Mark Latham Commodity Equity Intelligence Service

Thursday 2nd April 2015
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The Internet and Electricity Consumption

Image titleIEA published this am a tome on the 'internet of things' and its energy implications.

Image titleGrowth rate of data over the net has simply been phenomenal. We've never seen anything like this in recorded history that matches the power of this surge in demand fro data, nor the longevity of its sustained growth rate.
Image titleIts actually having a measurable impact on electricity consumption.
Image titleThe IEA is on the case, and 'standby' power is a big culprit on potential savings.

What does it mean in resourceland? Copper, tin and energy. But the intensity of usage relative to GNP on our read of this document this am was utterly unexciting to resource investors. There are real investment implications,  and the main one, for us,  is that the current global GNP mix is inimical to resource consumption.


US Labour tight says Bullard.

Image title
MGL: Bullard is a minority voice right now, but this speech in Frankfurt is worthy of attention:

Miner Vedanta to file notice of claim in Cairn India tax dispute

Vedanta Resources Plc said it would file a notice of claim related to a tax demand of about 205 billion Indian rupees ($3.29 billion) its unit Cairn India Ltd received from the Indian government this month.

The notice is the first step required before seeking international arbitration under the UK-India bilateral investment treaty, Vedanta said on Friday.

London-listed Vedanta has most of its operations in India.

Cairn Energy Plc, which sold its stake in Cairn India to Vedanta in 2011, also filed a notice of dispute under the treaty this week after receiving a tax demand of more than $1.6 billion.

Cairn India received the retrospective tax demand in relation to its 2007 listing in India.

The tax demands come at a time the Indian government, led by Prime Minister Narendra Modi, is seeking to reduce tax-related litigation and boost much-needed foreign investment.
MGL: This has been rumbling in the newflow for some weeks. The $3.2bn Indian tax claim is based on CGT on the original transfer of assets by Cairn into Cairn India, and subsequent flotation. The letter of the law may be punctilious in this assessment, but its a real potential set back for Indian capital markets unless clarified and, hopefully, withdrawn. The $3.2bn figure is more than Cairn India's cash balances, and 86% of the EV.

China eases property curbs as stimulus hopes spark bull run in equities

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

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

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

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

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

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

"The possible interest rate cut and relaxation policies by the PBOC as well as [the] China Securities Regulatory Commission's announcement to allow mainland fund houses to invest in Hong Kong under the stock market connect scheme have led investors to speculate that much of the 1.4 trillion yuan [HK$1.77 trillion] in Chinese funds may be invested in the local stock market soon," said Ben Kwong Man-bun, a director of broker KGI Asia. "The bull run is likely to continue in the near future."
MGL: First real action by Beijing we've seen that helps the distressed property market.  There's been a small bounce in rebar prices on expectation of this, but our sense is that there's a strong element in the market which had tattered hopes for much more.

Nigeria's Buhari gains early ground amid vote tally fears

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

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

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

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

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

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

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

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

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

Police fired tear gas at a crowd of 100 female supporters of Buhari's All Progressives Congress (APC) demonstrating outside the regional offices of the INEC election commission.
MGL: Who knows on vote rigging. But all the social media, press and youtube commentary we've seen suggests Nigerian's actually have fond memories of Buhari's radical rule, he is remembered for sending 'lazy' civil servants out into the fields to do agricultural work.  Maybe the country needs a hardliner. Last year's corruption scandal involving "about $21bn" thieved from the state oil company still resonates around the press. The Central Bank governor who had the gall to point fingers and openly complain about the missing money was sacked!

Buharni defeats Goodluck Jonathan

With anger swelling over corruption, inequality and a devastating Islamist insurgency in the nation’s north, Nigerians chose a former general who once ruled with an iron hand to be their next president, according to election results on Tuesday.

The election was the most competitive presidential race ever in Nigeria, one of the largest democracies in the world. Now, if power is handed over peacefully, it will be a major shift for the nation — the first transfer of power between civilians of different parties in a country that has spent much of its post-colonial history roiled by military coups.

With all but one of Nigeria’s 36 states counted, the former military ruler, Muhammadu Buhari, held a lead of more than two million nearly votes over President Goodluck Jonathan.

The remaining state is in the north, where Mr. Buhari enjoys broad support and the government has been widely condemned for allowing the Boko Haram militant group to sweep through villages and towns, killing thousands of civilians.

Since the end of military rule in 1999, Nigeria has been governed by a single, dominant party — Mr. Jonathan’s Peoples Democratic Party.®ion=FixedTop&action=Click&contentCollection=BreakingNews&contentID=31840949&pgtype=Homepage&_r=1
MGL: Buhari is elected simply because Nigeria's voters want something done about corruption.  Can Buhari deliver? 

Iran talks extend beyond deadline, Iran Russia say deal close

Oil futures edged lower on Wednesday amid speculation that a last-minute deal over Iran's nuclear programme would be reached that could allow more Iranian crude into world markets.

Talks between Iran and six world powers to settle a dispute around Tehran's nuclear programme extended beyond a Tuesday deadline, as the parties edged towards a deal but failed to agree on crucial details such as the lifting of U.N. sanctions.

Efforts to reach a framework deal were scheduled to continue on Wednesday morning in the Swiss city of Lausanne.

Russian Foreign Minister Sergei Lavrov said a general agreement had been reached over all key aspects of a future deal, TASS news agency quoted him as saying. A diplomat, speaking on condition of anonymity, later denied that an agreement had been reached.

"Whether or not there is an Iranian nuclear deal, we do not expect a flood of oil into the market as a consequence," head of commodity markets strategy and oil strategy at BNP Paribas, Harry Tchilinguirian, told Reuters Global Oil Forum.

Iran currently produces around 2.8 million barrels per day (bpd), according to Tchilinguirian, although Western sanctions limit exports to around only around 1 million bpd. The country keeps around 30 million barrels of crude on its fleet of oil tankers.

"Which sanctions will be lifted and the uncertainty in the timing of lifting suggest that Iran will not be in position to significantly add to the current oversupply in the market," he said.
MGL: Another deadline extension. You read it here first.

Russian Miners With Billions of Dollars Weigh Dividend Increase

Russian metals exporters that are piling up cash after the ruble collapse are sharing the wealth with investors as the economy tilts into recession and global demand slows.

The weaker ruble has benefited Russia’s resource companies, which have costs in the national currency and revenues in dollars or euros. OAO Novolipetsk Steel, OAO GMK Norilsk Nickel and four other of Russia’s largest metals and mining companies together held $8.3 billion in cash and equivalents at the end of December, according to data compiled by Bloomberg. They had about $5.7 billion a year earlier.

Companies are using the windfall to reward shareholders, switching focus from debt repayments or investments. Prices for major materials have softened as China’s economic growth slowed last year to the weakest since 1990. Russia is sliding into its first recession in six years, as U.S. and European sanctions add to slowing consumer demand and a slump in oil prices.

“It makes no sense to start large investments now, and it’s better to pay excessive cash to the owners,” Kirill Chuyko, head of equity research at BCS Financial Group, said by phone on March 31. “The cost of capital for Russian companies increased, which also makes companies rethink their dividend policies.”

Steel and nickel prices fell more than 20 percent in the past 12 months, while copper has dropped about 9 percent. At the same time, Russian producers have turned into world leaders in terms of profit margins and cost cutting. The ruble plunged 46 percent last year before stabilizing in the first quarter, while the economy is forecast to contract 3 percent this year.

Novolipetsk Steel, known as NLMK, said this week it’s overhauling its dividend policy. The steelmaker, which cut its debt ratio to among the lowest in the industry last year, may double distributions and is adding free cash flow as a basis for its payouts.
MGL: Analysts are suggesting Norilsk could have a 11% dividend yield next year. First class deposit, dominant position in Palladium, and an unusual constellation of oligarchs with needs on the shareholder register, all combine to give Norilsk a 'shareholder friendly' attitude, add in the management changes which see them 'licking their wounds' after a decade of disastrous investments outside their core mines, and its almost compelling. 

China official PMI rises in March, HSBC improves

China's official gauge for manufacturing activity picked up in March, indicating the sector has managed to return to expansionary territory.

The official Purchasing Managers' Index (PMI) released by the National Bureau of Statistics (NBS) came in at 50.1 in March, up slightly from 49.9 in February.

However, the HSBC final manufacturing PMI for March fell to 49.6, compared to 50.7 in February, beating an earlier flash estimate of 49.2.

A figure above 50 signals expansion, while anything below indicates contraction.

Both indexes track activity in factories and workshops, but the HSBC index measure focusses on small and medium sized enterprises, while the official PMI is skewed towards state-owned enterprises.

Meanwhile, official data also showed activity in the country's services sector grew moderately in March with a PMI of 53.7, easing from 53.9 in February.
MGL: It is worth observing that China has left behind a decade of 'silly season' infrastructure investment, and seems embarked on a much more sensible path. Beijing has finally, and forcefully rammed through its 'anti-pollution' message, and succeeded in changing the thinking of most of the mega cap companies that we look at as investments. Is the word sustainable applicable to the 'low growth' path from here?  Surely there are still some nasties in the cupboard, but nothing the market has not now thought about. 

Iran Nuclear Talks Run Into 8th Day as U.S. Says Deal Possible

Iran and world powers extended talks aimed at ending the 12-year standoff over the Islamic Republic’s nuclear program into an eighth day with the U.S. indicating progress toward an agreement.

Diplomats negotiated all night in Lausanne, Switzerland and will reconvene at about 9:00 a.m. local time, U.S. spokeswoman Marie Harf said. The U.S. State Department said late Wednesday that enough progress had been made in meetings between Secretary of State John Kerry and his Iranian counterpart Mohammad Javad Zarif to warrant continuing talks.

“We’re moving,” Zarif told reporters after exiting the negotiating session. Before the overnight talks, he urged “all our negotiating partners to seize this opportunity which may not be repeated.”

Diplomats are seeking an accord that would ease Iran’s international isolation and reduce the potential for tensions over its nuclear ambitions to escalate into war. While negotiators are still try to salvage a deal, the claims and counterclaims emerging from the talks suggest sides are also positioning themselves for failure.

French Foreign Minister Laurent Fabius, who left the talks in the early hours of Wednesday and said he’d only come back “if useful,” rejoined them as well, and talks dragged on past midnight. The U.S. won’t “arbitrarily and abruptly” halt the discussions if progress is being made, White House spokesman Josh Earnest told reporters in Washington.

Should the negotiators manage an agreement, they have until the end of June to work out the precise mechanics of the accord, spelling out how Iran will restrict its nuclear activities in exchange for sanctions relief.

A senior Iranian negotiator, Deputy Foreign Minister Abbas Araghchi, suggested his nation had showed new flexibility over the easing of United Nations sanctions, an issue that’s been an impediment to a deal. Speaking in Persian to state television, he suggested movement from Iran’s longstanding position that UN sanctions must be removed at once, a demand that has made a deal impossible so far.
MGL: Here's the question: have the Iranian's moved to keep the talks alive, or because they genuinely realise that they need market access? 

The math is still the math: 2mbpd at $25 is the same revenue as 1mbpd at $50.  

Its a bluff to keep the talks going.

US PMI beats but?

US Manufacturing PMI beat expectations, printing 55.7 up from 55.3 prior to its highest since Oct 2014, once again flying in the face of the collapse in US hard-data-base macro. 

More in line with the underlying reality, Feb Construction Spending dropped for the 3rd month of the last 4 and March ISM Manufacturing tumbled to 51.5, missing expectations of 52.5, to its lowest since May 2013. 

Under the covers, it is even uglier with the lowest New Orders since Jan 2014 as US Manufacturing data has missed 5 of the last 7 months and dropped for 5 months in a row - which hasn't happened since 2008.
MGL: Are purchasing managers enjoying themselves buying cheap inputs? That new order index is not encouraging.

Janus Contrarian fund manager expects oil to fall further

Energy stocks have further to fall before they look attractive,
according to a fund manager who has made his name investing in out of
favor companies.

Daniel Kozlowski, portfolio manager of the $4.6 billion Janus
Contrarian fund, is not adding oil-related stocks to his portfolio
despite the price of crude dropping about 50 percent since last June.

The popularity of the United States Oil fund - an exchange traded fund
that effectively functions as a bet that the price of oil will go
higher - combined with fund managers fearing they will miss a jump in
oil prices, is preventing the market from hitting its natural floor,
Kozlowski said.

"There's tremendous pressure for active managers to own energy right
now. That's not how bottoms typically settle," Kozlowski said.

Instead, Kozlowski is more interested in what he calls "truly out of
favor" sectors, such as mining stocks.

"People are terrified of gold stocks today," he said.

Further consolidation in the mining industry will likely occur after
years in whichcompanies over-invested in capital spending, Kozlowski

Kozlowski's fund received a 2015 Lipper Award Tuesday for the best
multi-care core fund for the three year period that ended in December
2014. The fund's largest holdings include airliner United Continental
Holdings Inc, pharmaceutical company Endo International PLC, and
generic drug maker Mallinckrodt PLC, according to Morningstar data.
MGL: Here's his sector breakdown:

17% Pharmaceuticals.
8% Oil and gas service (mainly gas related by the looks of it)
7% Chemicals.
6% Airlines.

Oil and Gas

Blackstone CEO Sees ‘Remarkable’ Opportunities in Slumping Oil

Blackstone Group LP’s Chairman Stephen Schwarzman is seeing “remarkable” opportunities in debt and equity that are emerging out of the slump in crude oil.

Most of the New York-based private equity firm’s energy investments aren’t in oil, meaning its exposure to lower oil prices is limited, Schwarzman said in an interview on the sidelines of the Boao Forum for Asia with Bloomberg Television on Saturday. Schwarzman, who is also chief executive officer of Blackstone, didn’t elaborate on specific energy investments.

Crude prices tumbled more than 50 percent after the U.S. shale boom boosted output to a three-decade high and as OPEC, led by Saudi Arabia, the world’s largest oil exporter, relinquished its traditional role adjusting production to moderate price swings in an effort to maintain market share.

Brent crude, the global benchmark, fell from last year’s high of $115.71 a barrel to a six-year low of $45.19 on Jan. 13.
MGL: We suspect ARAMCO opened the faucet wide open last week as the Saudi military intervened in the Yemen. Oil expectations are still around $83 long term. Too high. Nevertheless US based investors in particular persist in believing that Middle East tension is bullish for Oil. The evidence in our eyes suggests the Muslim civil wars provoke Saudi to cut Oil prices drastically in order to bankrupt the armies. For Saudi, Muslim stability is more important that their budgetary balance.

Cnooc Surprises With 6.6% Gain in Profit as Peers Slump

Cnooc Ltd., China’s biggest offshore explorer, reported a 6.6 percent increase in full-year profit, beating the plunge in crude prices that has hit explorers across the world.

Net income rose to 60.2 billion yuan ($9.7 billion), or 1.35 yuan a share, from 56.5 billion yuan, or 1.26 yuan, a year earlier, according to a statement to the Hong Kong stock exchange. The mean profit of 24 analyst estimates compiled by Bloomberg was 52.3 billion yuan. Sales dropped 4 percent to 275 billion yuan.

Beijing-based Cnooc’s cost control “measures laid a solid foundation for the company to cope with the low oil price environment,” Chief Executive Li Fanrong said in the statement.

Brent, a benchmark for half of the world’s crude trading, dropped 48 percent last year, forcing explorers worldwide to pare investment and fire workers. State-owned peer China Petroleum & Chemical Corp. posted a 30 percent slide in 2014 profit on Sunday, while Chevron Corp., the second-largest U.S. energy producer, reported a 10 percent drop and Royal Dutch Shell Plc posted a 9.1 percent decline.

The company plans to increase production by as much as 15 percent this year, while cutting capital expenditure by as much as 35 percent to 70 billion yuan.

