Mark Latham Commodity Equity Intelligence Service

Monday 9th November 2015
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    China: Reform and Transition

    Image titleComplex Mechanism.

    Image titleNo more local debt issuance! It failed! 

    Barry Naughton
    Sokwanlok Chair of Chinese International Affairs
    School of Global Policy and Strategy
    University of California, San Diego

    Orbiting President Xi Jinping

    The Chinese president keeps a tight grip on his power and does not permit others to speak for him. Foreign officials and scholars have found it difficult to penetrate President Xi’s inner circle and get to know the men who advise him on policy and matters of state. Based on research and interviews by The New York Times, here are some facts about five men who, to varying degrees, give advice to Mr. Xi and are trusted by him — for now.

    • Wang Qishan, 67, head of the Communist Party’s Central Commission for Discipline Inspection, Politburo Standing Committee member

      A fan of “House of Cards,” he has told people that he pays special attention to the role of party whip, according to a Hong Kong magazine. That’s the job of the devious and menacing Frank Underwood character at the start of the show.

      As a former finance official, he met often with Henry M. Paulson Jr., the Goldman Sachs chief executive who later became United States Treasury secretary under President George W. Bush. Mr. Paulson wrote that during the 2008 financial crisis, Mr. Wang said: “We aren’t sure we should be learning from you anymore.”

      He is married to the daughter of Yao Yilin, a former vice-premier, but does not have children, which some political insiders say gives him fewer vested interests and makes him more immune to corruption.

    • Li Zhanshu, 65, head of the General Office of the Communist Party’s Central Committee, Politburo member

      He drank socially with Xi Jinping when the two were county-level party chiefs in Hebei Province in the 1980s.

      He once said in an interview that he abides by a Three-No’s Principle: “No screwing other people, no playing games, no loafing on the job.”

      An uncle, Li Zhengtong, died in 1949 fighting as a Communist soldier against the Kuomintang. That took place less a month after the uncle had gotten married. Mr. Li has described his father bringing the uncle’s body back to their village on a cart. In a 2005 essay memorializing his uncle, Mr. Li wrote: “There is an endless yearning that dwells deep in my heart. No matter how time flies, my thoughts for him linger.”

    • Liu He, 63, head of the Communist Party’s Central Leading Group for Financial and Economic Affairs, Central Committee member

      A fluent English speaker, he has an M.B.A. from Seton Hall University and an M.P.A. from the John F. Kennedy School of Government at Harvard University.

      He was awarded a top economics prize in China for writing a paper in 2012 that compared the 2008 global financial crisis with the Great Depression of the 1930s. He concluded with three lessons for China, including, “Have contingency plans for the worst-case scenarios.”

      This summer, as foreign analysts were questioning the stability of China’s economy and its stock market, he told a Hong Kong television station, “There’s no problem; rest assured,” and, “There’s no problem with the stock market, either.”

    • Wang Huning, 59, head of the Communist Party’s Central Policy Research Office, Politburo member

      He spent most of his academic career as a professor in the department of international politics at Fudan University in Shanghai and has been a policy adviser to Presidents Jiang Zemin, Hu Jintao and Xi Jinping.

      After a six-month visit to the United States in 1988, he wrote a book, “America Opposes America.” His purpose on the visit was to observe up close the “biggest capitalist country,” he wrote. “People wonder how this nation, with a short history of only 200 years, could become the most developed country in the world.”

      Wei Chengsi, a former Shanghai official, wrote that he once asked Mr. Wang why he did not describe himself, a known proponent of strong centralized leadership, as a subscriber to “neo-authoritarianism.” Mr. Wang replied: “Because the Communist Party can only publicly accept one doctrine, and that’s Marxism-Leninism."

    • Gen. Liu Yuan, 64, political commissar of the Logistics Department of the People’s Liberation Army, Central Committee member

      He is the son of Liu Shaoqi, the president of China from 1959 to 1968, who was purged by Mao during the Cultural Revolution and died in 1969 after months of being beaten and tortured.

      He had an early career as a civilian official in Henan Province, rising to the post of vice governor, before being transferred to the People’s Liberation Army with the rank of major general.

      The most vocal critic of corruption in the military, he was the first to challenge Gen. Gu Junshan and Gen. Xu Caihou, that latter of whom was a vice chairman of the Central Military Commission, which oversees the military. Those two generals were later purged by Mr. Xi for corruption.


    Mia Li and Yufan Huang contributed research.

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    Early Look: China’s Economy Likely Stabilized in October, But Growth Remained Subdued

    China’s economy may have stabilized in October after a slew of government stimulus measures, but growth momentum remained subdued amid sluggish demand both at home and abroad.

    The world’s second-largest economy likely heaped a widening trade surplus in October, mainly boosted by a sharper decrease in imports, instead of robust export growth like it recorded in previous years. China’s exports likely fell 4.1% in October from a year earlier, following an on-year drop of 3.7% in September, according to a median forecast of 11 economists polled by The Wall Street Journal. The nation’s imports in October likely declined 15.0% from a year earlier, compared with a 20.4% fall in September. That will take the trade surplus last month to $62.2 billion, compared with $60.3 billion recorded in September.

    China’s Ministry of Commerce said on Thursday that the nation’s exports for the full year of 2015 are expected to be little increased from a year earlier, while imports will likely report a “relatively big” decline. China set a 6% trade growth target for 2015 that it looks very likely to miss. China’s foreign trade in the first nine months of the year fell 8.1% from a year earlier, as exports declined by 1.9% and imports plunged 15.3%.
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    Maersk profit halves, cuts global sea trade forecast

    Shipping and oil conglomerate A.P. Moller-Maersk said on Friday third-quarter profit almost halved and global demand for container transportation this year would grow at a slower pace than previously expected.

