Mark Latham Commodity Equity Intelligence Service

Thursday 22nd September 2016
Background Stories on

News and Views:

Attached Files


    $195 Billion Asset Manager: "The Time Has Come To Leave The Dance Floor"

    Rivelle says that “the credit-fuelled expansion inevitably comes to a bad end,” Rivelle, chief investment officer for fixed income at TCW, said in a note sent to investors Tuesday. “We’ve lived this story before.”

    His other observations are just as dire in their stark admission of just how scary reality has become:

    over the course of the past 25 years, the traditional business cycle has been replaced with an asset price cycle. Rather than let recessions run their painful but necessary course, central bankers move forthwith to dispense the monetary morphine. The Fed’s playbook on this is well worn: first, policy rates are lowered. This triggers a daisy-chain of events: low or zero rates promote a reach for yield; the reach for yield lowers capitalization rates across a variety of asset classes which, in turn, spurs a rise in asset prices. Rising asset prices – the so-called wealth effect – “rescues” the economy by rebuilding balance sheets and restoring the animal spirits. And voila! Aggregate demand rises, businesses invest, and a virtuous growth process is launched.

    Well, maybe not so much. If it were all so simple, then why is it that after ninety something months of zero or near zero rates, growth is sputtering, the corporate sector is in an earnings recession, and productivity growth is negative?

    The explanation is simple: growth is not a simple function of higher asset prices.

    Which, incidentally means, that central bankers are now powerless.

    Rivelle concludes with an even more dire warning:"Face it: the central banking Emperors have no clothes... when the supposed solutions to the Fed’s dilemma are merely new “problems,” you know you are approaching the cycle’s end... successful, long-term investing is predicated on not just knowing where the happening parties are during the reflationary parts of the cycle but, even more importantly, knowing when the time has come to leave the dance floor. In our view, that time has already come."
    Back to Top

    Brazil's Vale shares jump on talk of fertilizer unit sale

    Shares in Brazil's Vale SA rose the most in almost 15 weeks on Wednesday on speculation the world's largest iron ore producer would announce the partial sale of a unit to U.S. fertilizer producer Mosaic Co later in the day.

    An O Globo newspaper online blog said Vale's board was scheduled to approve the $3 billion deal that would combine its fertilizer and phosphate assets. The blog, which did not say how it obtained the information, also said that the disposal of the remaining 25 percent of Vale's agricultural chemicals assets was being negotiated with an undisclosed bidder for $1 billion.

    Rio de Janeiro-based Vale and Plymouth, Minnesota-based Mosaic declined to comment. Three people familiar with the process told Reuters that, while an announcement of the deal was unlikely on Wednesday, the transaction was in an advanced stage.

    Preferred shares of Vale rose as much as 6.3 percent to 15.27 reais, the biggest intraday rise since June 3. The stock had shed about 7 percent over the past month, on concern that weak iron ore prices and a slower-than-expected pace in planned asset sales may delay efforts to cut debt.

    Based on the information of O Globo's Lauro Jardim blog, Mosaic would pay the equivalent of 15 times the unit's operational earnings, a "very accretive multiple," according to a Banco BTG Pactual trading desk note.

    On June 17, Reuters reported that Mosaic was eyeing the totality of Vale's fertilizer assets, in a cash-and-stock deal valued at about $3 billion. Vale has fertilizer assets in Canada, Brazil, Peru, Argentina and Mozambique.

    Brazil is the world's fifth-largest fertilizer consumer, and remains a key growth spot for fertilizer and phosphate producers. People familiar with the matter told Reuters talks with Vale have regained momentum in recent weeks after Canada's Agrium Inc and Potash Corp of Saskatchewan Inc announced a planned merger on Aug. 30.
    Back to Top

    India to fund major gas pipeline to boost eastern states

    India's government will partly fund a $2 billion gas pipeline project linking five eastern states to help kick-start economic growth in a region that has trailed the rest of the country, the oil minister said on Wednesday.

    The 2,500-km pipeline is to be built by state-run GAIL (India) Ltd, and this will be the first time the government has offered finance for such a project as part of Prime Minister Narendra Modi's plan for more balanced development.

    Oil Minister Dharmendra Pradhan said the government will meet 40 percent of the cost of the pipeline that will run through the states of Uttar Pradesh, Bihar, Jharkhand, West Bengal and Odisha, which together account for nearly 40 percent of India's 1.3 billion population.

    It will be the biggest pipeline project in the country and had won government approval in 2007 but could not move forward.

    "This will be the first time that government spending will be made for pipeline infrastructure. This will help in achieving the prime minister's vision of the economic development of the eastern states," Pradhan told reporters after a cabinet meeting.

    "The prime minister wants energy justice for all," he said.

    India's economic development has been concentrated in the western and southern states, where there is better infrastructure and more accessible energy supplies. These states get piped gas supplies for household and transportation.

    Pradhan said the government was hoping the new pipeline would help attract investment in the agro processing industry in the eastern region. The government has already removed the cap on foreign direct investment in the sector.

    The new pipeline will also help in efforts to revive three fertilizer plants, which Modi's campaign had promised to do in his 2014 election run.

    India's gas demand is expected to go up by as much as 10 million cubic meters a day once the pipeline is completed in a little more than two years.

    Natural gas accounts for about 6.5 percent of India's overall energy needs, far lower than the global average. India plans to raise the share of gas in its energy mix to 15 percent over the next three years.

    Attached Files
    Back to Top

    Oil and Gas

    Russian oil output surges as Opec talks loom

    Russian oil output rose to a record ahead of talks on supply with Saudi Arabia and other members of the Organization of Petroleum Exporting Countries next week.

    Output in September has been about 11.09 million barrels a day, the highest monthly average since the Soviet era, and reached about 11.18 million on Tuesday, Energy Ministry data show. Maintenance at Sakhalin Island in August capped output that month at just over 10.7 million barrels a day.

    Russia will meet fellow oil producers in Algiers on Sept. 28 to discuss the market as the global crude surplus keeps prices below $50 a barrel. President Vladimir Putin said Sept. 1 he’s confident producers can overcome differences that derailed a proposal to freeze supply in April. Yet the start of new Russian fields shows the country is keen to squeeze as much revenue from its oil resources while it can.

    “Russia keeps posting new record highs because neither Russia nor OPEC managed to agree upon freezing,” said Alexander Kornilov, an oil analyst at Aton LLC. “Production is profitable.”

    The April agreement collapsed when Saudi Arabia insisted on the participation of Iran, which refused to join as it ramped up output following the removal of international sanctions. Putin has said he’d like Russia and OPEC to reach an accord on freezing supply while exempting Iran until it restores production to pre-sanctions levels.

    Russia would be ready to cap output at the level of any month in the second half of this year, Energy Minister Alexander Novak said two weeks ago in China.

    Russian oil producers have been able to weather the commodities rout as a weaker ruble reduced costs and taxes eased with lower crude prices. That has helped support output at existing projects as new fields come on line.

    Putin on Wednesday oversaw the start of Siberia’s East Messoyakha oil field, run by Rosneft PJSC and Gazprom Neft PJSC. The deposit is expected to produce 577,000 tons of oil this year and reach a peak of 5.6 million tons, or 112,000 barrels a day, at the end of the decade, according to the Kremlin.