Cnooc’s Canadian unit, Nexen Energy, said earlier this month that it’s cutting 13 percent of its workforce and getting out of the oil-trading business.
MGL: Realised prices per boe looked high. Here's what they said in q3: Realized oil price of US$ 98.98/bbl, down 6.8% YoY Now in Q4, when prices crashed, full year average is down a mere 8.6%. It looks suspiciously like CNOOC benefitted from term contracts with the Chinese gov't. China has managed to invert the normal scheme of results, loading Sinopec and Petrochina with heavy inventory losses, whilst sustaining enfeebled CNOOC.

Asian giants want majority stakes in Australian LNG projects

Asian companies will seek to take majority stakes in Australian liquefied natural gas projects within five years, KPMG Asia Pacific energy head Mina Sekiguchi says.

Ms Sekiguchi, KPMG's Tokyo-based head of energy and natural resources in Asia Pacific, said Asian utilities, trading houses and national oil companies, particularly from Japan, were enthusiastic about using their minority positions as platforms for further investment and potential acquisitions.

"Some are looking to be operators or take bigger stakes and they think taking these minority stakes is a good way to learn," she said. "In probably five years time once construction ends and we start shipping I think it could trigger the next phase where Japan will get more involved in these projects.

"Some of the projects might be sold because they might not be profitable enough around these prices for current shareholders but that means they will be picked up by somebody else, a new entrant maybe from Japan, China, Indonesia, Malaysia or Korea, for example. That has started happening and there will be a lot more transactions."

Japanese investment has been important in the rapid expansion of Australia's LNG capacity. Japanese utilities have taken minority positions in the majority of Australian LNG projects in operation or under construction. The $34 billion Ichthys project near Darwin, headed by Japan's INPEX and scheduled to start production in late-2016, will be the first Japanese-operated LNG project anywhere in the world.
MGL: Icthys, as we have often noted, has terrible economics. The Japanese likely smell blood on the street as the LNG cycle collapses to all time lows. Strategically, they will always be buyers of natural gas, and buying distressed assets makes sense for these utilities. We would note that whereas Big Oil seeks high teenage returns on assets, Japanese utilities will feel spoilt at high single digit returns on investment.

India said to lower natural gas price 10 percent as energy costs plunge

India will probably cut the price of locally produced natural gas starting next month as global energy costs slump, a government official said.

Prices will probably be lowered to $5.02 per million Btu, the official told reporters Thursday in New Delhi, asking not to be identified because of rules. The price is based on the net heat value of gas and will be lower at a gross value, he said, declining to give a specific figure.

Domestic prices, due for review April 1, were boosted by one-third to $5.6 per million Btu on Nov. 1.

The government continues to work on a plan to allow a premium for gas produced from deep-water fields, the official said. The premium will be applicable only to gas discovered and produced after November 2014 and will be a percentage, rather than a specific number. The percentage may vary for different depths of fields, according to the official.

The cost of overseas liquefied natural gas for India has dropped to about $9 per million British thermal units, curbing the government’s scope to increase rates for local producers, Oil Minister Dharmendra Pradhan said in an interview last month.

LNG is about $7 per million Btu and it costs about $2 per unit more to ship it to India, Pradhan said. The difference between the price of LNG — gas chilled to a liquid for ease of transport by ships — and local prices is too small, he said.

While Prime Minister Narendra Modi has made boosting energy supplies a priority to curb blackouts, explorers such as Reliance Industries Ltd. and BP Plc argue higher domestic gas prices are needed to spur investment and raise output. BP last year wrote off $770 million from an undersea Indian gas block, while Canada’s Niko Resources Ltd. is seeking to sell its stake in the project because of uncertainty about the long-term pricing outlook in India.
MGL: If this turns out to be true, it's a nasty surprise, particularly for the big domestic quoted Oil and Gas companies: Reliance, ONGC. Obviously its an unexpected boon to the fertilizer stocks.

India looking at lowering LNG imports from Qatar

In an interesting development, India is weighing the option of cutting natural gas import volumes from Qatar under its long-term contract.

Multiple sources said that with gas prices in the spot market being lower by almost $6 a unit (gas is measured in million British thermal units) than the prevailing long-term price it has with Qatar’s RasGas, India is looking at cutting the contracted volumes by about 10 per cent.

Petronet LNG imports 7.5 million tonnes annually from the global energy supplier, RasGas, under the long-term agreement.

The two had signed the first sales and purchase agreement (SPA) in 1999. Sources said the contract provides for flexibility of reducing the volumes on acceptable terms.

At present, this gas is priced at $13 a unit, while the spot delivers at India’s shores are at around $7 a unit. To this landed cost are added re-gasification costs, transmission tariffs, marketing margins, and local taxes/levies, before the end-user receives it.

High level talks are on between India and Qatar, though New Delhi allows companies to procure liquefied natural gas (LNG) under open general licence.

Under the open general licence, the marketer is free to purchase and sell based on commercial consideration. “The ties, which the two countries have had, make it a sensitive issue. Since this will not be a commercial decision, lot will depend on the political powers,” another official said.

“With new gas markets opening up for India, including the US, the country will have to re-align its gas import strategy and look at best deals in pure commercial terms,” the official said adding that even Qatar would like to maintain its strong position.
MGL: Typically there are two kinds of escape clauses in these fixed index linked contracts: 1> Volume modifiers: +/- 10% is typical of most we've covered. 2> Contract exit IF spot volume adequate. Now the Indian could easily opt for 1>, and reduce volumes 10% without needing to go to Qatar. We find the newsflow here that the Indians are talking face to face with the Qataris very instructive, it strongly implies that India is presenting data to the Qataris that suggests option 2> may be on the table, either now or later. It is plausible the Indian's would prefer the contract to be renegotiated down to spot, and keep the firm volumes. We're pretty sure this line of thinking won't make the Qataris happy. This is definitely worth watching. If we are right, a major shoe is about to drop in LNG.

Chevron pulls out of Australian gas project with Beach Energy

Chevron Corp. withdrew from a natural gas exploration venture in central Australia, as the second-biggest U.S. energy producer curtails spending.

Chevron decided that “the opportunity does not align strategically” with its global exploration and development portfolio, its partner Adelaide-based Beach Energy Ltd. said Friday in a statement.

The move follows San Ramon, California-based Chevron’s announcement earlier Friday that it’s selling its 50% stake in Caltex Australia Ltd. to institutional investors.

In 2013, Chevron had agreed to pay as much as $349 million to join Beach in its first shale investment in Australia.

Beach will now look at opportunities to bring in another partner after Chevron said it won’t go ahead with the second stage of the Nappamerri Trough gas project, according to the statement. Beach will carry out further studies through the year ending in June 2016, with minimal spending, it said.

The project is still “potentially significant on a global scale,” Beach said in an emailed response to questions. “Beach remains committed to this resource” that has potential to supply gas to the east coast and export markets.
MGL: Chevron, as we've pointed out is overcommitted to large capex heavy projects like Wheatstone, and Gorgon, and we suspect a handful of other similar projects. So everything that's not 'fixed to the deck' must go, and this Beach JV has shown too little commercial progress. It does leave Beach with 100% of an interesting project, but there's going to few obvious takers in this environment.

Gulf Keystone gives lender until end of working week to accept offer

Gulf Keystone Petroleum has given its lenders until the end of the shortened working week to accept an incentivised offer for the amendment of terms for US$250mln of loan notes.

A prior offer, which would see lenders receive $5 for every $5,000 of the GKP they hold, was due to expire on Wednesday April 1.

Now the deadline has been extended by 24 hours and will expire on Thursday April 2, at 5pm.

The incentivised offer comes ahead of a meeting of loan holders scheduled for April 7, after the Easter bank holiday weekend.

Earlier this month the Kurdistan based oil firm disclosed it was set to breach a technical covenant of the debt, and it was seeking to amend the loan terms with its lenders.

The loan notes carry 13% interest and are due in 2017; however, the anticipated covenant breach could trigger early repayment. These notes are just one portion of GKP’s outstanding debt.
MGL: Accept or we go bankrupt???

Shell delays Australian drilling plans as crude oil prices dive

Royal Dutch Shell’s delay of the drilling of a $100 million-plus exploration well off Australia’s north-west coast is the latest example of modified plans in the wake of the plunge in crude oil prices, which sources say have driven some companies to renege on work commitments.

Shell’s Cronus-1 well was due to start drilling this quarter in the Browse Basin, targeting a large gas discovery, but the well has been put back until later in 2015. Wells by Japan’s Inpex Corporation and Santos planned off Western Australia’s coast have also been deferred recently, while several others have sought modifications to permit terms to allow them to cancel or delay work.

However, a Shell spokesman rejected the suggestion the company had put off drilling Cronus because of the drop in prices, although he couldn’t give a reason for the delay.
MGL: Capex cancellations/postponements are very much par for the course in this environment. Why should Shell's spokesmen be so reticent in admitting the obvious? Unfortunately the likely truth is that internally this verity is simply not obvious, nor thinkable, simply because of the repercussions to long held plans, projects, and -most important- job security.

Vale CEO Murilo Ferreira to lead Petrobras

Brazil has chosen Murilo Ferreira, the chief executive officer of Vale to head the board of embattled state-run Petroleo Brasileiro SA or Petrobras, according to a filing from the oil company on Friday.

Ferreira’s nomination will be voted on April 29 at the next shareholders meeting of Petrobras, a company struggling to deal with the fallout from a vast corruption scandal in which four former executives are accused of participating in a bribery scheme.

Ferreira has led Vale, the world’s biggest iron-ore producer, since 2011, and has spent his entire career at the company.

It is still unclear whether the executive can hold both top posts without facing accusations of conflict of interest

It is still unclear whether the executive can hold both top posts without facing accusations of conflict of interest, as Vale is one of Petrobras top customers and business allies.

Vale’s CEO has been under the government’s radar for a while. Last year it was rumoured that Brazilian President Dilma Rousseff was planning to appoint him as her new finance minister.

Ferreira’s nomination is considered a last-ditch attempt to restore credibility to the state-controlled oil producer.
MGL: Brazil's elite circles the wagons with this appointment. It smacks of fear and desperation by the President, and the market was, rightly, hoping for better. We have to ask whether Vale's large and local capex program on iron mines was also impacted by the corruption and fraud detected at Petrobras.

Consensus low on Oil??

Image titleImage title2. Oil

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

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


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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

Under one scenario put forward by the CGEP, Qatar’s LNG revenues could plunge 34 percent to $37 billion in 2026.
MGL: Consultants are guilty of extrapolating the present into the future. So we're actually describing the state of play NOW; LNG prices on index contracts have a lag, but are descending inexorably down below that critical $12 level which provides the IRR for most of these plants.  We would argue that it was Qatar massive expansion in the late 2008-2010 period that broke the LNG pricing model in the first place, everything else since then has just been reiteration of the theme: excess returns on LNG investment a decade ago provoked a veritable inundation of capacity.  Add in that shale gas transformed the US from being a major importer to being a potential low cost exporter, and excess supply is in the order of 50-100%. Worse yet, buyers have really only conformed to the "great gas growth" story at low prices, leaving demand much feebler in Asia than the rosy spectacled analysts had expected. 

Gazprom says 2014 net income under Russian rules down 70 pct

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

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

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

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

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

The company also said it had booked reserves of 22.3 billion roubles for possible writedowns on the Shtokman project, which was supposed to produce offshore gas in the Barents Sea. The company scrapped the plans due to cost overruns.
MGL: Gazprom trades 2.8x eps, 0.2x book, 1.8x cashflow, it has a 5% yield. The bulls have completely surrendered on this once totemic Russian grandee. The Kremlin has surrendered, and favours Rosneft or Novatek. All we need now is for the company to just stop spending money on projects that make little sense, and Shtokman cancellation is really the first evidence we've seen that event may be beginning. 

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

Sinopec, PetroChina persevere with shale gas as drilling costs fall

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Shandong Dongming, which operates an oil refinery processing as much as 450,000 barrels a day, expects to sell about a third of its output through the new gas-station network, the company said in a joint statement with the Qatari investors. It generated an operating income of $7.5 billion in 2013, according to the statement.
MGL: Qatargas owns Milford Haven in the UK, Golden Pass in the US,  so adding a Chinese LNG port to their integrated chain makes eminent sense. 

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

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

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

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

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

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

Poland said earlier this month it would not increase payments for the construction, which was supposed to be completed by the end of 2014 for a total of 2.4 billion zlotys ($636 million).
MGL: The contractors accuse the gov't of changing the law, which required mid construction modifications, and delayed the project almost an entire year. Poland's long term index linked deal with Qatar- at 16% of Oil- is one of the highest index deals we've seen, and reflects Polish desire to move away from Gazprom. Rught now that Gas would arrive at $8.50, vs $7.10 at spot. Muddying the water here is a summer election. I cant believe they wont resolve these issues, and complete this port, its too strategic for Poland. 

Niko Announces Favourable Judgement From Indian Court

Niko Announces Favourable Judgement From Indian Court

Niko Resources Ltd. is pleased to announce that the High Court of Gujarat in India has issued a favourable judgement on the retrospective application of the definition of undertakings and whether or not mineral oil includes natural gas for the purposes of the income tax holiday claims for the Company’s fields in India.
MGL: Niko, the largest independent to make discoveries in India, (partnered with Reliance),  is fighting for its very life with $510m of debt, and very little cashflow. Niko's enormous Indian portfolio lies wasting away as the gov't slowly rolls out decisions on gas prices, taxes, allowable capex, and every detail of the development plan. Modi's gov't has so far done little to help Niko, indeed the reversal of gas price increases we're hearing about from the Indian press could well be the kiss of death here. Reliance may pick up the pieces for a song.

Harvest Natural faces cash crunch, considers restructuring

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

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

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

Harvest has tried twice to sell its interests in Venezuela. In 2013, a deal with Indonesian oil company Pertamina was rejected by the Venezuelan government and a similar sale attempt to a unit of Argentina's Pluspetrol was also unsuccessful.
MGL: No debt here. Harvest has simply had no sales from its Venezuelan unit for some 5 years now.  Harvest owns 20m boee odd in Venezuela, and some early stage exploration efforts outside the country.

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

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

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

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

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

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

But the London oil company again turned to the debate over whether it has the financial muscle to pay the maximum fines. It said the equity of its Houston-based U.S. oil business, the unit legally tied to the spill and that manages its Gulf of Mexico operations, fell to $5 billion in December amid low oil prices.
MGL: This is desperate.  Which lawyer dream't this  one up?  Barbier, the judge has so far refused to take nonsense from either side in this case. US gov't adsurd estimates of the spill size were thrown out, and Bp's attempts to wriggle off the hook have equally been thrown out. 

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

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

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

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

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

This February, operators reported 1,521 oil, 210 gas, 245 injection, and three other completions, the commission said. In February 2014, the commission said operators reported 2,768 oil, 232 gas, 131 injection, and 11 other completions.
MGL: Texas production already being revised down, and the implied damage in the 4q must have been around 1mbpd, thats consistent with other numbers we've seen. 

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

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

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

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

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


Apache reports strong results in Egypt

Apache Corporation today reported strong appraisal- and development-drilling results from Egypt following the previously announced discovery of two new oil fields in the Western Desert. The initial discoveries were announced with the fourth quarter 2014 results on Feb. 12, 2015. Development leases were approved by the Egyptian General Petroleum Corporation (EGPC) and Ministry of Petroleum in record time, taking only 13 days from submission of the development plan for Berenice, and only six days for Ptah.

The Berenice and Ptah fields are located in the Faghur Basin along the same fault trend in the Khalda Offset Concession. Exploration and drilling efforts are targeting rock from both the Mesozoic and deeper Paleozoic eras. These targets are a PRIMARY focus for Apache Egypt and have proven successful in this area with oil and gas discoveries made at the nearby Shu-1X, Apries-1X, Bat-1X and Geb-1X wells, although Ptah is the largest new field found in the play thus far.