    The Danish company, which operates the largest container shipping business
     in the world, kept a reduced forecast made two weeks ago for a 2015 underlying profit of $3.4 billion, down from the $4.0 billion previously expected.

    Maersk has taken a double hit to its businesses -- its oil units have floundered as crude prices halved since last year, while low trade volumes and an overcapacity of vessels have weighed on Maersk Line, the container shipping business.

    The earnings report, which showed third-quarter net profit almost halved to $778 million from $1.5 billion a year ago, comes two days after Maersk Line said it would slash costs, cut staff by almost a fifth and pull out of some vessel orders.

    On Friday, the company said it now expected demand for seaborne container transportation around the world to grow 1-3 percent this year, lower than its previous view of 2-4 percent.

    Growth in demand for shipping, at 1 percent in the third quarter, is the lowest since the 2008 financial crisis that hit the industry particularly hard. Maersk made an annual loss in 2009, the only year it has lost money in its 111-year history.

    Though the global economy has recovered since, trade volumes have risen at a slower pace than in the past and economists are increasingly concerned about flagging growth in China.

    Overcapacity has exacerbated that situation - in 2015, Maersk expects a 9 percent growth in container shipping capacity, outstripping the around 1-3 percent growth in trade.

    Read more at Reuters

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    Google Ad Prices falling too.

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    VW Emissions Scandal Leads To Suspension Of U.S., Canadian Sales

    In a turnaround, Volkswagen Group suspended sales of additional diesel-powered vehicles in North America as the scandal widens over the automaker’s use of software designed to deceive emissions tests.

    The company told dealers in the United States and Canada on Nov. 4 to stop selling cars from the 2013-2016 model years of VW and Audi with 3.0-liter engines. They include the 2013 Audi Q7, the 2014-2015 Audi A6, A7, A8, Q5 and Q7 and the 2013-2016 Volkswagen Touareg. The day before, VW-run Porsche had suspended sales of its Cayenne SUV for the model years 2014-2016.

    The U.S. Environmental Protection Agency (EPA) said on Nov. 2 that some 10,000 VW, Audi and Porsche vehicles powered by 3.0-liter diesel engines had been equipped with software that under-reports the vehicles’ emissions of toxic nitrogen oxide during testing.
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    The 'Teenager' Speaks on Oil: Abdul Aziz bi Salman

    The oil and gas industry has cut $200 billion from investments this year as low prices discourage new projects, leading to cuts in crude supplies equal to half the daily output of Saudi Arabia, according to the kingdom’s Prince Abdul Aziz bin Salman.

    Nearly 5 million barrels a day of projects have been deferred or cancelled, Bin Salman, who is also vice oil minister for Saudi Arabia, said in prepared remarks set to be delivered to energy ministers meeting in Doha Monday. Saudi Arabia pumped 10.38 million barrels a day in October, according to data compiled by Bloomberg.

    Oil prices have dropped 42 percent in the past year as Saudi Arabia led the Organization of Petroleum Exporting Countries in maintaining production in the face of a global glut rather than make way for booming U.S. output. Supply from outside the 12-member group will start to decline next year,
    after oil prices near $150 a barrel in 2008 proved unsustainable, Bin Salman said, according to the prepared remarks.

    “A prolonged period of low oil prices is also unsustainable, as it will induce large investment cuts and
    reduce the resilience of the oil industry, undermining the future security of supply and setting the scene for another sharp price rise,” Bin Salman said in the remarks. “As a responsible and reliable producer with long-term horizon, the kingdom is committed to continue to invest in its oil and gas sector, despite the drop in the oil price.”

    Energy companies will probably reduce investments another 3 to 8 percent next year, making it the first time since the mid-1980s that the industry cut spending for two consecutive years, he said. The vice oil minister said the impact of the current price instability is not just confined to the oil sector as "the
    spillovers are being strongly felt in other parts of the energy complex, such as renewables and natural gas," according to the prepared remarks.

    The drop in non-OPEC supply will probably accelerate “beyond 2016,” he said in the remarks.

                             Spare Capacity

    Oil demand is expected to be 94 million barrels a day this year, rising 1.5 percent from last year, with about 2 million barrels a day of spare capacity, mainly held in Saudi Arabia, he said in the prepared remarks. Growth in Asia’s demand may slow “by efforts to efficiency enhancement and oil substitution,” he said in the remarks.

    "But the petroleum industry should not lose sight of the fact that scale matters," with billions of people moving up into the middle class, the prince said in the remarks. The size of the world’s middle class will expand from 1.8 billion to 3.2 billion in 2020, and to 4.9 billion in 2030, with the bulk of this expansion occurring in Asia, he said in the remarks.

    “Rather than being a commodity in decline, as some would like to portray, supply and demand patterns indicate that the long-term fundamentals of the oil complex remain robust.”

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    BRIC Fund at GS closes.

    The BRIC era is coming to an end at Goldman Sachs Group Inc.

    The bank’s asset-management unit folded its money-losing BRIC fund, which invests in Brazil, Russia, India and China, and merged it last month with a broader emerging-market fund. Goldman Sachs pulled the plug on the nine-year-old product because it doesn’t expect “significant asset growth in the
    foreseeable future,” according to a filing to the U.S. Securities and Exchange Commission.

    Fourteen years after former Goldman Sachs economist Jim O’Neill coined the acronym that ushered in an unprecedented investment boom, the biggest emerging markets are now sputtering. Russia and Brazil have fallen into recessions. China, long an engine of the world’s growth, is poised for its
    weakest expansion since 1990.