    Rosneft, Russia’s largest oil producer, also plans to start its Siberian Suzun field in a month’s time, Chief Executive Officer Igor Sechin said Wednesday. The company expects output from the deposit to peak at 4.5 million tons of oil, or 90,000 barrels a day, in 2017, according to a presentation last month.

    Russia’s second-largest producer, Lukoil PJSC, started test production at the Caspian Sea’s Filanovsky field at the beginning of August, pumping 20,000 barrels a day, it said Aug. 30. The company’s press service didn’t immediately comment on Filanovsky’s current output when contacted on Wednesday.
    Back to Top

    Saudis Said to have Met With Iran for Oil Talks Before Algiers

    OPEC members Saudi Arabia and Iran, whose rivalry derailed an oil supply accord earlier this year, met in Vienna a week before the organization holds talks in Algeria.

    The two oil producers, along with fellow OPEC member Qatar, met at the headquarters of the Organization of Petroleum Exporting Countries in Vienna, according to three people familiar with the matter. They were making preparations for informal discussions between energy ministers from OPEC and Russia in Algiers next week, the people said, asking not to be identified because the talks were private.

    The face-to-face talks between Saudi Arabia and Iran, OPEC’s two leading members and fierce regional rivals, show diplomatic efforts to secure a meaningful deal in Algiers are still under way despite market skepticism. Prices have retreated this month amid concern there will be no serious commitment to constrain supply and all but two of 23 analysts surveyed by Bloomberg this week predict there will be no agreement next week.

    "We may be starting see a change of attitude in Riyadh," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "A positive result to the talks in Algiers is looking more likely."

    Doha Failure

    OPEC’s last attempt to reach a deal, which also involved Russia, the largest non-OPEC producer, fell apart in Doha in mid-April when Saudi Arabia insisted at the last minute that Iran also had to freeze production. Iran had refused because it was just starting to revive exports following the end of international sanctions.

    The discussions on Wednesday in Vienna marked the latest step in a flurry of shuttle diplomacy that has seen OPEC officials meet from Paris to Moscow and the Middle East. OPEC Secretary-General Mohammed Barkindo visited Qatar and Iran earlier this month to build consensus before the Algiers conference. President Vladimir Putin said on Sept. 2 that the producers can overcome their divisions to reach a deal.

    With Iran having restored lost output since international sanctions were lifted in January, the chances of a deal now are higher than at any time since OPEC launched its strategy two years ago, according to Jamie Webster, a fellow at the Center on Global Energy Policy at Columbia University in New York.

    Remaining Obstacles

    The growing pressure from low oil prices may also give Saudi Arabia, which has depleted its cash reserves to cover a budget deficit, an incentive to compromise, according to Abhishek Deshpande, chief energy analyst at Natixis SA in London. Still, a number of obstacles to securing an agreement remain, including tensions between Saudi Arabia and Iran as they continue to clash in proxy conflicts around the region from Syria to Yemen.

    OPEC also remains locked in a contest for market share, both between members and with competitors outside the group like U.S. shale drillers, making a deal difficult. Some OPEC members such as Iran and Iraq aim to boost capacity, while de facto group leader Saudi Arabia is pumping at record levels to maintain its sales volumes.

    The group is also reluctant to enter into a pact with Russia, which it doubts would deliver on any pledge to curb supply, according to Citigroup Inc.
    Back to Top

    LNG players under pump as Qatar goes all out to lift output

    LNG powerhouse Qatar is pushing its massive export facilities at beyond capacity production levels as it moves to protect market share from Australia and other upstarts amid low prices, in a move analysts have described as similar to Saudi Arabia’s tactics in oil.

    The increased output comes as Qatar, the world’s biggest LNG producer, revealed it would pursue a strategy to maintain its share of global production amid low prices. Last year, it renegotiated a key Indian contract that had left the buyer severely out of the money.

    Analysts say the moves could further hit prices and Australian LNG projects struggling to ramp up in the low-priced environment, which recently caused Santos to announce it would hold back production from its Gladstone plant.

    Qatar’s mantle as the world’s biggest LNG producer is under threat from $200 billion of new Australian projects approved over the past decade.

    The investment is bringing on a wave of supply that has overtaken demand growth and is hitting prices that are already much lower than expected when the projects were committed to.

    But instead of easing off production of uncontracted LNG, Qatar appears to be following a similar strategy to that of Saudi Arabia in oil by running full tilt.

    Credit Suisse analysts say Qatar has the lowest cash costs in the world.

    “Qatar again ran at over 100 per cent capacity in 2015, and has been talking in 2016 about considering ‘innovative marketing strategies to protect its market share’,” Credit Suisse co-head of global oil and gas research, David Hewitt, told The Australian.

    “If that were to translate to lower prices to secure volume in the spot market, it would put additional pressure on other suppliers, including Australian projects, into the already fragile spot market.”

    In the sheikdom’s latest economic outlook, released in June, Qatar revealed concerns about new LNG market entrants that was not visible in its previous reports.

    “In a context of surplus shipping capacity and a looming glut in global LNG supplies, Qatar intends to consider and follow innovative marketing policies to protect its market share,” the country’s Ministry of Development Planning and Statistics said.

    Neither the Ministry nor Qatar gas responded to requests from The Australian for more details on the policies.

    Last year, Qatar exported a ­record 106.4 billion cubic metres of gas as LNG (77.1 million tonnes), stretching production beyond its capacity of 77 million tonnes.

    According to the Platts news service, Qatar’s 2016 first-half ­production for this year was 3 per cent higher than for the same ­period last year, indicating this year could see another record.

    Credit Suisse, citing industry sources, says only about 60 million tonnes of Qatar’s annual exports are contracted.

    “It could clear the potential excess from 2018 onwards on its own,” the bank says of the coming global oversupply.

    “That, however, looks unlikely, as Qatar has the lowest cash costs and could pursue the more recent policy of Saudi Arabia for oil.”

    On top of producing flat out, Qatar’s state-owned RasGas last year agreed to cut the price of a contract with India’s Petronet LNG to $US6 to $US7 per MMBtu, up to 50 per cent lower than the $US12 to $US13 agreed earlier, according to Reuters news agency. Qatar also waived a $US1.5bn penalty for taking less LNG than agreed.

    Wood Mackenzie analyst Saul Kavonic said the Petronet deal highlighted the risk that LNG contracts would need to be renegotiated, especially if oil prices (which LNG contracts are linked to) rose while spot LNG stayed low.

    “If you see it with India, that’s one thing, but if you start to see it with the more traditional buyers, like Japan, South Korea, or even China, that could be more meaningful,” Mr Kavonic said.

    “It’s a big risk out there in the market that is keeping some of the big LNG players awake at night.”

    Australia produced about 25 million tonnes of LNG last year but is forecast to increase production to 85 million tonnes by the end of the decade as projects approved during the boom continue to ramp up.

    While the returns will be low after development cost blowouts and lower-than-expected prices, most should generate cash at current spot prices of $US5 per MMBtu because of low operating costs.

    The Santos-run Gladstone LNG project and Shell’s Queensland Curtis LNG projects are two of the higher-cost plants, with Credit Suisse-estimated cash costs of $US7.50 to $US8 per MMBtu.