Five wells, including the discovery wells, have been completed to date by Khalda Petroleum Company, Apache's joint-venture company with EGPC. All five wells are producing without the need for fracture stimulation at a combined rate of more than 13,600 barrels of oil per day (bbl/d) with first production starting in November 2014. The wells have produced approximately 1 million barrels of oil to date. Apache has invested $14 million to install production facilities and plans to invest another $35 million to handle the forecasted production increase.

Apache currently has three rigs operating in these two fields to drill development wells. All oil is being shipped via pipeline to nearby Khalda-operated processing facilities. Apache plans to continue increasing production from the two fields to 17,500 bbl/d by mid-year.
MGL: Image titleApache is one of the few big E&P's we follow thats trading under its PV10, EV is $35bn, PV10 is $43bn. We're not huge fans of Egypt, but the  political background has improved, subsidies are being reduced, and we must acknowledge the strength of activity in this geologically fecund country. Image title

India Cuts Domestic Gas Price by 8% as Global Energy Costs Fall

India cut the price of locally produced natural gas by 8 percent for six months beginning Wednesday as global energy costs slump.

Prices have been lowered to $4.66 per million British thermal units based on the gross heat value, according to the oil ministry’s Petroleum Planning and Analysis Cell. Rates were fixed at $5.05 per million Btu effective Nov. 1.

The reduction will squeeze the profit margins at explorers such as Reliance Industries Ltd. and Oil & Natural Gas Corp. and curb their appetite for investments needed to raise output. Prime Minister Narendra Modi aims to cut dependence on imported energy to 50 percent by 2030 from 77 percent now.

“If prices continue to fall for long, it will reflect on investments by producers,” said Dhaval Joshi of Emkay Global Financial Services in Mumbai. “This will pinch the producers, although it’s good for consumers.”
MGL: Thats the quickest turnaround from rumour to fact in India we've ever seen!

OPEC oil output hits highest since October on Iraq, Saudi

OPEC oil supply has jumped in March to its highest since October as Iraq's exports rebounded after bad weather and Saudi Arabia pumped at close to record rates, a Reuters survey found, a sign key members are sticking to their effort to regain market share.

The increase from the Organization of the Petroleum Exporting Countries adds to excess supply in the market, despite some signs that the halving of crude prices since June 2014 is encouraging higher oil demand.

OPEC supply has risen in March to 30.63 million barrels per day (bpd) from a revised 30.07 million bpd in February, according to the survey based on shipping data and information from sources at oil companies, OPEC and consultants.

"Demand might be a bit stronger than expected at the beginning of the year, but I don't think it is strong enough to absorb the entire oversupply," said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. "There's still oversupply in the market, which is reflected in the inventory builds."

Besides Saudi Arabia, the main reasons for the rise are the resolution of involuntary outages - Iraq lifted exports due to improved weather and Libya managed to nudge production higher despite unrest.

If the total remains unrevised at 30.63 million bpd, March's supply would be OPEC's highest since 30.64 million bpd in October 2014, based on Reuters surveys.

Saudi Arabia was the driving force behind OPEC's refusal last year to prop up prices by cutting its output target of 30 million bpd, in a bid to discourage more costly rival supplies. The group holds its next meeting in June, and comments from OPEC officials suggest it will not alter the policy.

In March, the largest increase has come from Iraq, whose southern oil exports recovered following bad weather that delayed tanker loadings, according to shipping data and industry sources. Northern exports were slightly lower.

Based on this survey, Iraq's exports have come close to December's record high of 2.94 million bpd, depending on whether tankers at the southern ports on earlier on Tuesday actually depart in March. Iraq was hoping to reach 3 million bpd of exports this month.

Saudi Arabia has increased output to within a whisker of 10 million bpd on average in March, sources in the survey said, due to higher demand from export customers and an increased local requirement in new oil refineries.
MGL: Confirms our newsflow. Next chapter in the Oil bear: the storage cliff. When do run out of storage? At the moment the tealeaves suggest its a May event, but we're still not seeing the kind of VLCC storage activity we would associate with a collapse.

Warburg pumping $500Mln into start-up oil producer

Private equity shop Warburg Pincus is putting $500 million behind a start-up Houston oil producer that’s aiming to buy oil and gas properties in the Mid-Continent and Rockies regions, the firms said Tuesday.

The transaction is only the latest foray of buyout firms into the U.S. oil industry, as Warburg, Blackstone and other firms have raised billions to take advantage of bargains in the oil patch amid low crude prices.

Warburg’s start up, Independence Resources Management, will look first to the Anadarko Basin in western Oklahoma and the Texas Panhandle. It’ll focus on regions with large quantities of oil but that are tougher to extract out of the ground.

There, the firm says, “advanced drilling and completion techniques can create compelling risk-adjusted returns.” Warburg hired Mike Van Horn, who was most recently a senior executive at Newfield Exploration, to be CEO of Independence.

“The investment will enable us to acquire a meaningful footprint in targeted plays and optimally delineate and develop that hydrocarbon resource over time,” Van Horn said in a written statement.

The line-of-equity investment of up to $500 million comes in part from Warburg’s first energy fund, for which the New York firm raised $4 billion last year to pour into U.S. oil explorers and other companies.

“The opportunity to grow a start up E&P company behind a great management team fits squarely within our investment thesis,” said James Levy, managing director at Warburg Pincus, in a written statement.
MGL: Image titleMore PE capital comes chasing into the Oil patch. Here's the most actives from Wall Street in q1, check out the  3x long crude ETN, which traded 3bn shares. Image titleHere's the shares outstanding, which leapt from 300% between December and March. Retail, and the blogs confirm this, thinks this Oil crash is totally temporary.  

New EIA monthly data tracks crude oil movements by rail

For the first time, EIA is providing monthly data on rail movements of crude oil, which have significantly increased over the past five years. The new data on crude-by-rail (CBR) movements are integrated with EIA's existing monthly petroleum supply statistics, which already include movements by pipeline, tanker, and barge. The new monthly time series of crude oil rail movements includes shipments to and from Canada and dramatically reduces the absolute level of unaccounted for volumes in EIA's monthly balances for each region.

EIA is initiating the new series with monthly data from January 2010 through the current reporting month, January 2015. CBR activity is tracked between pairs of Petroleum Administration for Defense District (PADD) regions (inter-PADD), within each region (intra-PADD), and across the U.S.-Canada border. EIA developed the new series using information provided by the U.S. Surface Transportation Board (STB) along with data from Canada's National Energy Board, and EIA survey data.

Total CBR movements in the United States and between the United States and Canada were more than 1 million barrels per day (bbl/d) in 2014, up from 55,000 bbl/d in 2010. The regional distribution of these movements has also changed over this period.
The maps below provide general flows of CBR movements annually from 2010 through 2014.

The Williston Basin in North Dakota (PADD 2) was the primary origin of 55,000 bbl/d of CBR shipments in 2010, with most shipments remaining in the Midwest region. Rail tank cars were used mainly to move Bakken crude oil to the Cushing, Oklahoma, storage and pipeline hub. The remaining volumes of Bakken CBR shipments went to Gulf Coast and East Coast refineries (PADDs 3 and 1, respectively).
MGL: So the dominant crude by rail shipments are Bakken to PADD1. With Bakken output faltering now, and Bakken crudes trading at $43.80 for spot, we have to think this activity moves into sharp contraction.  At the end of January 660 wells in the Bakken were awaiting completion, a number that has steadily risen since last June (@ 300 then.)  Harold Hamm's recent comments suggest non-completions reached 85% in March, which implies that the Bakken 'overhang' must now be around 750 wells,  at EIA average production per well, thats over 400kbpd waiting for either pipe or price.  The Dakota access pipeline, in construction now, will almost entirely replace this Bakken -> Padd1 activity as it links Bakken oil fields directly to major pipeline capacity interchanges in Illinois. Expected completion q4 2016, capacity 450kbpd.

US oil production on track to reach all time high

Rystad Energy estimates US annual oil production (crude oil plus lease condensate) to peak at 9.7 million barrels per day by September 2015, assuming WTI stays at 55 USD/bbl on average for the year. The average production for 2015 estimated at 9.65 million barrels per day could be an all-time high after its peak in 1970 with 9.64 million barrels per day as yearly average.

'The monthly peak is estimated at 9.7 million bbl/d by September 2015, assuming horizontal oil rig count for Bakken, Eagle Ford and Permian will stabilize at 400 rigs, which is 43% below peak,' says Per Magnus Nysveen, Senior Partner and Head of Analysis at Rystad Energy. 'Production could be even higher depending on assumptions like (1) lower drilling costs, thus more barrels per dollar spent, (2) narrowing price differentials in North Dakota, and (3) reduced backlog of completed wells.'

By accounting for 400 thousand bbl/d of plant condensates produced from natural gas processing plants, Rystad Energy estimates that US oil production reaches an absolute all-time high already during April 2015, and further growth could be expected throughout the year. For overall liquids production, including biofuels, NGL and processing gains, the all-time-high was already passed during 2013. In 2012 US total liquids production surpassed both Saudi Arabia and Russia.

Last week US domestic oil production reached 9.42 million barrels per day. Production in March was 0.124 million bbl/d higher than in February, and a staggering 1.2 million bbl/d higher than in March a year ago. The current growth rate for US oil production is thus the highest since October 2014, and on an increasing trend for the first three months of this year.

Growth is also supported by year-over-year additions of 0.17 million bbl/d from new deep water fields in the Gulf of Mexico, including Tubular Bells, Jack, St Malo, Mars, Cardamom Deep, Cascade and others.
MGL: So this is confirmation of our primary thesis that capacity follows capex. Last year, at about this time, we did suggest US Oil production might be growing above 1.2mbpd as the new superfracs went into production. If you were to add the now substantial evidence of a 1mbpd fracklog building in the major basins, its entirely plausible that the growth would have been much higher. However, there's a growing disconnect appearing between the EIA data and local Texas RRC data, and if the RRC is correct, national data maybe overstating oil production by close to 1mbpd at this point in time. Image title
Make no mistake, if this Texas RRC data is correct, the 'fracklog' is the culprit.

Natural gas storage levels end heating season higher than last year

As winter makes its exit, and with it peak demand for heating, the nation’s natural gas storage inventories are higher than they were this time last year, despite 2015’s late start to spring temperatures.

And as the industry prepares to restock inventories during the so-called injection season between April and October, robust production will keep the natural gas market oversupplied and prices low, analysts said.

Natural gas in storage clocked in at 1.48 trillion cubic feet on March 20, according to the U.S. Energy Information Administration, representing “the first positive net injection this year.”

Storage levels are 63.6 percent above this time last year but 11.6 percent below the five-year average, according to the EIA.

Meanwhile, natural gas production, driven by fracking in shale plays, posted a year-to-date high of 73.2 billion cubic feet per day on March 22.

“This was largely because of record Northeast production, which hit an all-time high of 19.9 Bcf/d,” said the EIA, citing data from Colorado analytics firm Bentek Energy.

Production is expected to grow this year despite a falling rig count and plummeting oil and gas prices.

“We’re seeing an average 5.5 Bcf per day increase in production over last year,” said Erica Bowman, vice president of research and policy analysis for Washington, D.C.-based trade group America’s Natural Gas Alliance.
MGL: That was a shocker of a winter for gas bulls. We went into the season with low storage,  weather conditions seemed 'normal' for winter, if there is such an event, and here we are now at $2.6 for spot gas, worse yet LNG in Tokyo Bay at $7 odd is reflecting US gas prices. Image titleThis is the EIA data for the Marcellus field, its a supergiant, and now firmly in the top 10 globally of updated statistics. I've circled in yellow the technology 's' curve that has destroyed US Natural Gas pricing so profoundly.  Post the collapse in Natural Gas prices in 2010, the industry really beefed up its productivity, and production per well soared 5x in 5 years. Many analysts point at associated gas from Oil fields, and yes this was a contributor too, but the advent of the Marcellus is almost equal to associated gas in the national data, depending on your start point, each added over 10bcf per day to production.  

Our two questions: Is the natural gas bear now at exhaustion? We're going to lose the associated gas production growth, we're going to gain LNG exports. Second question: Is the Permian story an analog of the Marcellus story? We have multiple layers of oil bearing shale, we have an industry in its infancy on shale drilling in the Permian, and the Permian geology in size and scale is multiples of the Bakken and Eagle Ford. 


Canada Oil Output Limits GDP Declines in January

Crude oil gave Canada’s economy a surprise cushion in January, with gross domestic product shrinking less than economists forecast.

Output fell 0.1 percent, Statistics Canada said today in Ottawa, as rising oil production offset declines by wholesalers and retailers. The median forecast in a Bloomberg economist survey was for a 0.2 percent drop, with estimated declines ranging from 0.1 percent to 0.5 percent.

The report suggests that while Canada’s economy is being hurt by falling oil prices, the impact may not be as dire as some have worried. It also backs Bank of Canada Governor Stephen Poloz’s view that his surprise interest rate cut in January has bought policy makers time, said Bank of Montreal senior economist Robert Kavcic.

Crude oil and gas output rose 2.6 percent in January, after a 2.1 percent December fall, as oil sands producers completed maintenance work on some facilities, the statistics agency said.

Those gains were offset by a 2.6 percent drop in wholesaling and a 0.7 percent decline in manufacturing.
MGL: Image titleHere's Canada's Oil pipeline system. Since 2011, it has been struggling to keep up with Oil output from the oilsands, and WCS has traded at repeated, and large discounts throughout the period.Image title
Here's Enbridge's expansion activity. Since q3 last year Enbridge has been completing various pipelines running south and east from Alberta.
The big one was 600kbpd of crude from Chicago to Houston, completed in q4, and indeed as this capacity has come online WCS discounts have narrowed sharply, from peaks around $20, to current levels of $12. There's still a plethora of expansion activity to complete, out to late 2017.

Image title
As Enbridge points out, even on the low case, there a phalanx of large crude projects in the pipeline adding some 600kpd of Oil boe's by the end of 2017. Its only then that curtailed capex spend begins to impact Canadian crude production.

Somehow in all the noise about shale output south of the border, the market has been ignoring Canada's substantial Oil industry inertia as projects instigated at Oil prices above $100, and now contracted, in construction and completing over the next 2-3 years add a substantial amount to crude supply south of the border.  We strongly suspect the build in Cushing of inventory is directly associated with these added flows into the system.  The company and state data is indicating that the fracklog has replaced current oil production with potential oil production, and created not only a mammoth inventory build, but also a large overhang in the system.

Market implied expectations of some kind of V shaped recovery in Oil pricing late this year are sharply at odds with the facts as we find them.


Cost key variable in crude-price scenarios

With Saudi Arabia reluctant to cut production, crude oil prices over the next decade depend greatly on producers’ costs, says a veteran observer of oil markets and the Middle East.

An oil-price rise to $80-90/bbl in the next couple of years requires a production cut unlikely to be made by Saudi Arabia, says Fereidun Fesharaki, chairman of Facts Global Energy (FGE), London. Without a Saudi cut, Fesharaki writes in a March report, “prices can lag at $40-60/bbl for some time to come.”

Lower growth in oil production in the US, he adds, will not support prices on its own.

According to Fesharaki, Saudi Arabia “had no choice” when under pressure last year to cut production in defense of the crude price while supply was zooming in the US.

Before agreeing to cut output, he believes, the Saudis need to see growth in US oil production fall to no more than 200,000 b/d in 2016 and Iraq accept “real quotas.”

Both conditions are steep. US production growth last year was 1.5 million b/d and this year will be about 1 million b/d. And Iraq, which will be producing nearly 4 million b/d by yearend, remains “absolutely reluctant” to accept a quota.