    The downfall of the BRIC fund, which had lost 88 percent of its assets since a 2010 peak, also underscores how the strategy of bundling disparate countries into a single investment theme is losing its appeal among investors.

    “The promise of BRIC’s rapid and sustainable growth has been challenged very much for the last five years or so,” said Jorge Mariscal, the chief investment officer of emerging markets at UBS Wealth Management, which oversees about $1 trillion. “The BRIC concept was popular. But nothing is eternal.”

    The BRIC fund is being swallowed up by the Emerging Markets Equity Fund as part of Goldman Sachs’s efforts to “optimize” its assets and “eliminate overlapping products,” the New York-based bank said in the Sept. 17 filing.

    Instead of liquidating the fund, Goldman Sachs opted for the merger because it will give investors access to “a more diversified universe” of developing nations. The bank pointed out that the emerging-market fund has outperformed in the one-, three- and five-year periods.

    The BRIC fund lost 21 percent in the five years through Oct. 23, the last trading day before the merger. Its assets declined to $98 million at the end of September after peaking at $842 million in 2010, according to data compiled by Bloomberg.

    "Over the last decade emerging market investing has evolved from being tactical and opportunistic to being a strategic part of most asset allocations," said Andrew Williams, a spokesman for Goldman Sachs. "We continue to recommend that our clients have exposure to emerging markets across asset classes as part of their strategic asset allocation."

    O’Neill, who stepped down as the chairman of Goldman Sachs Asset Management in 2013 and became commercial secretary to the U.K. Treasury in May, declined to comment.

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    Oil and Gas

    Apache Said to Get Takeover Approach for $18 Billion Company

    Apache Corp., the oil and natural gas company worth more than $18 billion, has received an unsolicited takeover approach, according to people familiar with the matter.

    The Houston-based company rejected the initial offer and is working with financial adviser Goldman Sachs Group Inc. on defense, said the people, who asked not to be identified because deliberations are private. The potential buyer, who could not immediately be identified, sent a letter to Apache in the past few weeks and it’s unclear whether talks will resume, one of the people said.

    A spokesman for Apache couldn’t immediately be reached for comment outside of regular business hours. A representative for Goldman Sachs declined to comment.

    Apache on Nov. 5 reported a smaller-than-expected adjusted loss and boosted its 2015 production forecast. It’s one of the biggest leaseholders in the Permian Basin in western Texas, the largest U.S. shale play and the only one where oil output has continued to grow even as drillers slash spending and idle rigs. It also explores in Egypt, the Gulf of Mexico, Canada and the Eagle Ford and Woodford shale basins in the U.S.

    A deal for Apache would be the largest for an independent oil and gas producer in the U.S. this year. Noble Energy Inc. bought Texas shale driller Rosetta Resources Inc. for $3.9 billion, including assumed debt, in an all-stock transaction in July.

    Apache’s shares have fallen 54 percent from their 2014 peak as crude prices have crashed amid a global supply glut. It’s part of a larger sell-off in exploration and production companies, with an S&P index of 17 drillers down 28 percent in the past year. The shares closed at $47.67 on Friday in New York.

    A high-flying producer during the shale boom of the 2000s, it has chronically under-performed in recent years, largely due to bad bets on major projects in Argentina and Australia that didn’t pan out. Apache, which appointed a new chief executive in January, has been selling off lackluster properties in Texas and Australia.

    Apache had a net loss of about $5.7 million in the third quarter, compared with a net loss of about $1.3 million a year earlier, according to its latest earnings report. The company has cut it its 2015 capital budget by more than 60 percent from a year earlier, according to an investor presentation in September.
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    Santos Raising Takes Australian Oil Share Sales to 6-Year High

    In the Australian energy industry, selling billions of dollars of shares, even at a significant discount, beats accepting low-ball offers from predators.

    Australia’s oil producers and utilities are on track to sell almost $5 billion in new shares this year, the most in at least six years, as they seek to shore up balance sheets amid the rout in oil prices, according to data compiled by Bloomberg. Santos Ltd., which last month rejected a $5.2 billion takeover bid from Scepter Partners,said Monday that it plans to sell about A$3 billion ($2.1 billion) in stock.

    “If this was the bottom of cycle you would expect a lot more M&A, but what we’re seeing is more of these types of deals, companies raising equity,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said by phone. “There seems to be a big disconnect between what buyers are willing to pay and what sellers want to get.”

    Santos and Origin Energy Ltd. are starting two separate liquefied natural gas projects on Australia’s east coast at a time when oil -- and the companies’ share prices -- are sliding. Oil’s decline of more than 40 percent over the past year is cutting revenue for the gas-export projects whose contracts with Asian buyers are linked to the price of crude.

    The collapse in oil prices came just as $60 billion in new export projects were due to start up in Queensland. With much of the construction funded by debt, the balance sheets of Santos and Origin were doubly stretched. Santos’s net debt blew out to A$8.6 billion as of June 30 from A$616 million three years before, Origin’s climbed to A$11.6 billion from A$5.5 billion.

    Santos’s project started output in September. Origin said at the end of October it expected production to start within a month.

    A wave of new supply from Australia to the U.S. is deepening a glut of gas, raising the risk of losses for exporters and prompting some buyers to look at breaking contracts with suppliers, according to a report last week from Goldman Sachs Group Inc.

    Santos plans to sell A$2.5 billion in shares to existing holders at A$3.85 per share. That’s 35 percent less than its closing price of A$5.91 on Nov. 6. It’s also selling A$500 million in shares in a separate placement to Hony Capital, a China-based private equity firm.

    Origin announced at the end of September the sale of A$2.5 billion in shares at a similar discount in a bid to reduce debt. The new Origin shares were trading at about 35 percent more than the offer price of A$4 a piece as of Nov. 6.