    Attached Files
    Back to Top

    Venezuela PDVSA awards $3.2 billion oil service contracts to boost output

    Venezuela's state oil company PDVSA has awarded $3.2 billion in contracts to drill wells in the Orinoco Belt with the aim of increasing production by 250,000 barrels per day in the next 30 months, the Caracas-based company said in a statement on Wednesday.

    Schlumberger NV, Oklahoma-based contractor Horizontal Well Drillers and Venezuelan contractor Y&V won contracts to service three joint ventures between PDVSA [PDVSA.UL] and foreign partners.
    Back to Top

    Saudi Aramco plans maintenance at two refineries in Nov-Dec

    Saudi Aramco plans to shut two refineries towards the end of this year for scheduled maintenance, four sources close to the matter said, which could free up more of the state oil company’s crude for export.

    Saudi Aramco has scheduled maintenance at its refinery in Yanbu and its largest refinery in Ras Tanura in November and December, the sources said.

    Each shutdown could add 4 million to 8 million barrels of crude into global markets, depending on the extent of the shutdowns and their duration, according to Reuters’ calculations.

    A rise in Saudi crude exports on top of a recovery in Nigerian production would add to global supply which is likely to weigh on oil prices and push a potential market rebalancing further out into 2017.

    “It’s bullish for refining margins but very bearish for crude,” said an oil analyst who declined to be named due to company policy.

    “Saudi crude exports will climb.” Saudi Arabia’s fuel output will also fall during the maintenance, in particular middle distillates such as diesel and jet fuel, helping to tighten the market during peak winter demand in the northern hemisphere.

    Yanbu Aramco Sinopec Refining Co (Yasref), owned 62.5 per cent by Aramco and the rest by China’s Sinopec, is expected to shut its 400,000 barrel-per-day refinery complex for maintenance in November, the sources said.

    This could last for 10-15 days, one of the sources said.

    Separately, Saudi Aramco plans to carry out maintenance at the Ras Tanura refinery in December for 20-25 days, which may involve only the 325,000-bpd crude distillation unit (CDU), the sources added.

    Saudi Aramco and Sinopec do not comment on refinery operations.

    Saudi Aramco could export more Arab Light and Arab Heavy crude during the refinery shutdowns, trade sources said, although the producer also has the option to move excess barrels into storage if supply exceeds demand.
    Back to Top

    India boosts LNG imports in August

    India’s imports of liquefied natural gas rose 34.6 percent in August as compared to the same month a year ago, according to the data from oil ministry’s Petroleum Planning and Analysis Cell (PPAC).

    India imported 2,144 million metric standard cubic metres (mmscm) of LNG in August compared with 1,593 mmscm in the same month last year, PPAC said.

    The country imported 10,348 mmscm of LNG in April-August, up by 25.7 percent as compared with the corresponding period of the previous year.

    India’s LNG imports have been rising steadily this year boosted by low prices of the chilled fuel with the exception of July when the country’s LNG imports marked the first monthly decline as gas consumption remained flat and domestic gas production rose.

    Costs of importing LNG into India have dropped sharply in 2016 after India’s largest LNG importer, Petronet signed a revised long-term contract with RasGas of Qatar.

    The country’s prime minister Narendra Modi said last month that the world’s fourth-largest importer of the chilled fuel could save up to US$3 billion due to the renegotiated import deal.

    India imports LNG via Petronet’s Dahej and Kochi LNG terminals, Shell’s Hazira plant, and the Dabhol terminal operated by Ratnagiri Gas and Power.

    Attached Files
    Back to Top

    YPF Sees Argentina Reforms Drawing Billions in Shale Investments

    Argentina’s biggest oil company sees the government removing production subsidies by the end of 2017, a step that may help lure investment as President Mauricio Macri tries to sell his vision of a more competitive economy.

    The reforms, including talks with unions and contractors to help reduce costs, may attract some $5 billion to $10 billion in additional investments into the country’s oil and gas industry through the end of next year, YPF SA Chairman Miguel Angel Gutierrez said in an interview Wednesday at Bloomberg headquarters in New York. YPF has also had conversations with “middle-market" energy producers and equity firms as it seeks to pull in even more money, the chairman said.

    “We need to demonstrate to the world that we are able to reduce costs." Gutierrez said. “With the right set of conditions, I think the investment will come."

    While support for natural gas production should remain in place for another three years after it expires next year, the direction is clear, he said. “We are moving toward a market economy, no doubt. Our industry is not an exception."

    Since taking office in December, Macri has devalued the national currency, ended foreign exchange restrictions and cut fuel subsidies, as he tries to revive Argentina’s moribund economy. State-owned YPF, meanwhile, is courting international corporations from Exxon Mobil Corp. to France’s Total SA, as it seeks help to develop the world’s second biggest shale oil and gas reserves.

    Bowing to public opinion, YPF will “no doubt" remain controlled by the government, Gutierrez said. Nonetheless, market reforms are making the company and country more competitive, helping to attract investments from major energy companies, private equity firms and other backers, the chairman said.

    Contract Negotiations

    YPF is negotiating with unions and contractors to lower costs and the national and local governments have spent billions on new roads and other infrastructure in Vaca Muerta, the country’s vast, mostly untapped shale fields, Gutierrez said. The Buenos Aires-based company expects to lower drilling costs below $10 million a well by the end of this year, he said.

    Macri ended a 15-year fight with bondholders, who had frozen the nation out of debt markets and trimmed a budget deficit that ballooned under past presidents. He also replaced YPF’s leadership this year, appointing Gutierrez, a former Telefonica SA and JPMorgan Chase & Co. executive, as chairman and Ricardo Darre as chief executive officer.

    Vaca Muerta, Spanish for dead cow, has major deposits of both oil and gas. Covering an area the size of Belgium, it has become one of the world’s top shale plays and is considered key to restoring energy self-sufficiency in Argentina. Exxon has designated the formation as one of nine “key activity” areas in the Western Hemisphere.

    YPF and Chevron Corp. are jointly developing shale there as well and BP Plc Chief Executive Officer Bob Dudley said on Sept. 14 that the U.K. producer sees “enormous potential" in the South American country.

    Domestic Focus

    While Vaca Muerta could eventually make Argentina a force on the global natural gas market, YPF’s focus for now remains on domestic use as well as sales to neighboring Bolivia and Chile, Gutierrez said. The country will likely remain a net importer of gas for at least the next five years.

    Financial index provider MSCI Inc. said in June it would review Argentina, South America’s second-largest economy, for a possible upgrade to emerging market status. Argentina has been classified in the frontier category for the last seven years.
    Back to Top

    Kurdistan payments 'in abeyance'

    Crude export payments have been halted to Gulf Keystone Petroleum and apparently other producers in Iraqi Kurdistan following a dispute between the regional and federal governments over exports.
    Back to Top

    Summary of Weekly Petroleum Data for the Week Ending September 16, 2016

    U.S. crude oil refinery inputs averaged 16.6 million barrels per day during the week ending September 16, 2016, 143,000 barrels per day less than the previous week’s average. Refineries operated at 92.0% of their operable capacity last week. Gasoline production increased last week, averaging 10.1 million barrels per day. Distillate fuel production increased last week, averaging about 5.0 million barrels per day.

    U.S. crude oil imports averaged 8.3 million barrels per day last week, up by 247,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, 9.0% above the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 569,000 barrels per day. Distillate fuel imports averaged 76,000 barrels per day last week.