“They [Iraqi officials] are unlikely to negotiate a quota before their production reaches 6-7 million b/d,” Fesharaki says.

What’s required

The market needs to shed 3-3.5 million b/d of current and future oil production to allow the crude price to exceed $80/bbl in the next year or two, he says.

This could occur if Saudi Arabia lowered production to 8 million b/d, if US production growth fell by 500,000-800,000 b/d, and if Iraq accepted a quota not exceeding 3.5-4 million b/d. Other OPEC members also would have to cut production, and Russia is likely to lose 300,000-500,000 b/d of production because of low oil prices and sanctions.

He expects US production growth to fall to 0-200,000 b/d by 2016, about FGE’s expectation for US demand growth this year.

This combination “can impact the market positively to the $50-60/bbl range, but it is not enough to raise prices to beyond $80/bbl,” Fesharaki says.

Iran, meanwhile, might increase production by 500,000 b/d in 3-6 months if freed of international sanctions and by 700,000 b/d a year beyond that. Iran will be reluctant to accept a lower production and remains committed to total liquids production of 4 million b/d.

Two scenarios

Fesharaki outlines one scenario in which crude prices fluctuate within a range of $50-80/bbl for the next 10 years. This assumes producers, especially in the US, don’t cut costs dramatically.

If costs do plummet, the price range for the next 10 years will drop to $40-60/bbl as US production continues to grow faster than 500,000 b/d/year in 2016 and 2017.

If US production doesn’t fall, Fesharaki adds, Saudi Arabia might have to raise production to perhaps 10.5 million b/d to depress the crude price to $30-40/bbl, despite protests from other members of OPEC.

“But we feel confident that oil prices in the range of $40-45/bbl will cut 80% of the US production growth,” Fesharaki says.

He doesn’t expect a demand rebound to rescue the market. Demand growth of slightly more than 1 million b/d is possible this year. Next year, growth of 1.5-2 million b/d is “unlikely, but not impossible.”

The analyst also doesn’t expect geopolitical upsets to cut production enough to balance the oil market, calling a major supply disruption from any of the vulnerable producers “highly unlikely.”

For the rest of this year, he expects prices of West Texas Intermediate and Brent crude to fall to $40/bbl in the second quarter, with WTI $2-3/bbl below the European marker, because of seasonal demand weakness, increasing storage costs, and postponement of refinery maintenance.
MGL: Image title
Canadian dollar depreciation has moved the marginal costs down 25% since the fall.
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In Russia, marginal costs have fallen in half.Image title
In the US operators are sharply reducing capex costs per well. 

Here's a typical consensus Oil breakeven chart:

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It's just history! ALL the above numbers are too high now. Between currency and technology we just shown you that 22m bpd (Russia, US, Canada) have seen cash breakevens drop between 25% and 50% in the last 4 months. 


Itochu to Post Loss on Samson U.S. Oil and Gas Investment

Itochu Corp. said it will post a loss of about 38 billion yen ($317 million) on a U.S. shale oil and gas investment amid a downturn in energy prices.

The loss resulting from Itochu’s 25 percent stake in Samson Investment Co. will be booked in the earnings for the fiscal year ended March 31, the Tokyo-based trader said. On a non-consolidated basis, the figure will rise to 43 billion yen. The full-year profit target of 300 billion yen hasn’t been affected, Itochu said.

Itochu joined the 2011 KKR & Co.-led purchase of most of Tulsa, Oklahoma-based Samson as part of the biggest leveraged buyout in the oil and gas production industry at the time, according to data compiled by Bloomberg. It was Itochu’s third-largest acquisition in raw materials, data show.

Itochu, Japan’s third-largest trading house, paid 78 billion yen, worth $1.04 billion at the time, for the equity in family-owned Samson. As a result of the loss, the balance of the investment will decline to 4 billion yen, Itochu said.

Samson Resources Corp., an oil and natural gas producer controlled by private equity giant KKR & Co., warned investors that bankruptcy may be its best option as collapsing crude prices erode its ability to repay debt.

Samson, which was acquired by KKR and a group of investors in a $7.2 billion buyout in 2011, hired restructuring advisers in February, including Kirkland & Ellis LLP and Blackstone Group LP, according to the company.
MGL: PV10 is $2.2bn, net debt $3.8bn, 2m acres of primarily gas acreage all over the map. This was one of the first big PE type investments post the gas crash, and had identical hallmarks to the infusion of capital we are now seeing in Oil in the US. 

Brazil engineering player files for bankruptcy

Brazilian engineering conglomerate Grupo OAS requested court protection from creditors for nine of its units on Tuesday as it grapples with the fallout from a scandal at state-controlled Petrobras, a major customer.

The filing comes after Grupo OAS struggled for months with the effects of a corruption investigation at Petrobras, as the state oil company is known, which undercut the builder's access to financing and contract payments.

An economic downturn, government austerity and a slumping currency have also taken a toll on the company in recent months.

OAS follows rivals Alumini Engenharia and Galvao Engenharia, two other engineering firms that have filed for bankruptcy protection since January as the Petrobras scandal escalated.

Prosecutors say the three firms were part of a cartel that paid bribes to Petrobras executives and politicians in exchange for contracts.

Sao Paulo-based OAS pledged to sell assets to repay debt and inject cash into its heavy construction unit.

Grupo OAS, founded in 1976 by contractor Cesar Mata Pires and his partners in the north-eastern city of Salvador, has about 8 billion reais ($2.48 billion) in debt.
MGL: Petrobras fallout must add to the stress from falling Oil on service and engineering providers, so far the pain here has been primarily in Brazil, but we note there's a vast gulf opened between the size of the Petrobras corruption ticket (~$30bn) and the companies who have owned up to paying the bribes. It surely has to impact everyone who supplied Petrobras's subsalt effort since 2005?

Sanchez PP buys some producing assets from Sanchez Energy

Sanchez PP buys some producing assets from Sanchez Energy

Sanchez Production Partners LP today announced that it has executed and closed an agreement with Sanchez Energy Corp. to acquire wellbore interests in certain producing oil and natural gas wells in the Eagle Ford Shale for aggregate consideration of $85.0 million, subject to normal and customary closing adjustments (the “Eagle Ford Acquisition”). The transaction has an effective date of January 1, 2015 and was financed by SPP with a combination of preferred equity raised in a private placement, common units, borrowings under an amended and restated credit facility, and available cash.

Producing assets: 59 wellbores in the Palmetto Field in Gonzales County, Texas.

Escalating working interest: Average working interest of 18.2% in 2015 increases to 26.1% on January 1, 2016; 33.5% on January 1, 2017; 40.6% on January 1, 2018; and 47.5% on January 1, 2019 for the remaining life of the wellbores.

Production: As a result of the escalating working interest transaction structure, average production of approximately 1,000 BOE/D net to SPP’s interest is expected from the wellbores over the period 2015 through 2019, with production following declines characteristic of MLP assets thereafter.
Reserves & Asset Mix: Based on estimates using the forward strip as of January 9, 2015, reserves total approximately 5.2 MMBOE, all of which are proved developed producing, with production expected to be approximately 84% oil and liquids and 16% natural gas.
MGL: Some will cry foul! Its hardly an arms length transaction. Nevertheless Sanchez family interests have deep pockets, and a desire to support the favourite son. 

Here’s Where Forecasters Think Oil Is Heading

The price of oil has just closed its third consecutive quarter of price declines, and experts diverge on where it’s headed next.

Major banks see WTI, the U.S. oil benchmark, ending the year anywhere between $52 to $84 a barrel. The range for Brent, the global marker, is similarly big – from $55 to $90 a barrel. On Wednesday Brent was trading around $55 a barrel and WTI  was around $47 a barrel.

While most forecasters agree that the seeds of the recovery have been sown — the number of U.S. oil drilling rigs has fallen by half since last year while large oil companies have cut capital expenditure by 10%-15% — there is less consensus about the timing and the strength of the recovery.

The case for bears appears to be strongest in the U.S. Oil inventories there are running at their highest in 80 years while production has continued to creep higher despite the falling rig count.

Yet some disagree with that assessment. “We do not buy the fundamental explanation,” said analysts at ING bank, one of the most bullish forecasters. According to the bank, the record-high oil inventories are not a reason to worry: they increase seasonally in the first quarter because many refineries shut down for maintenance. Demand is also showing signs of strength as end consumers take advantage of the cheap oil, the bank said.
MGL: Sometimes you just read fiction. Sometimes its good fiction. 

"Experts diverge" Really? Seems to me all of them point upward. No sign of any sell side recognition of the Saudi 'line in the sand' at $60. 

"Seeds of recovery sown". Really? All we've lost are speculative science rigs, the hard core high productivity rig loss is likely still under a 100 rigs. 

"Capex cut 10-15%" Really? When prices are down 50% and capex is only down 15% look at contractual obligations at the back of the annual, its well hidden. All the critical oil areas and companies we've looked at are still in major project mode. Supply will not follow price until contracts complete.

"Case for bear strongest in the US where inventory is highest in 80 years" Really? What are we to make of Chinese sources saying their inventory is full then? Just because we dont have good data doesn't mean we should ignore nasty symptoms. 

"We do not buy fundamental explanation"  Really? Seasonal inventory build brings us to 80 year highs does it? 

"Demand showing signs of strength." Really? Strip out the inventory gains and what is core demand doing please?

I think this is an april fool. 

Petrobras Signs $3.5 Billion Accord With China Development Bank

Petroleo Brasileiro SA, the world’s most indebted oil producer, is turning to China for funding as a corruption scandal keeps it out of international bond markets.

Petrobras, as Brazil’s state-run driller is known, signed a contract with the China Development Bank as part of a $3.5 billion agreement to be implemented this year and next.

“Both parties confirmed their intention to work on further cooperation in the near future,” the Rio de Janeiro-based company said in a regulatory filing Wednesday.

Petrobras is slashing investments, selling assets and seeking alternative financing options as it grapples with ways to book corruption losses in its financial statements. Delays in reporting earnings have all but shut out the company from bond markets at a time of slumping crude prices.

Brazil’s President Dilma Rousseff said Tuesday that Petrobras’ recovery process would proceed by publishing a long-delayed audited financial statement by the end of April. In an exclusive interview in the presidential palace in Brasilia, Rousseff denied that she knew about the bribery that has shaken the company she chaired from 2003 to 2010.

The CDB contract was signed with Petrobras Global Trading BV during a trip to China by Ivan Monteiro, the Brazilian company’s chief financial officer.
MGL: Petrobras finds a lifeline with the Chinese. 

These Rousseff denials irritate: either she knew and was culpable, (likely); or she didn't and was incompetent. Either way, its bodes ill for Brazil. 

PIRA: how low will Asian spot LNG price fall?

PIRA Energy Group reports that with crude prices collapsing during the past six months, a considerable amount of debate has emerged over how long it would take for Asian contract prices to fall as well.

The truth is that most contracts, based off of the average import price for Japanese crude oil (JCC), use between a one and four month lag. By no means is there a singular contract price, PIRA said in its weekly report. Making this assessment is important because it sheds light on how heavily Atlantic Basin spot cargoes will need to be discounted in order to keep LNG production from shutting in, which no producer wants to do. If Atlantic Basin flows to Asia are to remain as high as they were through January, it’s going to take some low prices to move volume in the second quarter, which is the seasonal nadir for Asian gas demand. It will be critical to discount spot LNG in the months and quarters ahead in order to keep crude, NGL, or condensate flowing.

In the U.S. the EIA’s penultimate storage update for the 2014-2015 heating season revealed a 12 BCF injection. The range of estimates defining the market was quite large with expectations stretching from a single-digit draw to injections above 20 BCF. In spite of the benign “miss” versus consensus estimates, the market took the prompt contract down ~5¢, to settle at ~$2.67 — its lowest level since early March. That bearish response could indicate that lower prices are in the offing given the material amount of coal-to-gas switching needed in April/May, PIRA believes.

While possessing the second most amount of gas demand, the U.K. has the smallest amount of storage cover of any of the major gas consuming countries in Europe. So any time something happens in U.K. storage, it can tend to have an outsized effect given the amount of trading liquidity in NBP. The U.K.’s largest storage facility at Rough has been placed under capacity restrictions and it will further limit the country’s already limited storage.
MGL: We've been flagging the collapse in LNG spot for some months, contract prices are slowly falling to current implied Oil index of around $7-$8, which is actually almost precisely where spot lies today.  At these prices the veritable mountain of LNG capacity thats in construction barely washes its face operationally, and certainly offers equity owners little or no return on capital. Of course none of the companies in the business are really talking about this, why should they? Oil might rally and save their souls. 

US export capacity in construction, which we'll call 50m mt is still a fraction of the capacity waiting for FERC approvals (~200m mt), at under $3 Natural Gas, its economics are still robust, but no longer excellent. The issue is, and remains, if you received a FERC license today would you convert an existing LNG port? Plausibly, yes, its entirely possible the LNG capex suppliers are suddenly facing a yawning gulf in new orders, so capital equipment discounts must surely be expected.

What about Mozambique? British Colombia?  Its ~200m mt of capacity that has yet to reach FID. 

Well, folks, we've globalised the LNG industry in under 3 years.(Quote, analyst to Neil and I: "we're not going to globalise LNG in my lifetime"- ex gas analyst, note the ex.) Supersized returns are gone. Its just a plain old vanilla cyclical commodity, and unfortunately, like Oil, Coal and Iron ore, suddenly its a market soaked in excess capacity, with a massive, and I mean massive amount in construction. In Oil, Coal and Iron ore, we have low single digits in construction over 2-3 years. In LNG, its gargantuan. We have at least a 36% add to capacity in the next 3 years, and that assumes no more US plant is built, which is a mighty strong assumption.Image title

Premier Oil Plc said it discovered oil and gas at a well in the Falkland Islands.

Premier, which owns 36 percent of the well, discovered 81 feet of net-oil bearing reservoir and 55 feet of net gas-bearing reservoir from the Zebedee well, the company said in a statement on Thursday.

The Zebedee well will now be plugged and abandoned as a successful exploration well.
MGL: Thats a proper discovery! So is it commercial? 

German cabinet imposes high barriers for fracking

German Chancellor Angela Merkel's cabinet signed off on a draft law on Wednesday that imposes an effective ban on the controversial technique of fracking for shale gas.

Fracking, or hydraulic fracturing, involves blasting chemicals and water at underground rock formations to release trapped gas. Opposition is strong in densely-populated Germany due to concerns about the contamination of drinking water.

"Protecting health and drinking water are priorities. For this reason, we want to prevent fracking as far as possible," Environment Minister Barbara Hendricks told a news conference.

The new law, which now goes to parliament for approval, will impose an outright ban on fracking for shale gas in the next few years and only allow test drilling under strict conditions.

Following successful test drilling and the approval of a special committee, the new law could allow commercial fracking from 2019 but only in exceptional cases.

The new law will allow fracking for deep-lying or "tight" gas, a technology that has been used for decades in Germany. But even this type of fracking will be subject to stricter rules and environmental audits, Hendricks said.
MGL: The best comment we've ever had about fracking was a simple observation that it is all about land values. In the EU land values are much higher than in the US, population density is high. That imposes all kinds of hurdles to fracking, and frankly onshore drilling.  Much of the so called environmental opposition is actually NIMBY'ism clad in PC clothing. 

Let's put it like this: Do you really think the French would turn the Eiffel tower into a drilling rig? Apparently there's 3-6bn boe of Oil in shales in the Paris basin. 

Out in the N Dakota 'badlands', so named because they are pretty useless; the only real competition is an occasional coyote.

Oil jumps on smaller-than-feared US stock build

Oil rallied on Wednesday for the first time in four days after weekly U.S. stock builds turned out to be less than some feared, and negotiators missed a deadline on Iranian nuclear talks that might bring more supply to the market.