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    Rosneft Offers Japan Chance to Join East Siberia, Far East Project

    Russia's Rosneft, the world's top listed oil producer by output, has offered Japanese companies a chance to join projects in Russia's East Siberia and Far East, Chief Executive Igor Sechin said on Friday.

    There is a huge potential for cooperation between the two countries, he said, in offering Japanese firms the opportunity to participate in the Verkhnechonskoye, Srednebotuobinskoye, Tagulskoye and Russkoye projects, as well as in other developments already in operation or yet to be launched.

    "We proposed to our Japanese partners deals with total reserves of six billion barrels and with a resource base of 100 billion barrels," Sechin told an industry symposium in Tokyo.

    "We would like to work with Japan."

    Sechin said that with the introduction of improved technology from the Japanese partners, Rosneft has ample room to expand its oil and natural gas output.

    Japanese exploration companies had huge write-down over the last three years because of investments in hard-to-recover hydrocarbons in the United States and Canada, and unsuccessful projects in the North Sea among others, Sechin said.

    Instead, he has asked them to invest in Russian projects, whose profitability is well above the global average, Sechin said, although he did not name any of the companies contacted.

    Sechin said there is a potential for a joint development offshore Sakhalin island, participation in the Far-East Petrochemical Co refining and petrochemical project, the development of Zvezda shipyard, and a possible pipeline to supply natural gas to Japan from Sakhalin.

    Investments in any upstream projects would have to start now to be ready for commercial operations by the time oil prices return to higher levels within five to six years, Sechin said.

    - See more at:

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    Toshiba tries to sell down $7 billion U.S. gas commitment

    Japan's Toshiba, struggling with a major accounting scandal, is trying to sell down a $7.4 billion commitment to U.S. liquefied natural gas (LNG), which it signed two years ago as part of a plan to sweeten sales of turbines for power plants.

    A plunge in Asian gas prices means an expected U.S. export bonanza has fizzled out before it even started, and has left the giant conglomerate potentially exposed to LNG processing fees of up to $370 million a year.

    Toshiba confirmed in an interview that it is looking to cut its commitment in the early years of the 20-year contract, but declined to comment on cost.

    "We have to admit the competitiveness of (U.S.) LNG is getting weaker compared to JCC prices," said Akira Nakatani, a manager in Toshiba's LNG group, referring to the typical price mechanism for long-term supplies to Japan.

    In recent weeks, Toshiba has held talks with oil and gas majors, utilities, trading houses and other potential LNG buyers to try to offload its commitments, according to six industry sources. Nakatani declined to comment on the names of possible buyers.

    Other Asian buyers are also trying to reduce their exposure to long-term LNG import obligations, as their demand wanes along with stalling economic growth and as excess supplies become available cheaply on the spot market.

    Toshiba, which is due to report an operating loss on Saturday following a $1.3 billion accounting scandal, may find it difficult to exit its commitment, say industry experts.

    The issue stems from a 2013 decision to buy the right to liquefy 2.2 million tonnes of LNG annually from 2019 from the proposed Freeport LNG export plant in Texas.

    The purchase of the so-called tolling agreement by an electronics conglomerate that makes everything from computers to vacuum cleaners stunned the market.

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    Obama ends seven-year saga: rejects TransCanada’s Keystone XL pipeline

    US President Barack Obama has rejected Canadian energy giant TransCanada’s application to build the Keystone XL pipeline, capping this way a seven-year saga that became one of the biggest environmental flashpoints of his presidency.

    The decision, announced in a media brief this morning, comes on the heels of the rejection ofTransCanada's request to pause the review of the proposed Keystone XL oil pipeline, a decision expected to lead to the project's rejection by the Obama administration.

    Addressing the media, Obama said the pipeline would not have made a meaningful longterm contribution to the US economy. He also said it would not have made any significant job contribution as their proponents claimed (fast-forward to minute 50):

    Obama also noted the pipeline would not lower gas prices for American consumers because gas prices have already been falling.

    America is now a global leader when it comes to taking serious action to fight climate change. Frankly, approving this project would have undercut that leadership

    The president spoke about the benefits of alternative energy sources: "America is now a global leader when it comes to taking serious action to fight climate change. Frankly, approving this project would have undercut that leadership…America has cut our total carbon pollution more than any other country on Earth."
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    U.S. Oil Drillers Idle 6 Rigs as Oil Cycle Hovers Near Lows

    U.S. crude explorers pulled back drilling rigs for a 10th straight week as conviction grows that the worst oil downturn in decades is nearing its bottom.

    Rigs targeting oil in the U.S. fell by 6 to 572, extending a five-year low after nearly 100 were idled since the start of September, Baker Hughes Inc. said on its website Friday. Natural gas rigs gained 2 to 199, bringing the total down by 4 to 771. The Eagle Ford Shale in south Texas, whose total rig count is down by 72 percent since the middle of 2012, was the only one of the four major U.S. basins to drop oil rigs this week. Three were let go there, bringing the active oil rig count down to 61.

    Despite more than two straight months of idling oil rigs, the small decline each week likely means more pain is ahead, said James Williams, president of WTRG Economics in London, Arkansas.

    "The fact that it was only six rigs might still be bearish for crude oil prices.," Williams said Friday in a phone interview. "Only six rigs doesn’t really indicate that you’ve had much of a drop in production."

    Oil is near a bottom and demand is poised to close the gap with global supplies as investments in new production decline and consumption grows, according to Pulitzer Prize-winning author Daniel Yergin. U.S. crude output, which surged to the most in more than three decades this year, deepening a collapse in prices, will retreat by about 10 percent in the 12-months ending in April, according to Yergin, vice chairman at IHS Inc.

