Mark Latham Commodity Equity Intelligence Service

Friday 8th January 2016
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    The House of Saud defends itself

    What is Arabic for Thatcherism?

    The plunge in the price of oil, from $110 a barrel in 2014 to less than $35 today, was partly because Saudi Arabia seems determined to protect its share of the oil market. Nevertheless, low prices are a time-bomb for a country dominated by oil and a government that relies on it for up to 90% of its revenues. The budget deficit swelled last year to a staggering 15% of GDP. Although the country has $650 billion of foreign reserves, they have already fallen by $100 billion.

    When oil prices fell in the 1990s, the Saudis simply borrowed heavily. They were saved when China’s boom sent commodity prices soaring again in the 2000s. This time no one, including the Saudi rulers, expects a return to triple-digit oil prices. Instead, they acknowledge that the economy must change. Speaking to The Economist this week (seeBriefing), Prince Muhammad laid out a blueprint for reform that amounts to a radical redesign of the Saudi state.

    The first step is fiscal consolidation. The goal is to eliminate the budget deficit in the next five years, even if the oil price stays low. Though there is much flab to cut, that is still a perilous undertaking which means dismantling the system according to which petro-cash, not taxes, pay for free education and health care as well as highly subsidised electricity, water and housing. More than money is at stake: this largesse has disguised how far the economy is chronically unproductive and dependent on foreign labour. It has been too easy for Saudis to avoid working, or to snooze away in government offices.

    The new leadership has made a start. Spending cuts in the last months of 2015 stopped the deficit from soaring to more than 20% of GDP. The 2016 budget includes steep rises in the prices of petrol, electricity and water (though they remain heavily subsidised). The prince pledges to move to market prices by the end of the five-year period. He is also committed to new taxes, including a value-added tax of 5%, sin taxes on sugary drinks and cigarettes, and levies on vacant land.  

    Recalibrating taxes and subsidies is only the first step. Roughly 70% of the 29m-plus Saudis are under 30. At the same time, two-thirds of Saudi workers are employed by the government. With the workforce projected to double by 2030, the country will prosper only if the sleepy statist economy is turned on its head, diversifying from oil, boosting private business and introducing market-driven efficiencies.

    Talking late into the night with the news left on throughout, Prince Muhammad discusses his country’s interventionist foreign policy and its uncompromising response to terrorism and sedition. Asked whether the kingdom’s actions were stoking regional tensions, he said that things were already so bad they could scarcely get any worse. “We try as hard as we can not to escalate anything further,” he says; and he certainly does not expect war. But for his entourage, Saudi Arabia has no choice but to stop Iran from trying to carve out a new Persian empire.

    If his defence of Saudi foreign policy was unrepentant, even more striking was his ambition to remake the entire Saudi state by harnessing the power of markets. No economic reform is taboo, say his officials: not the shedding of do-nothing public-sector workers, not the abolition of subsidies that Saudis have come to see as their birthright, not the privatisation of basic services such as education and health care. And not even the sale of shares in the crown jewel: Saudi Aramco, the secretive national oil and gas producer that is the world’s biggest company.

     Iran, the Shia power that has long alarmed Sunni Arabs, has spread its influence across the region, particularly through the militias it grooms—in Lebanon, Iraq, Syria and most recently in Yemen, Saudi Arabia’s underbelly. The Arab world is confronted not just by a Shia Crescent, “but by a Shia full moon”, says one confidant of the prince. As well as Shia militants, Saudi Arabia also faces resurgent Sunni jihadists: a revived al-Qaeda in Yemen to the south, and Islamic State (IS) in Iraq and Syria to the north. Both seek to lure young Saudis raised on the same textbooks and homilies that the jihadists use.

    Pillars of the House of Saud

    The Al Sauds have survived by making three compacts: with the Wahhabis to burnish their Islamic credentials as the custodians of the holy places of Mecca and Medina; with the population by providing munificence in exchange for acquiescence to absolutist rule; and with America to defend Saudi Arabia in exchange for stability in oil markets.

    But all three of these covenants are fraying. America is semi-detached from the Middle East. The plummeting price of oil, which provides almost all of the government’s revenues, means the old economic model can no longer sustain the swelling and unproductive population. And the alliance with obscurantists brings threats, because they provide intellectual sustenance to jihadists, and form an obstacle even to modest social reforms that must be part of any attempt to wean the country off oil and create a more productive economy.