Government data showed crude inventories in the United States rose 4.8 million barrels to 471.4 million in the week to March 27, hitting record highs for a 12th straight week.

While analysts in a Reuters poll had expected a 4.2-million-barrel build on average last week, some feared a bigger rise after industry group the American Petroleum Institute suggested as much as 5.2 million barrels in a Tuesday report.

Domestic crude production also fell 0.4 percent to 9.4 million barrels per day, the first weekly decline since the end of January.

U.S. gasoline demand has also risen over the past four weeks, up 2 percent from the same period a year ago, government data showed.

"Clearly, there is a (gasoline) demand response underway by consumers to the low retail price," said John Kilduff, partner at New York energy hedge fund Again Capital.
MGL: Actually we think Oil rallied because the EIA revised down production numbers, and moved its rig based forecast closer to the Texas Railroad commision's completion based forecast. 

Point 1: US shale oil production is already falling because of the fracklog.
Point 2: Inventories are likely filling because of improved Canadian crude flows to big storage areas like Houston and Cushing.


Updated geologic maps provide greater detail for Marcellus formation

Natural gas production from the Marcellus shale formation in the Appalachian basin increased to 14.4 billion cubic feet per day (Bcf/d) in January 2015, accounting for more than 36% of shale gas production and more than 18% of total dry natural gas production in the United States, according to EIA's Natural Gas Weekly Update. Recent updates to EIA's maps and geologic information for the Marcellus shale play help to characterize the formation's structure, thickness, and extent. Maps and detail:
MGL: How big is the Marcellus?

Here's the official answer(s)

Engelder (2009) estimated a median (P50) technically recoverable resource volume of 489 Tcffor the entire Marcellus, with 71.9 Tcf of that volume in New York State. The United States Geological Society (USGS) provided an estimate in 2011 of 84.2 Tcf of undiscovered technically recoverable resource for the entire Marcellus play.1 For additional information on Henry Hub pricing, ( | P a g e The EIA provided an estimate in 2011 of 410 Tcf of undeveloped technically recoverablereserves, and one year later reduced that estimate to 141 Tcf for unproved technically recoverableresource, a reduction of -65%. These estimates were for the entire Marcellus play.

So officially its not that big, a mere 100tcf or so. But talk to the industry and they will guffaw loudly at these nonsensical official estimates. Its some weird machination of the Obama's EIA in action, because they just dont have any reflection to reality.

Lets have a good hard look and see what we can do on observed well data:

Image title

First and foremost the Marcellus layer is only one of three large horizons in the arena. Utica is as good, but deeper. Devonian more difficult, if shallower. Image title
Here's the density map for the resource in place.  This gives you an idea of the fecundity of the play, and as you can see that SW sweet spot is really only 20%, if that, of the land area.

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Here's breakevens by operator and well for the Marcellus/Utica. Below $3 only about 8 of 36 operators in the basin are profitable, but move the gas price as little as $1 higher, and 17 operators move into the black. 

Range reckons they have drilled 15% of their acreage thats economic. Its worth remembering that we have not high graded this acreage, most drilling in the last five years has been driven by lease conversion, ie companies wanted to put acreage into held by drilling status. 

Some conclusions:

1> Resource estimates from official figures are a joke, Range which is low cost and economic at current price claims near 80% of Washington's deluded 100tcf figure.

2> The resource represents only 1/3 of the Geology. 

3> Resource estimates from the 1/3 of operators that are profitable are well in excess of official figures.

If you like Natural Gas, the Marcellus is the single best economic investment available anywhere we have seen. It satisfies all the critical criteria for successful resource investors. Its big. Its low cost. It has good access to customers. 

Start here for your global gas exposure please. 


Heavy Canadian Crude Seen Within $10 of WTI as Demand Picks Up

Western Canadian Select crude’s discount to West Texas Intermediate is poised to narrow to less than $10 a barrel for the first time in two years as new pipelines supply record volumes of the heavy oil to refiners.

The heavy oil grade’s discount to the U.S. benchmark narrowed 5 cents to $12.50 a barrel at 1:56 p.m. Mountain time, the smallest since Feb. 2, according to data compiled by Bloomberg. So far this year, the discount has traded at its narrowest since 2010 on a seasonal basis. New pipelines and rail capacity have increased Canadian exports to the U.S. as refiners ramp up operations after maintenance and before the summer driving season.

A discount of less than $10 is “well within the possibility,” Bart Malek, analyst at TD Securities in Toronto. said in a phone interview. U.S. refineries need heavy crude and it’s “less and less likely we will get supply bottlenecks.”

The U.S. imported a record of 3.21 million barrels a day of crude from Canada in January with 377,000 going to the Gulf Coast, U.S. Energy Department data show. U.S. refineries processed more crude last week than any since Jan. 9 as units returned to operation after maintenance.

“Refiners come back and you will get a bigger call on that crude,” Malek said.

Several refineries in U.S. Midwest states including Indiana and Illinois invested billions of dollars in recent years to be able to process the plentiful supply of cheaper heavy crude. There is more supply available after Enbridge Inc.’s Flanagan South and Enbridge and Enterprise Products Partners LP’s Seaway Twin pipelines started operation late last year, expanding capacity from the Midwest to Texas.

WCS, a benchmark grade for Canada’s oil sands producers, has traded at an average discount to WTI of $16.68 a barrel over the past year. The discount has widened to as much as $42.50 in the past when pipeline transport out of Alberta was disrupted.

Canada, the world’s fifth-largest oil supplier, produces most of its oil from bitumen dug or melted and pumped out of the ground in northern Alberta. Some of the bitumen is diluted for shipment by pipeline or rail to refineries, most thousands of miles away in the U.S. The rest is processed in an upgrader into synthetic crude.
MGL: Western Canadian Select is the perfect foil for WTI in US refinery configurations. Its cheapness makes it attractive versus imported alternatives, like Mayan Heavy, or  Venezuela's heavy grades.  This is the most likely source of the massive inventory build in the US. The fracklog and RRC data suggests shale output is declining, and sharpish. Image title
Canada's oil production is still sailing to new highs. Domestic demand is pretty constant, so the surplus moves south. 

Here's a recent CAPP forecast:
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Has anyone in Alberta noticed the Oil is $50 not $100? This is a country where 80% of Oil professionals believe Oil will be $80 by the end of this year.


Reckoning arrives for cash-strapped oil firms amid bank squeeze

Lenders are preparing to cut the credit lines to a group of junk-rated shale oil companies by as much as 30% in the coming days, dealing another blow as they struggle with a slump in crude prices, according to people familiar with the matter.

About 10 firms are having trouble finding backup financing, said the people familiar with the matter, who asked not to be named because the information hasn’t been announced.

April is a crucial month for the industry because it’s when lenders are due to recalculate the value of properties that energy companies staked as loan collateral. With those assets in decline along with oil prices, banks are preparing to cut the amount they’re willing to lend. And that will only squeeze companies’ ability to produce more oil.

Sabine, the Houston-based exploration and production company that merged with Forest Oil Corp. last year, told investors Tuesday that it’s at risk of defaulting on $2 billion of loans and other debt if its banks don’t grant a waiver.

Some of the companies facing liquidity shortfalls will also disclose that they have fully drawn down their revolving credit lines like Sabine, according to one of the people.

The credit discussions are ongoing and a number of banks may opt to be more lenient, giving companies more time to prepare for bigger cuts later in the year, the people said. Credit lines for some of the companies may be reduced by as little as 10%, they said.
MGL: We seem to have two sets of credit problems here:

1> Natural Gas orientated equity where liquids credits have fallen off a cliff, and expectations of a gas recovery have finally crumbled into dust. These guys are going bust, finally, after five years of living of investors and credit markets with too high a hope of recovery. This augurs well for Natural Gas. (capital withdrawal)

2> Oil, where expectations are firmly in denial, and the mindset of most participants is determinedly bullish. These guys are receiving a sympathetic hearing, and new capital appears to be pouring into their coffers from PE, and credit investors. 

Nevertheless 'prudence' dictates everyone cuts their credit metrics 10% or so. Thats still going to be painful.

Rex Energy Gets JV Partner, Slashes Budget Again

Rex Energy, our little energy company that could (and does) continue to drill in the Marcellus/Utica, is struggling. Rex has, like all companies, been hit with low commodity prices for natural gas, a shortage of pipelines to get the gas to markets, and consequently has scaled back on plans for 2015. 

Although Rex had a great 2014 with production up some 66% over 2013, in December the company announced they would trim the 2015 budget by 44% over 2014. 

In February Rex was included in a list of 19 companies on one analyst’s “death list”–meaning they owe a lot more money than they bring in–in Rex’s case they owe 5 times as much as they bring in annually. 

Shortly after that, Rex put 28K PA acres up for sale in their non-core area, to raise cash. And that brings us to yesterday, when Rex announced they are slashing their drilling budget again, by another 30%, and they’ve taken on a joint venture partner for some of their acreage in a bid to keep drilling…
MGL: Capex> 2x cashflow. Well economics surely dont breakeven. "Strip" quoted at 13% in March presentation. Service costs not falling very fast, which suggests they are overcontracted. 

PV10 is 50% higher than EV, so there is balance sheet value here. Trouble is that PV10 restated to strip is more likely to be well under the EV today.


Alternative Energy

China plans huge solar power station in space

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

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

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

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

Li Ming, vice-president of the China Academy of Space Technology, says, "China will build a space station in around 2020, which will open an opportunity to develop space solar power technology."
MGL: Trust the Chinese to seize on this idea. Its plausible, and right up Beijing's street.  No dissent allowed on microwave radiation in the back garden either. (Naysayers fret on what happens if the powerful microwave beam should accidentally incinerate downtown San Francisco, where the likes of Google and Musk think, plan and machinate on this piece of engineering)


Highfield Resources delivers high profit margin DFS for Muga Mine

Potash developer Highfield Resources has released a Definitive Feasibility Study for its Muga Potash Project in Spain which has revealed a long mine life and rank as the most profitable potash operation when in production.

Muga is located in northern Spain with close proximity to the Atlantic coastline of Northern Spain and Southern France.

Under the DFS, Muga would have an initial mine life of 24 years, based only on Proven and Probable Ore Reserves.

The DFS assumes 50% of product produced is sold in granular form into Brazil and 50% is sold in granular form into North West Europe.

The study, based on production of 1.123 million tonnes of granular K60 potash, delivered an after tax unlevered Project net present value of US$1.42 billion and a very handsome internal rate of return of 51.9%.

This would produce EBITDA in first full year of production of US$296 million with a cracking margin of 66%.
MGL: Highfield Resources is in a major bull market! $336m mcap, capex required $256, yielding $296m in year 1 for a project ev/ebitda of 2! Only wrinkle we can see: its in Spain. More frefful wrinkle: we can find too many Potash deposits heading for market, and demand is weak, that implies long term expectations are simply too high for price. Nevertheless, this is worth a speculative buy rating.

Allana Potash sold to Israel Chemicals for $137 million

Canadian junior miner Allana Potash Corp. has agreed to be acquired by fertilizer giant Israel Chemicals Ltd.  after it failed to raise the capital it needed to remain as a standalone company.

The market reacted positively to the news as the stock was trading almost 44% higher at 47.5 Canadian cents in Toronto at 11:18 am

The $109.50 million takeover(or Cdn$137M), aims to speed up development of Allana’s promising Danakil project in northeast Ethiopia.

“Considering the generally challenging financial environment for junior mining companies, we would expect the short and long-term financing needs of Allana to include potentially significant dilution to Allana’s current shareholders,” Allana chief executive, Farhad Abasov, said in the statement.

ICL already owns 16.4% of Allana’s shares and the deal is expected to close by August 17.
MGL: Isreal takes the big Allana deposit for 25% of Allana's peak valuation in 2011.

Floods halt Chilean lithium, potash and iodine production

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

The torrential rain has prompted the Chilean government to declare a state of emergency
MGL: Chile's weather is now disrupting Copper, Lithium and Potash deliveries.  For Lithium, Chile represents about 10% of the global market at 45k mt pa.

EPA will require weed-resistance restrictions on glyphosate herbicide

U.S. regulators will put new restrictions on the world's most widely used herbicide to help address the rapid expansion of weeds resistant to the chemical, Reuters has learned.

The Environmental Protection Agency confirmed it will require a weed resistance management plan for glyphosate, the key ingredient in Monsanto's immensely popular Roundup weed-killer.

The agency has scheduled a conference call for next week with a committee of the Weed Science Society of America to discuss what the final plan for glyphosate should entail, said Larry Steckel, a Tennessee scientist who chairs the committee.

An EPA spokeswoman declined to give specifics of the plan, but told Reuters that its requirements will be similar to those placed on a new herbicide product developed by Dow AgroSciences, a unit of Dow Chemical Co..

Requirements for the Dow herbicide include weed monitoring, farmer education and remediation plans. The company is required to provide extensive reporting to the EPA about instances of weed resistance and to let "relevant stakeholders" know about the difficulties of controlling them via a company-established website.

Monsanto spokeswoman Charla Lord would not discuss whether the company was negotiating a plan with regulators, but said Monsanto "will continue to work with the EPA to ensure proper product stewardship as we move through the regulatory process."

At least 14 weed species and biotypes in the United States have developed glyphosate resistance, affecting more than 60 million acres of U.S. farmland, according to data gathered by the U.S. Department of Agriculture and U.S. weed scientists. The herbicide-resistant weeds hinder crop production and make farming more difficult and expensive.
MGL: There are 'fluffy' stories (ie WHO deciding glyphosate is carcinogenic) and real stories, ie this one. If you stress an ecosystem by using too much of a powerful medicine, it will respond, that's the nature of evolution in action. Now we did run some stories some years ago on this issue, but quietly dropped them in the face of the bear afflicting commodity equity, Monsanto looked too robust, and too defensive to throw darts at, and it was a mega cap you could own, and sleep easily at night. Now, well we're well into the bear, precious stocks already show signs of value, mining stocks ex iron ore in some cases could be buys, so suddenly this story matters to holders of Monsanto.  At 20x eps, 11x ev/ebitda and a sub 2% yield there's simply no room for bad news. Time to exit.

World food prices hit lowest in nearly 5 years last month - U.N. FAO

Global food prices fell in March to their lowest in almost five years as supplies for most commodities, including cereals and meat, remained robust, the United Nations food agency said on Thursday.

The U.N. Food and Agriculture Organization's (FAO) price index, which measures monthly changes for a basket of cereals, oilseeds, dairy, meat and sugar, averaged 173.8 points last month, its lowest since June 2010 and 2.6 points below its February reading.

"We have quite a bit of a supply surplus in the market and that's definitely creating downward pressure across the board, except on dairy prices," FAO economist Abdolreza Abbassian said.

High global production and low crude oil prices have helped cap food prices for the past year and the index has been declining since April 2014.

The FAO raised its forecast for world cereal production in 2015 to 2.544 billion tonnes, 2 million tonnes above the February forecast of 2.542 billion tonnes.

Cereal stocks at the end of the 2014-15 season are now forecast to be at their highest in almost 15 years, reaching 645.3 million tonnes, up from a previous reading of 630.5 million tonnes.

This upward revision for cereal stocks "should definitely contribute to further downward pressure" on prices, Abbassian said.
MGL: So much for food shortage then.

Precious Metals

Hecla grabs Montana silver-copper deposit through $20 million merger

Hecla grabs Montana silver-copper deposit through $20 million merger

Hecla Mining has expanded its operations in the western United States with the purchase on Friday of Revett Minerals  in an all-stock deal worth $20 million.

Hecla, the largest silver producer in the United States with the Greens Creek project in Alaska, the Lucky Friday Mine in Idaho and the Casa Berardi gold mine in Quebec, entered into a merger agreement with Revett, whereby each Revett common share will be exchanged for 0.1622 of a Hecla common share, the companies announced in a press release. The deal represents a 32 percent premium on Revett's 20-day volume-weighted average price up to March 25, 2015.