    Recovery Ahead

    "We are in the bottom part of the cycle and a year from now the market will be looking different," Yergin said. "These prices are having such a big impact on investment."

    Despite the cutbacks, supplies haven’t yet followed suit as new techniques that increase efficiency keep production flowing. Output rose by 48,000 barrels a day last week to 9.2 million barrels, according to weekly Energy Information Administration data.

    The holiday season in the U.S. isn’t expected to be merry for the oil industry, Williams said.

    "Are we going to have Thankgiving layoffs?" Williams said. "Here’s the turkey and your pink slip."
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    Suncor Energy ramps up hostile $3.3billion bid for Canadian Oil Sands

    Suncor Energy Inc. is stepping up its hostile $3.3 billion bid for Canadian Oil Sands Ltd. by asking Alberta regulators to strike down the target’s new shareholder rights plan aimed at preventing its takeover.

    The Alberta Securities Commission will hold a hearing on Nov. 26 to consider the so-called poison pill adopted by the Canadian Oil Sands board last month, Suncor said in a statement Friday. The hearing follows Suncor’s application for an order to cease the new rights plan. Canadian Oil Sands vowed to protect its shareholders.

    The Canadian Oil Sands shareholder plan calls for 120 days to consider bids. Because Suncor’s offer is open for acceptance only until Dec. 4, unless extended or withdrawn by Suncor, it would not be a permitted bid under the new plan, Canadian Oil Sands said last month.

    “Suncor’s application is a smokescreen intended to obscure the weakness of its offer,” Canadian Oil Sands said in a statement. The company said it would “stand up for shareholders and vigorously oppose attempts by Suncor to remove the necessary protections of its shareholder rights plan.”

    Suncor, looking to bolster its status as Canada’s largest crude producer, last month renewed efforts to take over its partner and biggest shareholder in the Syncrude oil-sands joint venture after two friendly offers were rejected earlier this year. Canadian Oil Sands urged its shareholders to reject the bid and adopted the rights plan in response.

    Suncor has highlighted its oil-sands performance as further proof that its bid should be attractive to Canadian Oil Sands investors. Suncor’s upgrading operations that process oil-sands bitumen into light crude have run at more than 90 percent of capacity this year, compared with an average 70 percent for Syncrude, the company said last month. Suncor, which would boost its stake in the partnership to 49 percent from 12 percent with the takeover, made the comments as it announced a third-quarter loss.
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    Baytex Reports Q3 2015 Results

     "During the third quarter, we continued to position our company to withstand the current low commodity price environment. Consistent with our revised plans for 2015, we moved forward with a slower pace of development in the Eagle Ford and suspended heavy oil drilling in Canada. We remained focused on cost reduction initiatives across all of our operations and maintaining strong levels of financial liquidity. We have built an exceptional asset base focused on crude oil and liquids with a significant inventory of development prospects. We are well positioned for success as oil prices improve," commented James Bowzer, President and Chief Executive Officer.


    Generated production of 82,170 boe/d (81% oil and NGL) in Q3/2015;
    Delivered funds from operations ("FFO") of $105.1 million ($0.51 per share) in Q3/2015;
    Realized an operating netback (sales price less royalties, production and operating expenses, and transportation expenses) in Q3/2015 of $15.57/boe ($18.90/boe including financial derivative gains);
    Produced approximately 39,000 boe/d in the Eagle Ford with 14 wells brought onstream during the quarter generating average 30-day initial production rates of approximately 1,350 boe/d;
    Realized drilling cost savings in the Eagle Ford of greater than 10% for the second consecutive quarter (an overall reduction of 27% compared to 2014); and
    Maintained strong levels of financial liquidity with the suspension of our dividend and approximately $1.05 billion in undrawn capacity on our credit facilities.

    Production in the Eagle Ford averaged 38,941 boe/d (78% oil and NGL) during Q3/2015, as compared to 39,548 boe/d in Q2/2015 and 41,076 boe/d in Q1/2015. Capital expenditures in the Eagle Ford in Q3/2015 totaled $93.3 million, down from $98.3 million in Q2/2015 and $126.2 million in Q1/2015. We continue to work with our partner on cost reductions. To-date, we have achieved an approximate 27% reduction in well costs - with wells now being drilled, completed and equipped for approximately US$6.0 million, as compared to US$8.2 million in 2014.

    Production in Canada averaged 43,229 boe/d (84% oil and NGL) during Q3/2015, as compared to 45,222 boe/d in Q2/2015. The reduced volumes in Canada are a result of lower drilling activity and uneconomic production that we have shut-in. At September 30, 2015, we had a total of approximately 2,400 boe/d of uneconomic production shut-in, including the Cliffdale Cyclical Steam Stimulation project, which was suspended late in the third quarter. Capital expenditures for our Canadian assets in Q3/2015 totaled $33.5 million, an increase from $7.7 million in Q2/2015.

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    Too many Utica and Marcellus shale pipelines?

    A common complaint among Utica and Marcellus shale drillers is the lack of pipelines and other infrastructure to take away the oil and gas coming from the area.

    Companies are trying to fix that problem by constructing a bunch of pipelines – but will there be too much capacity when all is said and done?

    Columbia Pipeline Group Inc. is still optimistic.

    "If anything, folks are looking for opportunities to get access to capacity as soon as they possibly can," President Glen Kettering said on the Houston company's third-quarter earnings call.

    Kettering doesn't think overbuilding is a risk. People who worry about it double-count some of the projects, he said, and some projects may not get built. Projected oil and gas production should match "reasonably well" with expected pipeline output by 2020, he said.