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 6.2 million barrels from the previous week. At 504.6 million barrels, U.S. crude oil inventories are at historically high levels for this time of year. Total motor gasoline inventories decreased by 3.2 million barrels last week, but are well above the upper limit of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories increased by 2.2 million barrels last week and are well above the upper limit of the average range for this time of year. Propane/propylene inventories rose 0.7 million barrels last week and are above the upper limit of the average range. Total commercial petroleum inventories decreased by 6.0 million barrels last week.

    Total products supplied over the last four-week period averaged 20.3 million barrels per day, up by 3.0% from the same period last year. Over the last four weeks, motor gasoline product supplied averaged over 9.5 million barrels per day, up by 4.1% from the same period last year. Distillate fuel product supplied averaged about 3.6 million barrels per day over the last four weeks, down by 5.9% from the same period last year. Jet fuel product supplied is up 8.1% compared to the same four-week period last year.

    Cushing up 500,000 bbl

    Attached Files
    Back to Top

    Small increase in US oil production

                                                                           Last Week    Week before      Last year

    Domestic Production '000................. 8,512                8,493              9,136
    Alaska ............................................    464                   458                  488
    Lower 48 ........................................ 8,048               8,035              8,648
    Exports ...........................................     588                  418                 477
    Back to Top

    TransCanada Plan to Vie With U.S. Gas Stirs Fear of 10-Year Toll

    TransCanada Corp. and Alberta natural gas producers agree they need a new pipeline deal to fend off rival U.S. supplies. The challenge is to agree on how long it should last.

    The pipeline operator is striving to get commitments for decade-long contracts to ship fuel east to Central Canada in exchange for lower tolls. The idea is to help Canadian supplies remain competitive even as two rival pipelines are set to link giant shale plays in the eastern U.S. to markets in Ontario and Quebec. But the length of the contracts is becoming a point of contention.

    “What’s really got some of these guys concerned is how long you have to commit to,” Jeff Tonken, chief executive officer of gas producer Birchcliff Energy Ltd., said in a phone interview. While TransCanada aims to start a formal bidding process in October to sign up producers, Tonken said it may take until the end of the year before there’s enough support to move ahead.

    Holding on to clients in Canada’s two most populous provinces is becoming critical for western gas producers as the U.S. meets more of its own demand, while projects to liquefy and export gas from the Pacific Coast struggle for approval. Competition is set to become tighter with the proposed Rover and Nexus pipelines from the Marcellus and Utica shales.

    Long Discussions

    The mainline ships a significant amount of Canada’s gas to market. The country produced about 15 billion cubic feet a day last year, and the mainline carried about 3 billion of that -- or one-fifth -- from the West. It was the largest single source of adjusted earnings in TransCanada’s gas pipelines business in the second quarter. The company’s stock has gained 37 percent this year and is hovering near a record high after it made a big bet on gas with the purchase of Columbia Pipeline Group Inc. for $10.2 billion, which closed in July.

    TransCanada has proposed tolls 40 to 50 percent cheaper than the current rates for new firm, 10-year contracts, to as low as 82 cents a gigajoule if it can secure 2 billion cubic feet a day of commitments to ship from Empress, Alberta, to the Dawn hub in Ontario.

    Currently, local distribution companies in Ontario and Quebec and gas marketers hold contracts to move gas east from Western Canada, many of which expire in 2022. Those distributors are increasingly looking to buy gas at the Dawn hub near Sarnia, Ontario, and elsewhere in the province, as more supply options emerge.

    Currency Risk

    The requirement to sign up for a decade means producers would need to line up buyers for the fuel and would face fluctuating currency exchange rates affecting the viability of the tolls, said Tonken. Tonken is on a sub-committee of the Canadian Association of Petroleum Producers in talks with TransCanada.

    TransCanada is optimistic it can overcome the producers’ concerns in time to start a so-called open season for the tolls next month, said Steve Clark, the company’s senior vice-president of Canadian & Eastern U.S. Pipelines. That timeline is necessary for regulators to approve the tolls so they can take effect in November, 2017, in line with the shipping calendar, he said. Competitors of the Canadian producers are prepared to sign up for terms exceeding 10 years on other pipelines, he said.

    “That’s the nature of the pipeline business these days,” Clark said.

    There’s the added question of whether the 82-cent rate will be low enough to hold onto Central Canada.

    Price Clarity

    “It’s also not clear how much U.S. Northeast producers would be prepared to undercut Canadian producers to capture the market,” said Randy Ollenberger, an analyst at BMO Capital Markets in Calgary.

    Gas producer Peyto Exploration & Development Corp. has also raised the issue of a spate of outages over the last year-and-a-half on TransCanada’s Alberta system while the operator was conducting maintenance. The work hindered shipments and cost producers about C$25 million for firm transportation service they weren’t able to access, according to an estimate from Peyto. Darren Gee, Peyto’s chief executive officer, said that type of “unpredictable risk” is preventing him from signing up for a long-term mainline contract.

    TransCanada’s Clark said the Alberta system work is wrapping up and the company is confident it will be able to make the necessary firm transportation service available. He declined to comment on Peyto’s estimate on the cost to producers for the work.

    Consultants hired by TransCanada have shown that the 82-cent rate would allow Canadian gas producers to compete with U.S. rivals, he said.

    “Given we don’t have to build anything here, we just have to get a rate approved, we think we have a timing advantage,” Clark said. “But we can’t wait forever. We need to move quickly.”
    Back to Top

    NatGas Trades Above $3/Mcf 1st Time in > 1 Yr, Still Low in M-U

    We’ve just hit a milestone worth mentioning. The price of natural gas as traded at the benchmark Henry Hub delivery point (in southern Louisiana) closed at over $3 per thousand cubic feet (Mcf) for two days.

    It’s an important psychological barrier that gives traders (and drillers) hope for higher prices. However, before we begin popping the champagne corks here in the Marcellus/Utica, you should understand that there is no “the price” in natural gas.

    Gas is traded at hundreds of locations along major gas pipelines. The venerable Henry Hub is important because it is the benchmark, setting prices that many gas contracts are tied to.

    But the reality of natural gas prices for the Marcellus and Utica is one of low prices due to lack of pipeline capacity to move our oversupply to other markets. So while the price of gas trading at the Henry Hub yesterday closed at $3.08/Mcf (according to price experts Natural Gas Intelligence), the price of gas trading at the Tennessee Gas Pipeline Zone 5 300L in northeastern PA closed yesterday at $1.26/Mcf (NGI).
    Back to Top

    Smart Sand, Woodlands-based frac sand company, files for IPO

    The Woodlands-based Smart Sand has filed paperwork with the Securities and Exchange Commission to go public. The company deals in sand for hydraulic fracturing, similar to what is pictured here in this AP file photo taken in the Marcellus Shale drilling region in July 2011.

    Smart Sand, The Woodlands-based company that produces sand for hydraulic fracturing, plans to go public.

    The company on Friday filed a registration statement with the Securities and Exchange Commission for an initial public offering, documents show.

    Smart Sand operates two white sand processing sites in Wisconsin with a combined 344 million tons of "proven recoverable" sand reserves. In its SEC filing, the company said the two sites give it a large reserve base of sand with good access to Class I railroads.

    Company officials also stated they could likely expand capacity of their larger processing facility to meet increased demand, citing projections that demand for frac sand will grow 23 percent per year through 2020.