Revett investors approved of the arrangement, bidding up the stock price 10.91 percent to close at 61 cents a share on the Toronto main board on Friday. The Spokane Valley, WA-based company has a current market capitalization of 21.6 million.

Silver producers are clearly eyeing assets that can be purchased for attractive prices during the present down-cycle in precious metals. Silver on Friday closed at $16.97 an ounce on the spot market while gold ended the day at $1,198.40.

In Hecla's case, the prize is the Rock Creek project in northwestern Montana, which according to the companies, "is considered one of the largest undeveloped silver and copper deposits in North America." The project about 50 miles north of Hecla's Lucky Friday mine in Idaho has 22 million ounces of inferred silver resources and 2 billion pounds of copper.

"We are acquiring Revett with an eye to the future, as Rock Creek is a world-class silvercopper deposit that we see becoming another Greens Creek,” said Phillips S. Baker, Jr., Hecla’s President and CEO. “Our experience of Greens Creek operating in a National Monument in Alaska since 1997 will be invaluable as we take a patient and persistent approach to permitting and then responsibly operating the Rock Creek Mine."
MGL: 320moz of Silver in resource, copper and some prospective acreage. Silver Wheaton holds 13%, so at least one senior credible specialist gives Revett some credence. We really have no clue on capex required, so its difficult to calculate metrics, but presumably Hecla has run the numbers. Again, we would reiterate that there are fair few juniors with decent orebodies out there trading at significant discounts to NPV, and the seniors are more than happy to hoover them up. We fret that we're losing good quoted deposits, and have always found it difficult to recommend buys on potential corporate activity. MAG Silver is the obvious standout value with a serious deposit under development. The sensible way to play this may the vulture stocks like Lundin or Northern Star.

China gold flows to hit Q1 record

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

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

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

If this increase figure is indicative of the year ahead the China gold flows, as represented by SGE withdrawals, could this year reach a new record 2,300 tonnes or more – getting on for 75% of new mined supply assuming this is flat this year – CPM suggests, though, it will actually be 4.6% higher as recent new projects and expansions reach full capacity.
MGL: China's wealthy, who are largely associated with Jiang Xemin's faction, are fleeing China in record numbers, and taking gold with them.  We are more and more convinced that China's gold demand is a direct response to the new Politburo. Prior to 2011 China was simply not a factor in gold demand worldwide. The trouble is, these figures pick up one side of the trade. What happens when the refugee arrives in, say, Singapore and starts selling the bullion back to the market?

Gold Shorts at record.

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

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

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

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

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

Everyone is  a bear on gold. 

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

All resource open at depth and on margins.

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Barrick Gold loses bid to dismiss suit over troubled mine

Barrick Gold Corp has lost its bid to dismiss a U.S. lawsuit that accuses the world’s largest gold producer of concealing problems at a troubled South American mine and of fraudulently inflating the company’s market value by billions of dollars.

U.S. District Judge Shira Scheindlin in Manhattan ruled on Wednesday that shareholders can pursue class action claims that Barrick intended to deceive them about environmental problems afflicting its Pascua-Lama project on the border of Argentina and Chile.

“Though plaintiffs have not alleged a motive, they have sufficiently alleged strong circumstantial evidence of conscious misbehavior or recklessness,” the judge wrote in a 55-page decision.

Scheindlin also said shareholders can pursue claims that Barrick misled them about its accounting for the project.

The judge dismissed claims alleging that Barrick intentionally misled them about costs and production delays.

She also dismissed claims related to transactions conducted on the Toronto Stock Exchange, saying a key U.S. securities fraud law does not reach that far.

Jim Hughes, a lawyer for the plaintiffs, said in a phone interview: “It is a very good result for shareholders, and allows us to go forward on several very strong claims.”

Barrick bought the untapped Pascua-Lama mine in 1994, and had been counting on it to generate a large percentage of its overall gold production.

The case is In re: Barrick Gold Securities Litigation, U.S. District Court, Southern District of New York, No. 13-03851.
MGL: We ran a particularly good story just before Pascua Lama collapsed. Barrick was putting out PR saying "All's well", and meanwhile local court reporters were writing that the Chilean judge "had issues" with the mine after a visit. So our view is that Barrick's IR dep't was either naughty, or misinformed. 

AngloGold Ashanti looks to sell Mali and US assets

Anglogold Ashanti, has put three of its mines up for sale, with a potential buyer coming forward for two assets in Mali and a process started to find a partner or a buyer for its Cripple Creek & Victor mine in the United States.

AngloGold has previously spoken of asset disposals to raise capital towards cutting its net debt by $1bn, or one-third.

The firm will sell its 41% stake in the Sadiola gold mine and its 40% stake in the Yatela mine, in Mali, which delivered 96,000 ounces of gold last year.

“AngloGold Ashanti confirms that it has been approached by a potential buyer who meets its qualifying criteria, and a binding bid has been requested,” the world’s third-largest gold miner said.

AngloGold took the decision last year to close the Yatela mine as it sought to improve the quality of mines in its portfolio.

AngloGold’s Cripple Creek & Victor produced an estimated 211,000ounces of gold last year and the miner has started a process to find a joint venture partner or outright buyer, said CEO Srinivasan Venkatakrishnan.

“We continue to consider other asset sale options,”the miner said in the 2014 annual report released on Tuesday.

The Obuasi mine in Ghana, AngloGold is undertaking a study to mechanise and modernise the loss-making mine, it is also looking at a partnership, it said. The mine is currently suspended.

“As we look at the options available to finance and operate Obuasi into the future, we are also exploring options to reduce risk while maintaining exposure to the upside of this resource by considering a joint venture with another industry or financial partner,” AngloGold chairman Sipho Pityana said.
MGL: Surely the obvious buyer for Sadiola is Iamgold, at 5x ev/ebitda and with $655m of debt, they are not in a position to pay up.
Not sure why the classic 'vulture' buyers would be that interested in a non operated minority.  Cripple Creek and Victor has a local presentation:

It has produced 4m oz over since 1995, and seems to have life through to 2025. So it seems to have around ~200k oz of capacity. 

Base Metals

Southern Copper hit by conflicting remarks on Peru mine's future

Conflicting statements about whether Southern Copper Corp would cancel development of its $1.4 billion Tia Maria copper mine in Peru's Arequipa region have battered the company's share price and left investors wondering about the project's future.

Southern Copper's head of institutional relations, Julio Morriberon, told local radio RPP on Friday that the company was "canceling Tia Maria and withdrawing all its investments in Arequipa" due to lack of support from regional authorities and continued local opposition.

But Southern Copper's Chief Executive Officer Oscar Gonzalez later appeared to row back, telling Reuters that the announcement "did not totally reflect the intention of the board."

"Southern Copper will continue with its efforts to move forward with the Tia Maria project and we hope to have the support of the people and the government," he said.

The debacle raises questions of transparency and corporate governance in South America at a time when other resources companies in the region are also struggling with these issues.
MGL: A well organised opposition has,like at Newmont's Minas Conga, ruptured the intent and desire of Southern Peru. We did flag the protests last week, but had not foreseen this radical turn of events! Tia Maria is a good project, its an SX/EW project, low capital intensity, despite a near 40% increase in costs due primarily to delays. If Tia Maria does not proceed, then there are obvious and nasty consequences for a bevy of high profile mine developments in this resource rich country. The gov't is clearly onside, thats the only good news. Southern Peru has issued around $500m of external capital contracts for this project, but its clear that spent capex exceeds that figure.

Rio Tinto CEO says Nov plan to restart Oyu Tolgoi was "best and final offer"

Proposals made to the Mongolian government by global mining giant Rio Tinto last November to restart the long-delayed Oyu Tolgoi copper mine were the firm's "best and final offer" and won't be changed, Rio's chief executive said.

Rio submitted the proposals to resolve some outstanding issues, including a $127 milliontax claim that has already been cut to $30 million as well as the approval of a $4 billion project financing package to pay for phase-two construction.

"This is the best and final offer and we believe this a very reasonable approach to resolving the outstanding issues," said Sam Walsh in an interview with Reuters on Saturday ahead of a visit to the mine.

"Clearly, in terms of reaching a final conclusion there's a lot of detail that needs to be resolved, so negotiations were continuing last week," he said, adding that Rio was "not looking for special treatment" but wanted more certainty and clarity from Mongolia.

Walsh said the firm would be willing to go to international arbitration to resolve the tax dispute, but said it was not expected to affect current phase-one production at the mine.

Rio Tinto's Turquoise Hill Resources owns 66 percent of the $6.5 billion Oyu Tolgoi, with the Mongolian government holding the remainder. Rio is also in charge of running and developing the project, which is located in the Gobi desert close to Mongolia's border withChina.

The first, open-cut phase of the mine is already in operation. Turquoise Hill reported $1.6 billion in revenue for 2014 from the sale of 733,700 tonnes of concentrate from the mine.
MGL: Rio's Sam Walsh heads for Mongolia in a defiant and combative mood, the Sydney Morning Herald had a fuller interview in which Walsh was more "patient and hopeful", to use his own words. The tax claim is a thorny issue, but the real issue on the table is Mongolia's desire to swap its equity for an NSR. Mongolia simply doesn't have easy access to its share of capex required for phase 2. The 2014 technical reports proposed $4.9bn of capex for a project with an IRR of 29%, Mongolia's share would amount to $1.6bn.

Barrick to keep operating Zambia copper mine, pending royalty change

Barrick Gold, the world's biggest gold producer by output, will continue operating its Lumwana copper mine, in Zambia, while awaiting changes to the country's mineral royalty tax, the company said on Friday.

Barrick had said it would suspend operations after Zambia hiked mineral royalties for open pit mines to 20% from 6% in January. Major staff cuts to Lumwana's 4 000 workers were planned for March, Toronto-based Barrick had said.

"We are encouraged by the president's recent statement and will carry on operating at Lumwana while we await details on the government's proposed solution," Barrick spokesperson Andy Lloyd said in an email in response to a query from Reuters.
The new royalty plan, which has rattled unions and mining companies in Zambia, Africa's second largest copper producer, also increased the royalty tax rate on underground mines to 8% from 6%.

Zambian President Edgar Lungu on Wednesday directed the finance and mining ministers to change royalties on mining firms by April 8, saying the government could consider temporarily reverting to the 2014 tax regime as a new rate is negotiated.
Other options include modifying the 2015 royalty rates, delayed introduction of those rates, or negotiating interim arrangements for the most affected companies.

Barrick booked a $3.8-billion impairment charge to write down Lumwana's value in 2013 due to higher costs and a drop in profit after a pullback in metal prices.
MGL: The President is in China this week reportedly asking the Chinese for more investment. Zambia's populist party is hoisted by its own petard right now, they know raising royalties to 20% is suicide for the economy, but that was the popular mandate, and feeling runs high that the miners have circumvented 'rightful' taxes. Its really not clear what the end game is here, but there's some kind of tax hike for sure.

Guangdong Rising makes new, lower bid for PanAust

China's Guangdong Rising Assets Management launched a fresh $850 million bid to buy copper and gold miner PanAust Ltd, but priced its offer at a quarter less than 10 months ago, underscoring the rout in mineral commodities.

PanAust said on Monday it had received a letter from 22.5 percent shareholder Guangdong saying it plans to offer to buy all remaining shares at A$1.71 each, valuing PanAust at A$1.1 billion ($852 million). The offer would be 26 percent below the A$2.30 a share it offered last May.

PanAust shares, which have fallen in line with weaker copper and gold prices, jumped 40 percent to match the latest offer price, a four-month high for the stock.

State-owned Guangdong first approached PanAust last April and then sweetened its offer in May.

PanAust, which rejected the May bid as too low, said it would consider the fresh approach but noted it was made at a time when PanAust's stock and copper and gold prices are near 5-year lows.

PanAust mines copper in Laos and paid $125 million in late 2013 for the rights to the Frieda River copper project in Papua New Guinea. It cut 5 percent of its workforce in January as copper traded around its lowest level in half a decade.

Guangdong urged shareholders to accept the all-cash offer, warning that PanAust may need to raise additional capital to get the Frieda River project into production, potentially sending its shares lower.
MGL: Its difficult for us to imagine a better offer out there, but then we have a very low opinion of the Frieda River asset.

China's Tsingshan plans nickel pig iron production in Indonesia this year

China's Tsingshan Group expects to start production at its Indonesian nickel pig iron smelter as soon as January, becoming the second plant to ramp up since the country's new mineral processing laws came into force at the start of the year.

"Hopefully by October or November we will have started commissioning," said Slamet Panggabean, finance manger of Tsingshan's local joint venture partner Bintang Delapan Mineral, referring to the firm's pilot smelter project in Morowali on the Indonesian island of Sulawesi.

"The plan is for production (to begin) in January or February."

Stocks of nickel pig iron at China's stainless steel makers are running down, leaving them exposed to a supply gap next year and fuelling the need to build smelters in Indonesia as quickly as possible.

Output at the joint venture, Sulawesi Mining Investment, is expected to ramp up slowly and is unlikely to reach name plate capacity of 300,000 tonnes of nickel pig iron in the first year Panggabean said.

The group is currently preparing foundations for the planned second phase of the project, he added. This would add a further 600,000 tonnes of output capacity to the facility, which was partly funded by a $384 million loan from China's policy lender State Development Bank.

Some production could even start as early as October, two sources told Reuters.

MGL: Lets look at Nickel a minute. Here's consensus:

1> All the Lateritic Nickel projects have largely failed:

Image title
2> Chinese Nickel Pig Iron production is falling because of Indonesia:

Image title
But wait, that Indonesian start up announced by Tsingshan is 300k mt, starting now, gearing up, and with a further 600k mt behind it. This single start up overwhelms the loss of Chinese Nickel Pig iron capacity.

Back to consensus again:

Image title
Well Tsinghsan has one project in startup that is 3x the size required to balance the Nickel market. Analysts are going to receive a frustrating shock.

Copper Rebound as Miners Struggle on Output

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

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

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

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

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

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

“Because we believe the fundamentals of the copper market show a tight market, we remain bullish for the year,” it said.
MGL: We're reverting to first principles here:

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

Plat/Gold says demand is weak:Image title

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

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

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

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

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

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

Walsh added that there "are issues we're working through with the government, and I'm hopeful we'll bring to resolution."
MGL: The tax issue was small beer compared to the $2bn bill Mongolia faces if RTZ moves ahead on phase 2. So options:

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

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

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

Alcoa to shut Sao Luis smelter in Brazil

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

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

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

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

Alcoa idled 97,000 tons of smelting capacity at Sao Luis in 2014.
MGL: Between Rusal and Alcoa alone we have 1.4m mt of Al idled now, thats some 3% of global capacity between these two companies.

Less than half of copper projects needed to meet demand

Copper is down 9.7% compared to a year ago, but has recovered well from five-and-half-year lows struck in January. Most analysts expect copper to move into a surplus in excess of 200,000 tonnes this year after a mostly balanced 2014, but the copper industry has a long history of supply disruptions.

200,000 tonnes of potential copper mine output destined for markets this year have been lost

To these variables add more recent factors affecting future supply which includes the weak price which makes it difficult for miners to raise development finance (or raise wages for that matter). That leads to project deferrals, commissioning delays and downsizing of mine plans.

A new report by London-based CRU, an independent mining, metals and fertilizer researcher, estimates that some 200,000 tonnes of potential copper mine output destined for markets this year have been lost due to these factors.

By 2021 that figure would've increased to close to 3 million tonnes which compares to global annual production of under 20 million tonnes. At the same time output at existing operations are expected to peak next year and from 2020 a "marked downtrend in committed production will set in" according to Christine Meilton, Principal Consultant at CRU.