    "Could there be pockets, could there be time periods where you have a mismatch between capacity and the supply?" he said. "Obviously. But we don't regard that as being a systemic kind of the scenario that we’re likely to face."

    Columbia Pipeline Group has a number of Utica and Marcellus-area pipelines in the works, including the Mountaineer Xpress.
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    Magnum Hunter Refinances Again, Dodges a Bullet…Just Barely

    Magnum Hunter Resources (MHR) issued an interesting press release yesterday to notify investors that they dodged a bullet–for the moment–by refinancing certain loans and getting a new $60 million loan which will let them make their $29 million bond payment on Nov. 15.

    The statement also said in light of “ongoing discussions regarding its capital structure” they won’t issue a press release on third quarter financials, and they won’t hold a conference call with investors. Not a good sign. One analyst we read rhetorically asks,

    Does this mean they avoid bankruptcy? “The short answer is NO,” was his reply. He maintains “working on capital structure” means they are headed for a pre-packaged bankruptcy.

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    Rice Energy 3Q15: $59M Profit, $750M LOC, Selling Gas Outside NE

    Rice Energy, a very young but important pure play driller in the Marcellus/Utica, released its third quarter update yesterday.

    Bucking the trend of other northeast drillers, Rice earned $119 million in profit before interest, taxes and all that jazz (called EBITDAX), and they earned $59 million after all that jazz.

    In the black. No paper loss. It’s all good. One of the secrets to Rice’s success is that they’re selling their gas for an average of $0.38 higher per Mcf than others because of deals with the REX and Texas Eastern pipelines that carry Rice’s gas to markets outside of Appalachia.

    Production was 609 million cubic feet equivalent per day (Mmcfe/d) in 3Q15. The company reports expanding their line of credit at the bank to $750 million and transferring ownership (called a “drop down”) of their water services business from Rice Energy the driller to Rice Midstream the subsidiary, netting Rice Energy a nifty $200 million on paper. In essence they transferred money from one pocket to another.
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    Canadian Natural Resources and PrairieSky Royalty Announce Combination of Royalty Businesses

     Pursuant to the Combination Agreement, Canadian Natural and PrairieSky have agreed that PrairieSky will acquire a substantial portion of Canadian Natural's royalty assets representing approximately 6,700 boe/d or 81%, of Canadian Natural's royalty volumes (the "Assets"), for an aggregate purchase price of $1.8 billion, consisting of $680 million in cash and the issuance of approximately 44.4 million PrairieSky common shares (the "Share Consideration"). The Assets consist of approximately 5.4 million acres of royalty lands throughout Western Canada, including 2.2 million acres of fee simple mineral title land. The effective date of the Transaction is October 1, 2015 with closing expected prior to year-end 2015.

    Under the terms of the Combination Agreement, Canadian Natural has agreed with PrairieSky to distribute to its shareholders, by no later than December 31, 2016, by way of a dividend or return of capital (subject to regulatory approval and securities and tax regulations) sufficient PrairieSky common shares so that Canadian Natural, after such distribution, owns less than 10% of the issued and outstanding shares of PrairieSky.

    Canadian Natural's current intention is to distribute to its shareholders, by way of a dividend or return of capital (subject to regulatory approval and securities and tax regulations), the majority of the Share Consideration, at or near its next Annual and Special Meeting of Shareholders in May 2016. This will provide Canadian Natural shareholders with the opportunity to participate directly and indirectly in the combined royalty business of PrairieSky.

    Canadian Natural will allocate $680 million from the purchase price to the balance sheet through the application of the proceeds to the reduction of bank credit facilities increasing its undrawn bank lines of credit from $3.4 billion to $4.1 billion and decreasing its debt to book capitalization from approximately 38% to approximately 36% (all figures pro forma September 30, 2015).

    Canadian Natural expects to record an after-tax gain on disposition of approximately $700 million, based upon preliminary value allocations. The final determination of the gain on disposition will depend upon the value of PrairieSky common shares at the time the Transaction closes.

    This Transaction does not impact previously released Canadian Natural production or cash tax guidance.

    In conjunction with the Transaction, PrairieSky has entered into binding commitments with certain investors for an aggregate $680 million non-brokered private placement subscription receipt financing (the "Private Placement"), which is described in further detail below. The Private Placement is subject to customary closing conditions including receipt of applicable regulatory approvals and is expected to close on or about December 2, 2015.
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    Alternative Energy

    Oil major Total to step up solar power play, says CEO

    Solar energy could account for up to 15 percent of French oil major Total's assets by 2030, Chief Executive Patrick Pouyanne told French daily Le Monde on Friday.

    Pouyanne, who was appointed CEO a little more than a year ago, said that Total had invested $3 billion in solar, which now accounts for 3 percent of the group's assets.

    "We believe this is a growing market and that, in about 15 years, it will no longer 3 percent of our portfolio, but about 10 to 15 percent," he was quoted as saying.

    Total, which has a market capitalisation of 112 billion euros ($120 billion), entered the solar  business with a $1.3 billion 2011 takeover of U.S. company SunPower Corp in one of the biggest moves by an oil and gas major into the renewable energy industry.

    While Pouyanne acknowledged that oil and gas still account for about 40 percent of the world's CO2 emissions, he said that coal is by far the bigger polluter and that gas-generated electricity emits half as much CO2 as coal-generated power.

    "Coal is the number one troublemaker, the enemy, so to speak," he said, adding that Total is becoming more and more focused on gas.

    He also said that Total tests the profitability of all its investment projects by integrating a CO2 cost of 25 euros per tonne.

    Pouyanne added that he did not believe there should be a global CO2 price but said that there should be a carbon-pricing mechanism in as many regions of the world as possible.