    In hydraulic fracturing, drillers shoot millions of gallons of water into horizontal wells to fracture the rock and free the hydrocarbons. To keep those fractures open, they add "proppant" — sand.

    The company plans to raise up to $100 million during its IPO, according to Renaissance Capital.
    Back to Top

    Alternative Energy

    Barrick sees ‘perfect storm’ brewing around cost-effective renewables

    Renewable energy sources have reached the stage, where they can reduce energy costs as well as emissions,Barrick Gold’s senior manager of energy and greenhouse gases (GHGs), Russell Blades, tellsEnergy and Mines.

    “We are seeing a ‘perfect storm’ brewing around renewables.Solar and energy storage are improving in efficiencies and reducing in costs. Renewables are already cost-effective in many areas compared to traditional fossil fuel poweroptions,” Blades says. “In terms of further reducing ourenergy costs and emissions, we see that renewables have an important role to play alongside our energy management and fuel switching initiatives.”

    Moreover, with governments, investors and stakeholders more focused on carbon emissions, pricing and climate change, mines are moving more towards electrification andautomation. “Barrick recognises this global trend and is trying to get ahead of the curve to be a market leader to benefit our shareholders and other stakeholders,” Blades notes.

    The gold mining leader sees the benefits of power price stability that renewables offer, along with a host of other key attributes. “Although price stability is a major driver, we equally see the benefits of lower energy prices, reduced emissions and improved sustainability,” Blades says.

    As a senior manager at one of the world's largest gold miningcompanies, Blades’ responsibilities include effectively managing the company’s energy portfolio in order “to reduce operating costs and impact on climate change.”

    Barrick’s energy programme looks at how energymanagement, fuel switching and renewable-based strategies can reduce energy usage, costs and GHG emissions, Blades explains.

    “The majority of our GHG emissions come from our choice ofenergy sources (diesel, electricity, natural gas, heavy fuel oil(HFO), explosives, biofuels, renewables, etc). Not only does my work involve improving our active mine sites, but new mines and legacy sites as well. We try to incorporate sound energy management and renewable strategies into our new mine designs and are looking to develop renewable energyprojects at our closed mine sites,” Blades reports.

    When addressing carbon exposure, Barrick examines variousenergy options for existing or future mines, calculating GHG emissions as well as the capex and opex costs associated with these options. “To help select the best option we also run sensitivities on various projected prices for carbon to see what the impact might be to the project’s economics,” Blades adds.

    Almost 18% of Barrick’s power was sourced from renewables in 2015, but the company hopes to see that number climb in the future. “We have just finished a study that looked at all our sites (operating, legacy and new projects) and provided preliminary assessments for renewable resources at those sites and their potential economics.”

    Moreover, Blades says that Barrick is looking at renewables not just for power. Instead, the company adopts a much broader application of renewables, including heating andbiofuels.

    “It’s important to also understand that renewables for us isn’t limited to just electrical power. We also see the benefits of using renewables to provide heat to our processes like electrowinning (electrolyte), cathode wash water and heap leaching (solutions) and biofuels to replace diesel and HFO in our haul trucks, underground vehicles, power plants, lime kilns, etc. For example, we operate our UG vehicles at ourNevada mines on B50-B75 in order to reduce GHG and particulate matter emissions.”

    There are many positives to replacing diesel trucks andequipment with electrical counterparts, including better air quality and reducing ventilation and cooling requirements in the underground mines.

    “For openpit, the use of electrical-based material movement technologies like conveyors, Railveyor and Ropecon can cost-effectively replace traditional diesel haul trucks. We are also seeing some interesting development in large-scale electric vehicles that would provide us with another electric-based option to move materials at the mine site. Electric-based systems are much more efficient (electric motor 90% vs diesel engine 36%), have lower rolling resistance and improved payload to total weight ratios than diesel haul trucks,” Blades says.

    Barrick is also interested in “better leveraging mine design, topography, elevation and gravity at the mine site to produce regenerative energy and storage.”

    Attached Files
    Back to Top


    Japan signals end for $10 billion nuclear prototype

    Japan signaled on Wednesday it would scrap a costly prototype nuclear reactor that has operated for less than a year in more than two decades at a cost of 1 trillion yen ($9.84 billion).

    Tokyo believes it would be difficult to gain public support to spend several hundreds of billion yen to upgrade the Monju facility, which has been plagued by accidents, missteps and falsification of documents.

    There is also a strong anti-nuclear sentiment in Japan in reaction to the 2011 Fukushima atomic disaster and calls to decommission Monju have been growing in the ruling Liberal Democratic Party, with scant results from using around 20 billion yen of pubic money a year for maintenance alone.

    Monju was designed to burn plutonium from spent fuel at conventional reactors to create more fuel than it consumes. The process is appealing to a country whose limited resources force it to rely on imports for virtually all its oil and gas needs.

    Science Minister Hirokazu Matsuno, Trade Minister Hiroshige Seko and others had decided to shift policy away from developing Monju, a fast-breeder nuclear reactor in the west of the country, the government said.

    They had also agreed to keep the nuclear fuel cycle intact and would set up a committee to decide a policy for future fast-breeder development by the end of the year.

    A formal decision to decommission Monju is likely to be made by the end of the year, government officials said.

    The decision would have no impact on Japan's nuclear recycling policy as Tokyo would continue to co-develop a fast-breeder demonstration reactor that has been proposed in France, while research will continue at another experimental fast-breeder reactor, Joyo, which was a predecessor of Monju.

    "The move will not have an impact on nuclear fuel balance or nuclear fuel cycle technology development or Japan's international cooperation," Tomoko Murakami, nuclear energy manager at the Institute of Energy Economics, Japan, said.

    Attached Files
    Back to Top


    La Nina forecast downgraded as trade winds remain moderate

    Sea surface temperatures in the central Pacific have been significantly below the seasonal average for the last 10 weeks, consistent with the formation of mild La Nina conditions.

    But U.S. government forecasters have cut the probability of La Nina occurring this winter to 36 percent, down from an estimated probability of 76 percent at the time of their May forecast.

    The U.S. government now predicts conditions this winter are likely to be neutral, with neither La Nina or El Nino evident, and puts this probability at 56 percent, up from 21 percent in May.

    Surface temperatures in the central Pacific have cooled but not as fast or as far as expected earlier in the year, which has caused the forecast probability of La Nina developing to drop (

    Many other phenomena associated with La Nina are either absent or only weakly present, which has also caused forecasters to downgrade their predictions.

    Some models indicate a borderline La Nina this winter. But the consensus among U.S. forecasters is for neutral conditions based on the lack of significant support from other indicators.

    The National Oceanic and Atmospheric Administration dropped its “La Nina watch” in September, having been on the lookout since April, according to the agency’s latest forecast

    Attached Files
    Back to Top

    Precious Metals

    Panaf registers record R300m payout, weighs new gold mine

    PAN African Gold (Panaf) is to pay its largest final dividend yet of R300m, a 42% increase on last year’s payout following a strong showing in its 2016 financial year in which gold output increased 16.5% to just over 200,000 ounces.

    The gold and coal group’s CEO, Cobus Loots, said the record dividend was acknowledgement of shareholders’ desire for an attractive payout and added that the firm had also reviewed its dividend policy.