All of which should be great news for the copper price. Not so fast says Meilton:

There is no shortage of potential resources available to fill this gap.  CRU's portfolio of projects includes 231 "probable" and "possible" projects with total maximum potential output of 12.9M tonnes, while a further 6.6Mt is potentially available from earlier stage projects, those which CRU categorises as "prospects".   In addition, despite difficult financial conditions, grassroots exploration continues.
MGL: Years ago, as an industry analyst, I set out to build models on everything. I had all the industry consultant data, cost the fund a fortune in fees, all the company's modelled beautifully on excel spreadsheets, an immaculate access database full of company data.  It was satisfying, to a degree.

Result? Within 6 months almost every critical variable had gone pear shaped. Every excel spreadsheet required a weekly update to keep it even approximately real. Did it help me make decisions? No. Did it look good to my bosses? Yes.

The main, and object lesson from this expensive and time consuming exercise was that the quality of the data in the industry is rubbish. Copper was glaringly bad. 

A World Bank consultant loved our effort, but laughed at the result. "We've reached the same conclusion too"; he said, "but please don't tell the bosses, it will upset them. They prefer the certainty of bad data, to no data". An ex employee of one of the big consultants told me he advised the consultancy not to sell me  the data, as it was so poor in quality, of course they did. 

If you crave certainty and rigorous analysis this is not your sector. If you want results study Sherlock Holmes. 


China Q2 copper demand likely moderate compared to previous years

Seasonal demand for copper in China is likely to be moderate in the second quarter compared with previous years, with end users holding limited cash as the economy slows, industry sources in the country said.

Would-be buyers such as cable manufacturers appeared to be suffering from cash shortages despite recent measures by Beijing to boost liquidity in the economy, the sources said.

End users in China, the world's top consumer and producer of refined copper, typically increase purchases around the second quarter to support higher production as the summer approaches.

But this year, many have been reluctant to build copper stocks and have been buying hand-to-mouth, according to traders.

Weaker than expected Chinese demand could drag on international copper prices, which have risen more than 10 percent from the multi-year lows hit in January. They stood at $6,036 a tonne on Thursday.

"Even now Chinese end users are buying what they need for immediate production. They don't see prices rising strongly in the near term," said a Shanghai-based trader at an international trading firm. He declined to be identified as he was not authorised to talk to media.

Chinese banks have also reduced lending to metals firms after an alleged metal financing scam at the port of Qingdao came to light in June 2014.

Reflecting weak import demand, premiums for bonded stocks of refined copper in Shanghai have eased to $60-$90 a tonne over the cash LME copper prices this week, from about $90 in early March.

While metals firms are receiving fewer loans from banks, many sellers of refined copper and semi-finished copper products such as rods require buyers to pay cash on delivery, piling pressure on end users, traders said.

"Factories appear very short of cash. But many sellers have asked for cash this year, different from the two-week payment period in previous years, after some clients defaulted on payments last year," said a Guangdong-based trader at a large maker of copper rods, used for manufacturing electricity cables and wires.
MGL: Electricity consumption is down 6% year on year in China. Thats a full blown recession. 

How much worse can these numbers be?

Anglo American drops Peru copper project

Anglo remains fully committed to its bigger copper project Quellaveco, located in the southern part of the country.

Anglo American, the world’s number four miner, has decided to abandon its Michiquillay copper project in Peru, but said it remains fully committed to Quellaveco, located in the southern part of the country.

The news comes on the heels of a report showing that less than half of existing copper projects are really needed to meet current demand.

The red metal, used by investors as a gauge of global economic strength, has dropped 3.4% so far this year, extending its worst annual loss since 2011, as a property slump in China sapped demand in the world’s biggest consumer.

Quellaveco, however, is the kind of complicated project shareholders mostly hate

Quellaveco, however, is the kind of complicated project shareholders mostly hate: It is remote, could cost over $6 billion and — Morgan Stanley— is likely to take three to four years to build.

Anglo, which acquired the project in 1992, has completely redesigned it, so such estimates could prove high, as the bill would be shared with its partners. Another advantage of Quellaveco is that it already has a social license to operate, which it surely will come handy as Peru has a record of harsh and sometimes violent opposition to large-scale mining.

Quellaveco, part of a US$60bn mining project portfolio in Peru over the next decade, is a joint venture between Anglo American (81.9%) and Mitsubishi (18.1%).

The London-based miner has said it plans to submit its revised project to the board before the end of the year.
MGL: You have to think that the Tia Maria mayhem has tipped the scales on this decision. 

Indonesian Export Permits Issued Full List

JAKARTA, March 19 (Reuters) - Newmont Mining Corp's 
Indonesian copper export permit was extended for six months on
    Below is a list of six-month export permits issued by the
Energy and Mineral Resources Ministry for the year-to-date, but
released late on Wednesday by the ministry's Director General,
    The table below lists companies, concentrates and export
quota tonnage issued by the ministry:
    Company                        Mineral/concentrates  Tonnage
    PT Sebuku Iron Lateritic Ores  Iron                3,000,000
    PT Lumbung Mineral Sentosa     Lead                    8,697
    PT Lumbung Mineral Sentosa     Zinc                    5,839
    PT Freeport Indonesia          Copper                940,989
    PT Smelting                    Anode Slime               800
    PT Newmont Nusa Tenggara       Copper                477,000
    PT Sumber Baja Prima           Iron Sand             300,000
    PT Sumber Baja Prima           Iron Sand Pellet      100,000
    PT Kapuas Prima Coal           Lead                   40,000
    PT Megatop Inti Selaras        Iron Sand             691,200
    Below is a list of companies, smeltered material and export
quota tonnage issued by the Energy and Mineral Resources
    Company                        Mineral/concentrates  Tonnage
    PT Indonesia Chemical Alumina    Alumina             300,000
    PT Aneka Tambang                 Ferro nickel         18,000
    PT Indoferro                     Nickel pig iron     250,000
    PT Cahaya Modern                 Nickel pig iron       8,640
    PT Vale Indonesia                Nickel matte         75,000
    PT Sambas Mineral Mining         Nickel pig iron      12,000
    PT Macika Mineral Industri       Ferro nickel         53,680
    PT Karyatama Konawe Utara        Nickel pig iron      50,000
    PT Bintang Delapan               Nickel pig iron     300,000
    PT Fajar Bhakti Lintas Nusantara Ferro nickel         50,000
    PT Gebe Sentra Nickel            Nickel hydroxide     24,000

MGL: Please show you're nearest sell side Nickel bull these figures. 

Small note: we think Iron sand exports are really nickel laterites. We know one laterite producer put up some drying sheds and applied for an export license on 'beneficiated iron ore'.  Nickel laterites are mostly iron ore, but the value is in the Nickel. This is why NPI exists, you can feed an ordinary steel blast furnace a nickel laterite and make a perfectly acceptable Nickel pig iron. 

Steel, Iron Ore and Coal

Russia's NLMK sees flat Q1 after Q4 earnings fall

Russian steelmaker NLMK expects profitability to be flat in the first quarter compared with the fourth quarter of 2014, when its earnings were hit by lower steel prices and an impairment charge related to the weaker rouble.

NLMK has received a boost to exports from the lower rouble, which has fallen about 40 percent against the dollar since mid-2014 due to weaker oil prices and Western sanctions over Moscow's role in the Ukraine crisis.

"We expect an increase in the share of export sales in the first quarter of 2015 on the back of the seasonal slowdown in demand in the domestic market," the company said in a statement, adding its operational performance would remain stable.

However, the company's net profit was hit in the fourth quarter by a $356 million non-cash impairment on financial instruments related to the weaker rouble.

NLMK, controlled by businessman Vladimir Lisin, said its fourth-quarter net profit fell 17 percent, quarter-on-quarter, to $232 million.

Its earnings before interest, taxation, depreciation and amortisation (EBITDA) were down 9 percent, quarter-on-quarter, but up 53 percent year-on-year to $627 million, just ahead of analysts' average estimate of $625 million in a Reuters poll.

Revenue was down 10 percent, quarter-on-quarter, to $2.3 billion on the back of lower steel prices, while the cash cost of slab, the semi-finished steel product which NLMK exports, fell 24 percent to $225 per tonne at its core Lipetsk assets.

Shares in NLMK were up 1 percent in Moscow, outperforming a 0.5 percent rise in the broader market index.
MGL: NMLK makes slab steel. Most of the capex over the past few years has been earmarked for a pellet plant (to avoid high iron ore prices), and a PCI conversion (to avoid high coking coal prices). Prices for their product in dollars just keep dribbling south. ROE pre 2008 was 25%. last year it was 1.7%, and the newly completed investment (to avoid high ingredient prices), comes online when ingredient prices are in a state of utter and complete collapse, so there's no core recovery in profitability beyond the nice tailwind provided by the collapsing rouble. No bull market here, and at 8x eps, 5% yield there's nothing really to look for either.

NMDC sets target sale of 38 MT iron ore in FY16 - Mr Kothari

NMDC sets target sale of 38 MT iron ore in FY16 - Mr Kothari

Times of India reported that state owned iron ore miner NMDC has set a target of 35 million tonnes of iron ore production and 38 million tonnes sales in 2015-16.

Mr Narendra Kothari CMD of NMDC said that "We are also in the process of preparing our vision document that aims at a production of 100 mtpa by 2021-22. The document will be prepared by April and May this year, and will include details like capex, assets required, among others. Currently our production is 30 mtpa and by 2018-19, we are looking at increasing it to 70 mtpa."

Mr Kothari said that NMDC will complete the construction of its 3 million tonnes per annum Nagarnar steel unit in Chhattisgarh by 2016. The plant is in an advanced stage of construction and will be completed by December 2016. The investment in this unit is around INR 15,500 crore.

Meanwhile, speaking about that International Coal Ventures Private Limited (ICVL), which is a joint venture between SAIL, CIL, RINL, NMDC and NTPC, he said, it had bagged the mining rights of 2.6 billion tonnes of coal in Mozambique in 2014 and this year, the focus will be increasing its capacity. The JV company was floated by the country's top PSUs in 2009 to secure coal supplies from overseas assets.

NMDC has commissioned its new Project Bailadila Iron Ore Deposit 11B having iron ore production capacity of 7 million tonnes per annum with an investment of more than INR 600 crores in Bailadila Region of Dakshin Bastar district in Chhattisgarh on Sunday
MGL: NMDC has still not really adjusted to a market price environment. Years of operating with fixed, but low prices had left the company with an almost utility mindset. They could actually double production into this feeble market, then notice that prices don't justify the investment. It is one of the most singular parastatal miners we've ever looked at! Equity market analysts will likely not notice this expansion, and if they do, they simply wont believe it plausible. Here is the critical statement from the website: "NMDC is under the administrative control of the Ministry of Steel, Government of India." and steelmakers everywhere want cheap inputs.

China to cut 80 mln T of steel capacity over 2015-17 - official

China will aim to cut as much as 80 million tonnes of excess steel capacity in the next three years to tackle a massive supply glut that has plunged much of the sector into crisis, a government official said on Saturday.

Speaking at an industry forum, Luo Tiejun of the raw materials department of the Ministry of Industry and Information Technology (MIIT) said China would publish a new 2015-2017 action plan to restructure its bloated steel sector before June this year.

"The main task is still to strengthen the market position of enterprises and improve the overall competitiveness of the sector," Luo said.

According to the draft plan, China will cut the number of steel enterprises to "around 300", down from more than 500 currently, and would also strive to achieve zero energy growthfrom the sector and a cut in emissions by 2017, Luo said.

Last week, in a separate development plan for the sector, the industry ministry said it would aim to put 60 percent of total steel capacity under the control of its 10 biggest enterprises by 2025, 10 years behind an original schedule.

China has long struggled to resolve a capacity glut now amounting to around 300 million tonnes of annual production, with growth-obsessed local governments encouraging local enterprises to expand as quickly as possible.

Officials now say the industry is facing its worst crisis yet, not only as a result of slowing economic growth and a state vow to tackle pollution, but also amid long-term changes in steel consumption patterns.

Though prices of the key raw material iron ore have halved over the past year, Chinese mills still suffered losses in January and February, and "economic slowdown pressures" have got worse since 2014, said Liu Zhenjiang, vice-chairman of the China Iron and Steel Association.

Zhao Xizi, chairman of the All-China Chamber of Commerce for Small and Medium-Sized Metallurgical Enterprises, said the woes facing the sector were only just beginning.

He said steel intensity - or the amount used per 10,000 yuan of GDP growth - had already fallen from 174 kg in 2007 to 100 kg in 2014, and would drop further to 70 kg in the next few years as the structure of China's economy changes and steel production finally peaks.
MGL: Here's the RBA's analysis of steel intensity in China: Its clear from the above figures that China's steel intensity is 'normalising' rapidly, and at a rate of knots! This is too a large degree cyclical, but to expect steel intensity to rise back to its peak levels is surely hopeful. Please note that the figures mentioned in this press release: "174kg in 2007 to 70 kg in 2014" are steel units per quanta of GNP growth, and the RBA's numbers are steel intensity per $1m of GNP, which is not directly comparable, but surely indicative. To an extent this statement of intent is a reiteration of prior planned commitments, although the specifics are different. So why should we take this seriously? In part, because for Beijing this is a critical component in a larger plan to mitigate pollution, and at every turn Beijing is hammering the polluters. In part, because the big Steels: Baoshan, Wuhan, Hebei and Jiangsu, are now onside, where as in previous years we've noted their actions and words have often been 180 degrees apart. Baoshan, for example, would trumpet the closure of its enormous Shanghai site, then quietly reopen the capacity elsewhere. In part, its a very real fear by Steel execs of going to jail, whether for corruption or pollution. Where does this leave iron ore? Frankly, unexiting for a decade. We would reiterate that China is in the throes of a decade long change of policy and direction, and the new idea are not friendly to steel consumption. China's steel producers must clean up, focus on margins and head for higher margins. The volume game is over. There are many out there hoping for a resumption of the old morphine laced public policies, but Beijing has said NOTHING that supports that concept. If you wish for the old, then you must seriously think about a regime change in Beijing, and that an entire new ball of wax.

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

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

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

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

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

Much in line with the market trend and slow buying Stockpiles of imported iron ore at China's major ports reached 100.130 million tonnes by March 27 significantly higher than the previous week.
MGL: Thats $43 or less in Australia. Fortescue begins to loose money, and only BHP, RTZ, and Vale actually enjoy cash returns. Iron ore bear enters the long painful end of the bear market.  Iron ore begins to look like coal, not really much further downside (unless the dratted Indian capacity actually stages a return!), but its hard to bull with Beijing's current policy mix. 

Baosteel executive under investigation for corruption

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

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

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

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

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

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

The party has targeted 26 major state-owned firms for inspections this year, includingChina National Petroleum Corporation, Sinopec Group, China National Offshore OilCorp, Shenhua Group, China National Nuclear Corp, China Southern Power Grid andChina Power Investment Corp.
MGL: Anti corruption efforts seem to proceed SOE reform. In Baoshan's case it is associated with merger gossip with Wuhan, and thats a radical change in long held policy. Formerly the big 4 were used to rescue the small fry, but with 2 of the big 4 maybe merging, we're thinking 'consolidation'.

BC Iron gets royalty break as iron ore hits new lows

Australia's BC Iron said on Wednesday it will be able to defer A$8-A$12 million ($6.11-$9.16 million) in royalty payments, as it struggles amid a dramatic fall in iron ore prices.

Facing the prospect of mines shutting down, Western Australia state in December notified miners producing less than 20 million tonnes annually they could be eligible for a 50 percent deferral on the royalties they pay. It also froze port fees and tariffs for miners using the state's Indian Ocean export terminals of Dampier and Port Hedland.

