the Rubber Manufacturers Association said all of the steel wire used in tire-making is imported and should be exempted from any duties.

    John Cross, chief executive of Steelscape LLC, a Washington state-based fabricator of metal building products, said his firm depends on steel imported into West Coast ports that offer lower shipping costs than shipments by rail from mills in the Eastern United States.

    http://www.reuters.com/article/us-usa-trade-steel-idUSKBN18K361

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