    As a result, the company will recommend a payout ratio of 40% of net cash generated from operating activities after stay in business capital and capital for debt service.

    Panaf’s single largest shareholder is PAF Gold, (previously Shanduka Gold) which has a 22.5% stake. This follows a transaction in which Panaf bought a minority stake in Shanduka Gold – an effort informed by the need to preserve its black economic empowerment status following the merger of Shanduka Group with Pembani.

    Financially, Panaf reported full-year share earnings some 163% higher at 30.20 cents per share (2015: 11.48c/share). The figures were underpinned by a strong operational performance with increases in grades at Barberton Mines and especially at Evander Mines, up roughly a gram per tonne, ending its low grade intersections that had negatively affected the company.

    The Evander gold retreatment operations were at nameplate capacity whilst Uitkomst, a coal mine in KwaZulu-Natal province, also made a contribution to the bottom line.

    A one quarter increase in the dollar gold price, however, gave significant impetus to Pan African’s results and with the prospect of low interest rate and geopolitical uncertainty, the outlook remained solid for the group.

    Loots added that growth through acquisition remained a strategic goal as a result of its strong margins as it positioned “… the group to capitalise on potential acquisition opportunities”.

    The company has been weighing up a number of growth options including a surface gold mining project in Mpumalanga province known as Elikhulu.

    If approved the project could increase group output to 250,000 oz/year for the first eight years of its life, although Loots said in the past it requires a competitive capital number of about R1bn. The project was currently the subject of a definitive feasibility study by DRA with results of the study due by November.

    Speaking at the presentation of the group’s results today, Loots said Elikhulu would cost R1.7bn which he acknowledged was “significant”. However, relative to the firm’s market capitalisation, this was not a greater investment that at its BTRP facilities at its Barberton operations.

    “We have underwritten termsheets for the full amount [of the capital cost] from a number of financial institutions,” said Loots in respect of financing Elikhulu.

    Panaf also has expansion options at Evander including the so-called Evander 2010 pay channel which can be accessed through Evander Mines 7 shaft, previously worked by Harmony Gold.

    Surface drilling of the pay channel is underway although when Harmony stopped mining at 7 shaft it allowed for flooding of infrastructure to 18 level, the company said.

    Panaf said it was involved in a study of this expansion prospect with results also due November. “The 2010 pay channel may offer Evander Mines the possibility of establishing a new mine area without having to incur the cost of sinking a new shaft from surface,” it said.

    “During the next year we will also investigate further medium- to long-term underground production increases from sources such as 9 Shaft and projects such as Evander South at Evander Mines,” the company said.

    Loots said the company remained interested in merger and acquisition and had considered three gold operating companies in West Africa. “However, they didn’t meet our investment hurdles. We are quite conservative,” he said.
    Back to Top

    De Beers, partner officially open Gahcho Kué mine

    De Beers and its joint venture partner Mountain Province Diamonds have officially opened the Gahcho Kué diamond mine, in Canada, which will produce about 54-million carats of rough diamonds over its 12-year mine life.

    Gahcho Kué is the world’s largest new diamond mine to have been developed in the last 13 years and is located in theNorthwest Territories of Canada. It is De Beers’ third mine inCanada.

    The mine, which comprises three openpits, will employ about 530 full-time employees and is expected to reach full commercial operation in the first quarter of 2017.

    It cost about C$1-billion to build.

    The mine was opened officially by De Beers Groupchairperson and Anglo American CE Mark Cutifani, De Beers Group CEO Bruce Cleaver, De Beers Canada CEOKim Truter, Mountain Province Diamonds CEO Patrick Evans and representatives of First Nations and Metis communities in the Northwest Territories.

    “As millions of new consumers enter the middle classes in the coming years, consumer demand for diamond jewellery is set to see continued medium- to long-term growth. I’m therefore delighted with the official opening of Gahcho Kué, our largest ever mine outside of Southern Africa, as it will help to meet this increasing demand.

    “Allied to our major investments in production capacity expansion in the Southern African region, the opening of Gahcho Kué positions De Beers and its partners strongly to capitalise on the industry’s positive demand outlook,” commented Cleaver.

    Attached Files
    Back to Top

    Steel, Iron Ore and Coal

    Shenhua approved to boost output from Sept, report

    China's coal giant Shenhua Group has been approved to increase production from September this year, in a bid to curb fast rise of domestic coal prices caused mainly by persisting tight supply, the China Securities Journal reported on September 21, citing an anonymous source.

    14 coal mines of the company were allowed to boost output by combined 2.79 million tonnes a month, the report said.

    The move followed a meeting earlier this month to draw up a draft proposal that would allow miners to raise daily output up to 500,000 tonnes, or 15 million tonnes a month, if prices hit 500 yuan/t ($74.94/t) for two weeks.

    The latest Bohai Rim index, on which the production adjustments are based, put 5,500 Kcal/kg NAR coal at 554 yuan/t, up from 537 yuan/t a week ago.

    Some mines under Inner Mongolia Yitai Group and Huadian Group were also given the green light to increase coal output as the latest coal price increased to 537 yuan per tonnes from 515 yuan two weeks ago, the report said, without elaborating on details.

    This would and likely stall a sharp thermal coal price rally, which has seen Asian benchmark Australian prices soar by over 50% this year to $73.9/t, showed the globalCOAL index.

    In addition, supply of coking coal continued to be tight in domestic market, with stocks staying low at steel mills. The China Iron and Steel Association has recently proposed the National Development and Reform Commission to ask miners to boost supply and honor contracts so as to guarantee normal steel production.

    China's coking coal prices have been spiking in recent two months, with prices of main varieties up 100-150 yuan/t or over 20%. The price of Australian premium coking coal was more than doubled to $178.5/t FOB on September 21, compared with $86.2/t at the end of June.
    Back to Top

    Shanxi Coking Coal further raises September prices

    Shanxi Coking Coal Group, China's top producer of the steelmaking material, decided to further raise washed coking coal prices transported by railways by 50-95 yuan/t ($7.50/t-$14.24/t), effective September 21, after a price hike on September 1.

    Coking coal prices were on a rise in September, supported by robust demand from coke and especially steel producers who tried to boost steel output amid resilient market and build up stocks ahead of a cold winter.

    The state-owned company raised washed coal prices of Tunlan, Xiqu, Jiexiu, Liuwan, Shuiyu and Zhongxing mines by 90 yuan/t, that of Lishi by 95 yuan/t, and washed coal price of Zhanglan mine by 85 yuan/t.

    While for washed fat coal produced in Zhenchengdi, Malan, Shuangliu, Yixing and Shuguang mines, prices will rise by 95 yuan/t. The group raised prices of washed fat coal of Xinzhi and Liyazhuang mines by 80 yuan/t, and those of Bailong and Zhaocheng mines by 85 yuan/t.

    Shanxi Coking Coal Group adjusted up its washed lean coal price by 50 yuan/t, washed 1/3 coking coal price by 70 yuan/t in northern Shanxi and 80 yuan/t in other part of the province, and washed gas coal by 50 yuan/t.

    Besides, the company lifted up the washed thermal coal price of Yumengou mine by 50 yuan/t, and that of Liangdu mine by 30 yuan/t.