Rio Tinto , which is not eligible for the rebate because of its size, expects some 85 million tonnes of iron ore capacity to be taken out of the world market in 2015 because the price slump has made it too costly to produce, on top of an estimated 125 million tonnes last year.

Chinese mines - among the least efficient globally - will absorb most of the losses. But analysts have warned small Australian miners, such as BC Iron and Atlas Iron, were operating close to the break-even point and will need to reduce overheads if prices continue to drop.

Both BCI and Atlas have posted losses for the half-year ended Dec 31 versus profits in the corresponding period, which included hefty writedowns relating to the value of their mines.

"The amount, A$8-A$12 million, is not a great sum, but given the climate we are operating in, every bit will help," BC Iron Chief Executive Morgan Ball told Reuters by telephone.

Iron ore .IO62-CNI=SI stood at $51 a tonne, data from The Steel Index showed - the lowest since late 2008.

Western Australia state, once the economic engine of Australia, in December recorded its first budget deficit in 15 years as revenues from iron ore plummeted.

In the boom years, multinationals Rio Tinto and BHP Billiton spent billions of dollars digging new mines.
MGL: Australia, which last year was bullish iron ore to a man, has rapidly moved from surprise and denial, into action. Everyone is on a cost cutting binge, and even the gov't is pitching in here. 

Iron ore prices are finally down to levels where we can conceive that they could be higher in a years time. Its not an easy bull case: Beijing wins the faction war; corrupt officials are in jail, and Beijing moves to stabilise the property sector. Steel production bounces some, and iron ore stops falling like a stone.  Its possible, but not plausible.

Our central case remains that iron ore remains around these levels for a decade.

There's still an outside chance that the Indian's finally move their substantial capacity back into the market this year. Thats a killer now. 

Iron ore price dives 3% on Tuesday

Iron ore levels had the sharpest single day drop in recent memory dipping to lowest level in decade. The price is all set to break the USD 50 per tonne floor within this week with miners on production rampage iron ore has dropped more than 25% this calendar year and has plum down by about 75% since its peak of about US190, reached in 2011. By most measures, iron ore producers should be curtailing output to boost prices at this point BUT the 3 biggest producers Vale, Rio Tinto and BHP Billiton are sticking to their guns to protect market share. Thus there is a very good chance that prices will continue to deteriorate and could fall closer to US$40

It was absolute quandary in iron ore market on the last day of March with price levels dipping by 3% suddenly. Even though iron ore market has been worst hit this year losing 28% within a span of 3 months the quantum of collapse this week has petrified traders in China. Iron ore with 62 percent content at Qingdao in China, sank by over 3% to level of USD 51.35 per DMT. That’s the lowest since 2004-2005
MGL: Price has now pretty much done its worst. The issue now is duration. Our central case today is that iron ore is in oversupply for at least a decade, we fear its going back to its early 1990's slumber as one of the most boring commodities to study. The big three: RTZ, BHP, and Vale once again dominate the market, and everyone else is in deep trouble. Vale has the worst balance sheet, and still has to complete its build out of capacity. Prices could well fall some more from here, but below $50, we are entering price levels which are not really sustainable on a 5-10 year view. We're not giving up our bearish tack, just cashing in some chips and noting that the argument must move from price to duration. 

Yanzhou Coal Mining announces 2014 annual results

Yanzhou Coal Mining announces 2014 annual results

In face of unprecedented difficulties and challenges in 2014, through adopting innovative thinking and implementing a series of operation management measures to adjust costs of sales to enhance profit, optimize marketing strategy and strengthen management capability to improve efficiency, Yanzhou Coal presented an excellent posture of stable and positive results with strong endogenous driving force and greater development potentials.

For the year ended 31 December 2014, sales income of the Group amounted to RMB60.37 billion, representing an increase of 7.0% YoY. Net income stayed flat at RMB 766 million. Earnings per share amounted to RMB 0.16, maintaining at same level as 2013. The Board of Directors proposes to declare a cash dividend of RMB 0.02 per share for the year ended 31st December 2014.

Under the prolonged market downturn and oversupply grim situation, the Group insisted on adopting innovative sales model, expanding sales channels and strengthening efforts on market expansion, thus successfully achieving sale volume growth.

The Group’s total sales volume of coal was 123 million tonnes, up 18.3% YoY. Of which, sales volume of the headquarters was 34.75 million tonnes, sales volume of Yancoal Australia was 15.74 million tonnes, sales volume of ShanXi Neng Hua was 1.50 million tonnes, sales volume of Heze Neng Hua amounted to 3.11 million tonnes, and Ordos Neng Hua contributed a sales volume of 5.79 million tonnes.

The Group continued to expand the business of the sales of externally purchased coal. Sales volume of externally purchased coal reached 57.02 million tonnes, up 44.7% YoY, setting the foundation for the implementation of domestic and international integrated marketing strategy.

In response to the increasing difficulties to generate revenue and profit margins were being squeezed in both domestic and overseas coal markets, the Group continued to flexibly adjust its product mix, optimize sales and marketing strategies, improve quality of the products and aftersales services, in order to achieve stable sales volume and profits.

During the Year, the average selling price of coal of the Company in the headquarters decreased by 17.7% to RMB 439.94 per tonne, that of Shanxi Neng Hua down by 25.4% to RMB 210.69 per tonne, that of Heze Neng Hua down by 13.6% to RMB 525.65 per tonne, that of Ordos Neng Hua down by 13.5% to RMB 163.02 per tonne, and that of Yancoal Australia dropped by 19.2% to RMB 463.77 per tonne.
MGL: Yanzhou fights price with volume, and it sort of works. But at the end of the day, debt is still rising inexorably, cash flow is negative, and its not until 2016 that we see some positive cashflow. Until then, its just another expensive coal stock: 26x eps, 14x ev/ebitda, <1% yield. Short the rallies.

Large Chinese miners lower April thermal coal prices

Large Chinese miners lower April thermal coal prices

China’s top miner Shenhua Group lowered the April price of benchmark 5,500 Kcal/kg NAR thermal coal to 462 yuan/t with VAT, FOB Qinhuangdao, down from 520 yuan/t in March, sources said.

Shenhua will give a 2 yuan/t discount for buyers who purchase above 30,000 tonnes of coal in April, regardless of the coal grades, in a move to boost sales amid slackening demand.

That means the most favorable April price of Shenhua 5,500 Kcal/kg NAR coal would be 460 yuan/t, down 20 yuan/t from March.

The miner’s pricing has been falling for four consecutive months with a total drop of 60-70 yuan/t, but the April price is still some 20 yuan/t higher than average levels in the spot market.

China National coal group soon followed Shenhua to offer 5,500 Kcal/kg NAR coal at 460 yuan/t in April.

However, large coal groups may still face sales pressure this month due to bleak demand and high stocks, and spot prices may further slide, insiders said.

On March 31, the Fenwei/Platts CCI1 Index for domestic 5,500 Kcal/kg NAR coal traded at Qinhuangdao port was assessed at 439.0 yuan/t, inclusive of VAT, FOB basis, down 37 yuan/t from end-February and 55 yuan/t lower than the start of the year.

Buying interest from downstream power plants remains low, as their daily coal burn stays low due to a lack of strength in the demand for coal-fired electricity.

Coal stock at key power plants slid 32.3% from the beginning of 2015 to 64 million tonnes by March 31. It, however, was still enough for 20 days’ consumption, up from the 15-day normal level.
MGL: In order to stop coal demand from falling we need around 2-3% electricity demand growth in China. The pace of alternative energy implementation is red hot: hydro is largely done for now, but Nuclear, Wind and Solar are still accelerating. The last read we had for electricity was -6.3% year on year. 

Baosteel on track to start operations in September

Baosteel on track to start operations in September
With construction of the nine main parts of its steel complex proceeding smoothly, Baosteel Group's new project in Zhanjiang is well on track to start operating in September.

About half of the more than 40 billion yuan ($6.46 billion) investment has been utilized since construction of the project, located on Donghai Island, China's fifth-largest island, began in May 2013, said Zhanjiang Mayor Wang Zhongbing.

The complex is designed to have an annual capacity of 8.75 million metric tons of steel in its first phase.

A result of phasing out obsolete steelmaking capacity in Guangdong province, the project is set to become an efficient thin sheet and carbon steel production base.

It is expected to lift the equipment, automobile, home appliance and shipbuilding industries, as well as industries that support those, bringing revolutionary changes to the economic level and structure of the city.

The government will work to extend the industrial chain based on the project and plan other projects in nearby counties to promote their economies. The steel complex will create more jobs and entrepreneurial opportunities and help cultivate technological and managerial skills. More than 18,000 people are currently working on site for the project.

On the environmental side, Wang said, "I trust that Baosteel has the capital, technology and ability to make the environmental protection of the Zhanjiang steel project the best."

The investment in energy-saving and environmental protection makes up 16 percent of the total, with 116 well-established and reliable environmental technologies applied. Baosteel has planned the project to have the lowest emissions possible and the highest efficiency of resource utilization.
MGL: 16% of capex on environmental measures? Thats a new statistic for us to ponder. 

Again, we're still seeing inertia from the prior go-go growth regime, this project completes in September, which means it was likely started some 2 years ago? For all the talk from Beijing, we still haven't seen the top in steel, aluminium or cement capacity. All we're seeing right now is a rapid slowdown in the growth rate of additional supply. 

Evraz proposes tender offer to owners as core earnings rise

Russia's Evraz, one of the country's largest steelmakers, will return up to $375 million to its shareholders as part of a tender offer, it said on Wednesday, after its 2014 core earnings rose on a weaker rouble.

Margins at Evraz and other Russian steel exporters have been supported by a 40-percent decline in the rouble against the dollar since mid-2014 as their costs fell in dollar terms.

Evraz, partly controlled by Chelsea soccer club owner Roman Abramovich, said core earnings - earnings before interest, taxation, depreciation and amortisation (EBITDA) - rose 28 percent year-on-year to $2.3 billion.

However, the company's bottom line was hit by the rouble decline. Evraz made a netloss of $1.3 billion last year compared to a loss of $551 million in 2013 due to a foreign exchange loss of $1.0 billion and a $540-million assets impairment.

"In light of the strong financial performance in 2014, the directors would like to make a return of capital to shareholders of up to $375 million by way of a tender offer," Evraz said in a statement.

Its tender offer represents a maximum of 8 percent of issued share capital and a 10 percent premium to the closing price on March 31, Evraz said. Shareholders are expected to approve the offer on April 17 and to receive the proceeds by April 23.

Evraz added that its net debt to EBITDA ratio was at 2.5 at the end of 2014 and that the company could consider returning cash to shareholders should the ratio remain below 3.
MGL: Evraz turns shareholder friendly? Or does Abramovich just need a new yacht? Either way its good news for minorities, and this stock is in a bull market in dollars. 9x 5x ev/ebitda 3% dividend yield. 

Consol Energy's thermal coal unit files for IPO

CNX Coal Resources LP, Consol Energy Inc's thermal coal business formed as a master limited partnership (MLP), filed for an initial public offering with U.S. regulators on Wednesday, as Consol shifts focus to boosting natural gas production.

Coal miners have been weighed down by a switch by U.S. utilities to cheaper natural gas from power-generating coal, and weaker demand from top consumer China for steel-making coal.

CNX Coal's initial assets are expected to consist of a 20 percent interest and operational control over Consol's Pennsylvania mining complex, which consists of three underground mines, the company said in a statement.

MLPs have become increasingly popular as they distribute most of their cash flow as dividend.

CNX Coal's revenue rose 21 percent to about $334 million in the year ended Dec. 31. The company's net income rose about 30 percent to $84 million.

The filing had a nominal fundraising target of $250 million. The filing did not reveal how many shares will be sold in the IPO or their expected price.

The company intends to list its common stock on the New York Stock Exchange under the symbol "CNXC".

The offering is expected to be completed in mid-2015, Consol said.

The amount of money a company says it plans to raise in its first IPO filings is used to calculate registration fees. The final size of the IPO could be different.
MGL: Finally, Consols shakes out off that distracting complexity, and separate the coal and natural gas entities. The natural gas entity will be interesting, comparables like Range, Cabot, Rice sport ev/ebitda multiples in the low double digits, when and if the market is in the mood to like natural gas. Consol's today, is just under 10x ev/ebitda for the combined entity.

Asian iron ore prices crash below $50/dmt mark to $48/dmt CFR China

Asian seaborne iron ore prices plunged below the pivotal $50/dmt CFR China level Wednesday, April 1, as the short-term price floor most market participants had in mind was decimated by an absence of buying interest, while both traders and producers continued to pump the market with spot offers.

Platts assessed the 62% Fe Iron Ore Index down $3.25 from Tuesday at $48/dry mt CFR North China, comfortably breaking the $50/dmt mark.

This also marks a historical low in the existence of the benchmark IODEX assessments.

Offers continued to flow into the spot market Wednesday while bids were few and far between.
MGL: Full on collapse now.

Image title
OK, so we were stupid enough to be bearish this commodity in 2011, and then last year we were told we were bonkers for being in complete mega monumental bear mode.

Netbacks in Australia likely pierced the $40 mark this am. Thats Fortescue dead then.  

So now we're cashing in some chips. We would note:

1> No undeveloped deposit is economic today. Simandou may be the only deposit that we should fear, RTZ has spent years pressurising the gov't to let them have a go, now the gov't says yes. Whats RTZ to do?  You really think telling the politicos they are no longer interested will excite the locals? Mealy mouthed talk that RTZ is not responsible for logistics won't cut the ice.

2> Mines do deplete actually.Once the present round of capex and supply completes, we're loaded for years of natural declines.  

3> Beijing is winning the war, and showing signs of supporting that critical property sector.

Not saying I would buy the stocks, because no way would we do that. Just saying we have finally passed into a price point where 10 years out prices might be a tad higher. Thats new.


Japan says April-June crude steel output to fall to 6-yr low

Japan's crude steel output for April-June is forecast to drop 7.8 percent from a year earlier to the lowest for the quarter in six years, the Ministry ofEconomy, Trade and Industry (METI) said on Thursday.

The fall would mark the latest in a series of signs of economic slowdown, clouding the outlook for Prime Minister Shinzo Abe's drive to reflate the economy and spurring calls for more monetary stimulus.

The ministry predicted crude steel output would sink to 25.51 million tonnes in April-June, the lowest output for the quarter since 2009 when steel demand was hit hard by the global financial crisis.

"Steelmakers are reducing output to meet slow demand in automobile and civil engineering, and to cut mounting inventories," Takanari Yamashita, director of METI's iron and steel division, told a news conference.

Japan's inventories of ordinary steel products for the domestic market were estimated at 5.93 million tonnes at the end of March, which is worth 1.48 months of domestic supply, METI said. Inventory worth 1.2 months of supply is considered healthy, industry sources said.

Slumping demand for energy-related steel products such as drilling pipes and linepipes in the wake of plunging oil prices was also weighing on export demand, Yamashita said.

Demand for steel products, including those for export, is forecast to sink 3.8 percent to 23.21 million tonnes in April-June compared with a year earlier, the ministry said, citing an industry survey. Steel product exports are forecast to decline 3.5 percent.

Exports of special steel products, including drilling pipes for the January-March quarter, are now estimated at 1.65 million tonnes, below an earlier forecast of 1.73 million tonnes, METI said.
MGL: Oil demand hitting steel? No auto pickup visible to compensate. We're moving into the oil collapse valley here. In q3 last year when we first looked at the Oil collapse we posited three events:

1> Instant recession as we lost 3% of global GNP to consumer savings. (tick?)
2> Credit market problems as energy based lending caught a cold. (starting...)
3> Country problems as energy producers revenues dried up. (tick?)

We now have evidence of all three. Interestingly, its the currency markets that have been most 'honest' so far in their appraisal of the consequences. 
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