    Read more at Reuters
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    Showa Shell's 49 MW Biomass Power Plant Starts Operations

     Showa Shell Sekiyu K.K., a Japanese refiner, said it has completed a 49-megawatt biomass power plant south of Tokyo.

    The plant in Kanagawa prefecture began commercial operations earlier this month, the company said in a statement Monday. It’s Showa Shell’s first biomass power project.

    The station, built on the site of the company’s former refinery, uses wood pellets and palm kernel shells as fuel and will generate enough electricity for about 83,000 homes, according to the statement.
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    Precious Metals

    Lonmin offers 94% discount on rights issue

    Investors will have to subscribe for 46 new shares for every 1 owned.

    The potential dilution is terrifying, and much worse than anyone envisaged. The company announced plans to raise a gross amount of $407m by way of a rights issue that will see 26.99bn new shares issued at a price of 21,4 cents per share. The offer has been underwritten.

    This means that if you are an existing Lonmin shareholder, you will have to invest a further R9.84 for every Lonmin share owned in order to prevent being diluted.  After fees, the company will have $369m to be used at its disposal.
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    Base Metals

    Indonesia warns Freeport McMoRan about divestment obligations

    Indonesia has warned Freeport-McMoRan the company must soon propose a price for divesting part of its Indonesian operations or be considered in default of its obligations, a senior mines official said on Sunday.

    Freeport Indonesia must sell the government a greater share of its huge copper and gold mine in Papua as part of an extension the company's contract beyond 2021.

    Freeport had until Oct. 14 to submit a proposal on how much the 10.6 percent stake in the company was worth. The government would then have 90 days to respond.

    Mr Bambang Gatot, director general of coal and minerals at the mining ministry, told reporters "Because it has not offered this yet, we have a sent a warning letter. Further delays may lead the government to declare Freeport in default of its obligations.”

    Mr Gatot declined to specify how long the US company had to respond to the letter, which was sent last week.

    A Freeport spokesman last month said the company had no issues relating to the divestment as long as it had a "legal basis and a clear mechanism". He said the company would prefer to make the divestment through an initial public offering.

    Attached Files
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    Copper Socks

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    Steel, Iron Ore and Coal

    China October Iron Ore, Coal, Oil and Copper imports dip on month - customs

    China imported 75.52 million tonnes of iron ore in October, down 12.3 percent from the previous month, official data from China's customs authority showed, with National Day holiday disruptions compounded by a slowdown in the domestic steel industry.

    Slowing economic growth in China has had a massive impact on heavy industries like steelmaking and power generation, leading to a slump in demand for bulk commodities like iron ore and coal.

    Iron ore imports in October were down 4.9 percent on the year, while shipments for the first 10 months of the year have reached 774.5 million tonnes, down 0.5 percent compared with last year, despite a huge crash in prices and a decline in high-cost domestic production.

    Coal shipments in October, including lower-grade lignite, reached 13.96 million tonnes, down 21.4 percent from September and 30.7 percent from a year ago. Volumes for the year so far reached 170.3 million tonnes, down 29.9 percent compared with the same period of last year.

    Domestic steel mills have been struggling with weak demand and product prices now at multi-decade lows, and have relied on the export market to help absorb surplus production.

    However, despite complaints that China continues to dump large amounts of cheap steel on overseas markets, exports in October actually fell 19.8 percent to 9.02 million tonnes.

    October crude oil deliveries fell 5.7 percent from September to 26.35 million tonnes, amounting to 6.2 million barrels per day.

    Copper imports also declined 8.7 percent compared with last month, reaching 420,000 tonnes. Traders said imports had been affected by lukewarm domestic demand. Importers also arranged more deliveries in the previous month to compensate for the week-long October holiday.

    Arrivals of anode, refined copper, alloy and semi-finished copper products reached a 20-month high of 460,000 tonnes in September.

    Soybean imports also declined 23.8 percent on the month to 5.53 million tonnes, customs data showed, matching expectations, with supplies from South America in decline and production from North America still in transit.

    With U.S. deliveries now starting to arrive, imports are likely to pick up to about 7 million tonnes in November, the China National Grain and Oils Information Centre (CNGOIC) said.

    Read more at Reuters

    Attached Files
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    China's iron ore prices seen set to fall further as low season begins

    Both domestic and imported iron ore prices will remain under downward pressure over November and December as steel mills enter the seasonal winter low production period, market sources said Friday.

    "Winter is coming, which will drag down steel demand in China further, and iron ore prices will probably decline on waning buying enthusiasm from Chinese steel mills as a result [from this month]," a mining official in northern China said.

    Beijing saw its first snowfall of the year Friday.

    China's iron ore miners have been monitoring import price movements closely this year and routinely adjusting their prices to remain competitive, but their room to maneuver has been crunched to Yuan 5-10/dmt(80 cents-$1.60/dmt) since August when domestic concentrate prices hit Yuan 550/dmt, close to or below their cost of production.

    "China's steel output will most probably decline with the demand going into the low season," the China Iron and Steel Association or CISA said in a monthly report released Wednesday.

    A fall in inventories of iron ore both at steelworks and ports has failed to ease the oversupply situation in China and done little to support iron ore prices as a result, CISA said.
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    BHP iron ore target under review after Brazil disaster

    BHP Billiton Ltd said it was reviewing its fiscal 2016 iron ore production guidance following a deadly mudflow and flooding disaster at a mine in Brazil, which analysts described as a severe blow for the world's biggest miner.

    At least two people died and as many as 28 are missing after a dam ruptured at the Samarco Mineração S.A. mine and unleashed floods and mud that swept as far as 100 km (60 miles) from the mine.

    Samarco, a joint venture between BHP and the world's biggest iron ore miner, Vale SA , said it had set no date to restart the mine, which produced 29 million tonnes of iron ore last year.