    Attached Files
    Back to Top

    Indian government plans to phase out aged coal-based plants: source

    The Indian government is planning to phase out coal-based power plants that are more than 25 years old and are inefficient in order to reduce carbon emissions, a Central Electricity Authority (CEA) source said Tuesday.

    Power plants with capacity of around 30,000 MW that burn around 100 million mt/year of coal are likely to be retired in a phased manner, the source said.

    A committee has been formed that will hold consultations with state governments and will formulate a list by December of the plants that need to be closed down, he said.

    The Ministry of Environment, Forest and Climate Change recently issued new emission regulations for coal-based power plants, which will become effective from January 1, 2017.

    Sources said around 6,000 MW of capacity is expected to be shut down in a first round by March 2017.

    According to the CEA source, the coal linkages of these old plants could be used for new capacity.

    However, he said there is already adequate coal production by state-run Coal India Limited and power plants are running at 60% of the plant load factor because of low power demand.

    The government is also focusing more on non-conventional sources of power generation at the expense of coal-based power capacity, he said.

    Coal currently accounts for around 62% of India's total power generation, according to CEA data.

    A Mumbai-based power sector analyst said coal-fired generation is likely to remain the mainstay of the Indian power generation mix as the country needs cheaper power to fuel its industrial growth and renewables will only be part of the mix alongside coal-fired generation.

    Attached Files
    Back to Top

    Taiwan Taipower's move to buy more Indonesian thermal coal hits suppliers amid tightness

    Taiwanese utility Taiwan Power Company, or Taipower, has exercised its option to procure additional thermal coal cargoes this year under existing contracts, leaving Indonesian suppliers gasping amid supply tightness and a significant rise in prices in recent months, sources said this week.

    Taipower is seeking an additional volume of 8.4 million mt of Indonesian coal for delivery between the fourth quarter of 2016 and Q1 2017, a source at Taipower said.

    The utility plans to import 15 million mt of Indonesian thermal coal this year, up from about 14 million mt in 2015.

    Taipower's total coal requirement for 2016 is estimated at 28 million mt, which includes an additional 7 million mt from Australia, another major supplier to the utility.

    Some of the Indonesian thermal coal miners are struggling to cater to the utility's additional requirement under their term contracts for the year, sources said, adding that some of Taipower's suppliers are deferring Q4 shipments to Q1 2017. "Indonesian supply is way tighter than Australian coal. Most of the Indonesian suppliers said they cannot supply within the fourth quarter of 2016 so we had to extend [the shipping schedules]," the Taipower source said.

    "A stable supply and better price is what we were looking for," he added.

    The utility has exercised its option to procure additional tonnages as contracts awarded through tenders earlier this year were on a fixed price basis, said a major Indonesia-based producer source.

    Thermal coal prices have seen a significant rebound so far in the latter half of this year amid supply tightness in Indonesia as well as the return of Chinese demand for seaborne cargoes due to a cut in domestic supply.

    The price of 5,000 kcal/kg GAR coal has surged 32% since the start of the year, S&P Global Platts data showed.

    Some of the miners involved in this contract are impacted "pretty badly," the Indonesian producer source added, with some term suppliers heard having had to lower their spot supply to meet their contractual obligations to Taipower.

    The Taiwanese utility is finding it difficult to get offers in the spot market, another Indonesian producer said.

    He said that his company has to supply an additional 10%-20% of the annual requirement of 1 million mt in Q4 2016.

    "Even though this volume is not huge, it is still big now especially when people are chasing tons. Even 200,000-250,000 mt matter these days," he added. "We do not have any shipments to offer for the rest of the year [in the spot market] as we have to fulfill the additional volume requirement from Taipower," said a third Indonesia-based producer.

    He said he has to supply an additional volume of 400,000 mt during August to December 2016 over and above the 800,000 mt he is obligated to supply to the utility.

    "The contract price is relatively cheaper. Probably [Taipower] had some spot requirement so they exercised the additional volume option," he added.

    The company plans to import 30 million mt of thermal coal in 2017 and Indonesian coal is seen catering to nearly 60% of that requirement.
    Back to Top

    Brazil’s looming wet season poses new Samarco risks, BHP warns

    BHP Billiton, the world’s biggest miner, warns Brazil’s impending wet season may result in further environmental damage due to the failed Samarco dam, carrying the risk of new fines and legal claims.

    Work is underway to reinforce dam structures to help contain tailings as the November-to-April rainy season arrives inBrazil, BHP said Wednesday in its annual report. New releases or movement of tailings could result in further harm to the environment and have an effect on the feasibility and timing of a restart of the Samarco joint venture, it said.

    “A large portion of the works are scheduled to be completed before the next wet season commences,” BHP said in its report. “The potential nonetheless remains for further release, or downstream movement, of tailings material during this season, which may result in additional claims, fines and proceedings.”

    At least 19 people were killed and 700 people made homeless when a tailings dam failed last November at Samarco inBrazil’s Minas Gerais state, an incident described by authorities as the country’s worst-ever environmentaldisaster.

    BHP and joint Samarco owner Brazil’s Vale SA said in July they would book charges totaling more than $2-billion related to cleanup work. Total potential liabilities related to legal proceedings and enforcement actions “cannot be reliably estimated at this time,” BHP said in its report. The Samarco joint venture has been named in more than 23 000 small claims in addition to public civil claims made by federal and regional authorities in Brazil, it said.

    Vale regards a restart of Samarco operations as likely by the end of next year, head of ferrous minerals Peter Poppingasaid in an interview this month.
    Back to Top

    China Benxi Steel no longer in stake auction list amid talk of merger

    China's Benxi Iron and Steel Group is no longer part of an auction to sell stakes in state-owned firms to strategic investors, an official list shows, amid rumours that a long postponed merger with local rival Anshan Iron and Steel (Angang) is set to resume.

    The Liaoning Shenyang United Assets and Equity Exchange, a government-backed investment platform, said last month that stakes in nine government-run enterprises would be put up for sale to help promote mixed ownership, one of the main goals of China's ambitious reform programme for state-owned firms. Benxi Steel was one of the nine firms, according to the exchange's notice.

    But Benxi Steel, one of China's oldest mills, is not part of the auction list anymore, according to a revised list of participants released by the exchange on its website. (

    Chi Jingdong, the vice secretary general of the China Iron and Steel Association (CISA), said on Monday that Benxi Steel's merger with Angang would be next on the list of priorities following the restructuring of Baoshan Iron and Steel and Wuhan Iron and Steel.

    "I can tell you today that the next merger target promoted by the state is the Anben merger," he said. "Research will begin immediately and we will know by the end of the year."

    Benxi Steel could not immediately be reached for comment, but the listed unit of the Angang Group, Angang Steel , said on Tuesday that it had no knowledge of any new plans to restructure the two firms.

    The proposal to merge the two northeast Chinese steel firms appeared as early as 2005, but negotiations soon foundered as a result of bureaucratic complications and concerns that it would cause damaging job and revenue losses in the city of Benxi.

    Benxi Iron and Steel has total assets of 141 billion yuan ($21.14 billion) and liabilities of 105.6 billion yuan, a liability-to-asset ratio of 75 percent. It made losses of 7.95 billion yuan in 2015, according to the Shenyang exchange.

    China's five-year plan for the steel industry published in 2011 said that 60 percent of the country's total steel output should be controlled by the 10 biggest firms by 2015, but the rate actually fell to 34.2 percent, down from 48.6 percent in 2010, with officials blaming stiff competition from small private producers for the failure. China now aims to reach the 60 percent threshold by 2025.

    Attached Files
    Back to Top

    China Focus: China deepens steel industry restructuring

    For employees of Wuhan Iron and Steel Group, the company's merger plan, announced Tuesday, means the end of the 58-year-old steel mill, the first to be built after New China was founded in 1949.

    According to the Shanghai bourse, Baosteel Group will provide existing shareholders of Wuhan Iron and Steel with stock compensation.

    Wuhan Iron and Steel was China's first special steel maker when it started production in 1958. In 2015, 25.7 million tonnes of crude steel rolled off its production lines, ranking it sixth among the nation's steel makers.

    However, its listed arm posted a net loss of 7.5 billion yuan (1.1 billion U.S. dollars) in 2015, with a total debt of 70 billion yuan.

    Under the merger plan, Baosteel will acquire the production arm of Wuhan Iron and Steel. While, Wuhan Iron and Steel Group will retain all non-steel business.

    Those that work at Wuhan Iron and Steel generally welcomed the merger plan, as Baosteel is known to be well managed.

    "The merger is a market-oriented operation driven by a need to restructure rather than a mandated move to overhaul the lumbering production," said Zhang Chunxiao, a professor with the Chinese Academy of Governance.

    He said the new entity after the merger would have more incentive to integrate its market resources, which could lower costs in the upcoming steel production cut.

    China plans to cut its steel production capacity by 150 million tonnes by 2020, according to a government plan unveiled February.

    The combined production capacity of the two firms was 60.7 million tonnes last year, which would make the new entity the world's second biggest producer by capacity -- behind ArcelorMittal.

    "Being the world's second largest steel maker is not the most important thing. The merger will coordinate various aspects of the business, such as logistics and R&D," said Chen Derong, president of Baosteel.

    Baosteel has vowed to cut its steel production by 9.2 million tonnes between 2016 and 2018.

    He said production upgrading is the priority in the restructuring drive.

    The merger is a milestone in China's steel industry restructuring. It aims to improve efficiency through reshuffles to form a dozen powerful steel mills with advanced steel making technology. Following this merger plan, more restructuring of steel makers is expected. Next on the agenda is the restructuring of Ansteel and Benxi Steel Group, both steel giants based in the northeastern province of Liaoning.

    Attached Files
    Back to Top

    Ontario strikes deal with Bedrock to restructure U.S. Steel Canada

    The province of Ontario said on Wednesday that it has signed an agreement with equity fund Bedrock Industries LP to restructure U.S. Steel Canada, but the deal still requires approval from other stakeholders and a Canadian court.

    The plan, in a memorandum of understanding, must still be accepted by U.S. Steel Canada, which has been in creditor protection since September 2014, and the court supervising the company's credit protection proceeding, Ontario's government said in a statement.

    Bedrock, a private equity fund focused on metals, mining and natural resources, must also complete negotiations for new collective agreements for workers at Hamilton and Nanticoke facilities for the deal to proceed, said the United Steelworkers union.

    Under the agreement, Bedrock will purchase and continue operating U.S. Steel Canada's plants in Hamilton and Nanticoke, said the union, which has been briefed on the agreement.

    The province, which made loans to former U.S. Steel Canada parent United States Steel Corp (X.N), said terms of the agreement are confidential.

    U.S. Steel Canada employs nearly 2,000 workers in Ontario and has the capacity to produce 2.6 million tons of steel annually.

    "The deal announced today is far from perfect, given the challenges that arise from such a lengthy and complex insolvency process," said United Steelworkers Ontario director Marty Warren, in a statement. "However, we believe this could lead to a good final deal for the union's members and retirees."

    William Aziz, U.S. Steel Canada's chief restructuring officer, said the company welcomed the "constructive engagement."

    In early August, U.S. Steel Canada rejected a buyout offer from Ontario Steel Investments, a group including shareholders of Essar Global. It said that Essar, an Indian energy and resources conglomerate, failed to demonstrate its financial ability to own and operate the company and did not gain support from all stakeholders.

    That offer included the assumption of C$954 million ($722.51 million) in liabilities under U.S. Steel Canada's pension plan and a commitment of C$25 million for post-employment benefits for U.S. Steel Canada's staff.

    Attached Files
    Back to Top

    China's steel demand seen shrinking for a third straight year -CISA

    China's steel demand is likely to drop for a third year in a row, an industry official said on Thursday, as mills in the world's top producer focus on reducing capacity.

    China's crude steel consumption slipped 1.9 percent over January to July and there may be a slight drop for the year, said Wang Liqun, vice chairman of the China Iron and Steel Association (CISA).

    "For the whole year, the rate of decline may be smaller," Wang said on the sidelines of an industry conference.

    Driven by a drop in China's steel inventory levels amid shutdowns in the past year, steel prices have rallied more than 40 percent from end-May to mid-August, but have since fallen back as output recovered.

    The price rally helped boost steel margins among member mills of CISA, which includes major producers such as Baoshan Iron and Steel (Baosteel).

    On average, profit margins among mills stood at around 1 percent in January-July, Wang said. Data from Baosteel shows margins were at minus 2.2 percent for China's large and medium-sized steel mills last year.

    For the rest of 2016, it would be very difficult for the margin to rise further "but if we can keep it at 1 percent it would be very good", CISA's Wang said.

    Ji Chao, assistant to Baosteel's president, said the market needs to "get used to this new scenario of slower, steady growth in demand".

    At the moment, the priority for China's biggest listed steelmaker is to reduce capacity, in line with Beijing's efforts to tackle a chronic glut, Ji said at the conference.

    Baosteel has pledged to cut its production capacity by 9.2 million tonnes in three years. It is also taking over loss-making Wuhan Iron and Steel to create the world's No. 2 steelmaker as part of Beijing's push to overhaul the stricken industry.

    Faced with global anger from Asia to the United States and Europe over a flood of cheap Chinese steel products, Beijing has promised to cut steel capacity this year by 45 million tonnes and by 100-150 million tonnes over five years.

    By the end of July, China had only achieved 47 percent of its 2016 target and steel exports in the first eight months had risen 6.3 percent from a year ago to 76.35 million tonnes.

    The consolidation and capacity cuts in China's steel sector are meant to strengthen the competitiveness of domestic producers and should not just be a matter of meeting target numbers, said Wang.
    Back to Top
    Commodity Intelligence LLP is Authorised and Regulated by the Financial Conduct Authority

    The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only.

    Officers and employees, including persons involved in the preparation or issuance of this material may from time to time have "long" or "short" positions in the securities of companies mentioned herein. No part of this material may be redistributed without the prior written consent of Commodity Intelligence LLP.

    Company Incorporated in England and Wales, Partnership number OC334951 Registered address: Highfield, Ockham Lane, Cobham KT11 1LW.

    Commodity Intelligence LLP is Authorised and Regulated by the Financial Conduct Authority.

    The material is based on information that we consider reliable, but we do not guarantee that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only.

    Officers and employees, including persons involved in the preparation or issuance of this material may from time to time have 'long' or 'short' positions in the securities of companies mentioned herein. No part of this material may be redistributed without the prior written consent of Commodity Intelligence LLP.

    © 2018 - Commodity Intelligence LLP