    BHP's share made up about 6 percent of its total iron ore output in the year to end-June 2015 and contributed about 3 percent of underlying earnings before interest and tax, although analysts said the potential liabaility from the disaster would be more significant for the company.

    "It's probably the last thing the company needs, given it's struggling to generate earnings, it's on track to pay dividends out of debt, and then they've got this liability," said Ric Ronge, a portfolio manager at Pengana Capital.

    "In dollars and in terms of their ability to operate as a responsible citizen, it's very material," Ronge said, declining to put an estimate on how large the liability might be.

    BHP's shares fell 3.5 percent t A$21.90 a share by midday trading on Monday to a six-week low.

    BHP had been planning production of 247 million tonnes in the year to June 30, 2016 prior to the disaster, up 6 percent on a year earlier, ranking it behind Vale and Rio Tinto

    Samarco has the capacity to produce 30.5 million tonnes a year of iron ore pellets and to process 32 million tonnes of iron concentrate annually.

    The operations in the southeastern state of Minas Gerais include a three-tiered tailings dam complex. It was the Fundao dam that failed on Nov. 5.

    "This resulted in a significant release of mine tailings, flooding the community of Bento Rodrigues and impacting other communities downstream," BHP said in a statement to the Australian Securities Exchange.

    A second dam has also been affected, according to the company, which did not make clear the extent of damage, while a third dam was being monitored by Samarco, it said.

    Andrew Mackenzie, chief executive of Melbourne-based BHP, will travel to the mine this week to get a better understanding the disaster, according to the company, which reiterated the safety of Samarco's workforce and local communities remained its top prioirty

    "There's no way to dress this up as anything other than an ugly and sad thing," said Morningstar analyst Mark Taylor. "It's particularly disappointing for them (BHP) as it's not really a core asset."

    Read more at Reuters
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    UK steelmakers call for immediate EU action on Chinese imports

    British steelmakers called for business minister Sajid Javid to insist on immediate action against Chinese steel 'dumping' when he meets European Union economy and industry ministers in Brussels on Monday.

    Britain requested the emergency meeting after nearly 4,000 of its steel jobs were lost or put at risk in October - equivalent to about a fifth of the sector's workforce - with steelmakers and unions pinning much of the blame on China.

    "The U.S. and other countries have already moved to prevent cheap Chinese imports distorting their markets and now the EU must do the same and, do so quickly ... if we're to prevent large scale problems for steelmakers spreading," said Gareth Stace, director of UK Steel, an industry lobby.

    China makes nearly half the world's 1.6 billion tonnes of steel. It is expected to export a record 100 million tonnes of steel to world markets this year to help address its spare steelmaking capacity - estimated at 300 million tonnes.

    The issue made national headlines during Chinese President Xi Jinping state visit to Britain last month, putting the government under pressure.

    As a result, it promised last week to start refunding the cost of green taxes which push up energy prices for steel manufacturers as soon as the European Union grants state aid approval.

    But Britain's steel sector says its biggest problem has been a sharp rise in steel imports from China. UK Steel said forecasts show that Chinese 'dumping' of rebar steel in the UK is set to account for more than half the UK market of 720,000 tonnes in 2015.

    The European Commission opened an investigation into alleged rebar dumping in April. The investigations usually take 15 months, although the Commission can set provisional duties after an initial nine months.

    Global steel prices are at the lowest level in over a decade ST-CRU-IDX due poor demand growth and structural oversupply. Consultants CRU estimate that some 700 million out of a total 2.3 billion tonnes of global steelmaking capacity is spare.

    Read more at Reuters
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    ArcelorMittal South Africa plans R4.5bn rights offer Steelmaker says

    ArcelorMittal South Africa (AMSA), the latest local steelmaker to fall victim to record low steel prices, weak demand, and an influx of cheap imports, is planning to raise as much as R4.5bn through a planned rights offer that will be underwritten by the parent company.

    Africa’s largest steelmaker, which expects to post an annual headline loss of more than R6/share (11 times greater than that recorded last year) for the financial year ending December, believes the cash call is the first step in reducing debt and funding near term investments. Referring to the challenging trading environment which has rendered four consecutive years of net losses, CEO Paul O’Flaherty said, “…it has become critical to restructure the financial position of the company”.

    The funds raised by AMSA’s rights issue have already been earmarked to settle a loan of R3.2bn from the Luxembourg based parent company. South African shareholders are therefore being asked to repay the loans owed to the ArcelorMittal (AM) Group.

    Judging from the third quarter results the AM Group have just released, it becomes clear why. ArcelorMittal reported a $700 million loss for the third quarter and revised its full year Ebitda expectations down to between $5.2bn and $5.4bn from previous estimates of between $6bn and $7bn. In an attempt to reduce its 2016 cash requirements by $1bn, it is lowering its capex spend and suspending its dividend for the 2015 financial year.

    At the same time, AMSA is placing its Vaal Meltshop in Vereeniging under care and maintenance. The 283 employees at the meltshop will be affected when production there ceases in the fourth quarter. It may also outsource jobs at its Corporate Services Division. The company will also implement “a number of significant operational, productivity and cost efficiency improvements” at its Vanderbijlpark Works over the next two years.

    AMSA is also renegotiating the pricing mechanism terms of a long term deal with Kumba Iron Ore, from whom it procures up to 25Mt of iron ore a year. Under the new agreement, AMSA will no longer pay cost-based prices but rather export parity prices (EPP) which will be based on an international index. It will receive discounts of between 5% and 7.5% to the EPP based on the index price of iron ore. “The current market environment presents significant challenges for the mining and steel industries.
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