    Not surprisingly, Saudi Arabia’s many critics have dusted off their obituaries of the House of Saud. But for Prince Muhammad the lesson of the Arab spring, and of history, is that regimes that lack deep roots are doomed to be swept away; by implication the Al Sauds are here to stay.

    Yet he knows that change must come, and fast. He has injected new energy into government, and is taking huge gambles. What he lacks in experience and foreign travel, he compensates for with confidence, focus and a battery of consultants’ reports. He reels off numbers and policies with ease, pausing only to take a call from John Kerry, America’s secretary of state. He speaks in the first person, as if he were already king even though he is only second in line. Over five hours King Salman is mentioned once; his cousin, the crown prince, Muhammad bin Nayef, does not figure at all, though he is in charge of internal security and may be biding his time.

    Prince Muhammad’s most dramatic moves may be at home. He seems determined to use the collapse in the price of oil, from $115 a barrel in 2014 to below $35, to enact radical economic reforms. This begins with fiscal retrenchment. Even after initial budget cuts last year, Saudi Arabia recorded a whopping budget deficit of 15% of GDP. Its pile of foreign reserves has fallen by $100 billion, to $650 billion. Even with its minimal debt of 5% of GDP, Saudi Arabia’s public finances are unsustainable for more than a few years (see chart).

    Under his “Transformation Plan 2020”, set for publication by the end of the month, the prince wants to develop alternatives to oil and drastically to cut the public payroll, which acts as a form of unemployment benefit. To do so he wants to create jobs for a workforce that will double by 2030. Ministers speak of doubling private education to cover 30% of students, establishing charter schools and transforming public health care into an insurance-based system with expanded private provision. In addition to Aramco, the prince wants to sell stakes in state assets from telecoms to power stations and the national airline. The government is to sell land to developers, such as the 4m square metres it owns around Mecca, the most expensive real estate in the world. The prince sees huge promise in developing Islamic tourism to the holy sites; he hopes to boost the 18m annual visitors to 35m-45m in five years.

    Surprisingly, perhaps, for a Saudi royal with no Western education, Prince Muhammad speaks about America passionately.
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    Iran Accuses Saudi Arabia Of Bombing Its Embassy In Yemen

    Last weekend, an already chaotic geopolitical landscape was complicated immeasurably when Saudi Arabia moved to execute prominent Shiite cleric Nimr al-Nimr.

    The Sheikh was a leading voice among Saudi Arabia’s dissident Shiite minority and it was his role in a series of anti-government protests that ultimately sealed his fate. “In any place he rules—Bahrain, here, in Yemen, in Egypt, or in any place—the unjust ruler is hated,” Nimr once said of the Sunni monarchies. “Whoever defends the oppressor is his partner with him in oppression, and whoever is with the oppressed shares with him his reward from God. We don’t accept al-Saud as rulers. We don’t accept them and want to remove them.”

    The Saudis branded Nimr a “terrorist” and insist that he was no different from the 43 Sunnis who were executed last Saturday.

    The Shiite world isn’t buying it - not for a second.

    In fact, it seems likely that Riyadh knew good and well that killing the Sheikh would precipitate a firestorm. Even John Kerry warned the Saudis against executing the popular Shiite figure. In light of that, it seems just as likely as not that Riyadh wanted to create an excuse to sever ties with the Iranians and escalate the regional proxy wars playing out in Yemen, Syria, and Iraq.

    In short: Saudi Arabia is losing. The Russian intervention in Syria has turned the tide against the Sunni extremist elements battling the SAA, what was supposed to be a quick victory in Yemen has devolved into a protracted stalemate, and Iraq has become an Iranian colony. The so-called “Shiite crescent” is waxing and the Saudis appeared powerless to stop it.

    So they created a crisis. They engineered sectarian strife and then blamed Tehran for good measure.

    From the time protesters took to the streets in Bahrain last Saturday we’ve been asking how long it would be before the “diplomatic” spat became part and parcel of the multiple regional proxy wars unfolding across the Mid-East.

    On Thursday, we got the answer. Tehran now says Saudi Arabia has bombed the Iranian embassy in Sana’a.

    "Tehran holds Saudi Arabia responsible for the damage caused to its embassy in Yemen," Bloomberg reports, adding that "an unspecified number of embassy guards were wounded."

    Tehran says the missile attack represents a violation of international law.
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    ARAMCO coming public?

    A Thatcherite revolution

    All latest updates

    Saudi Arabia is considering an IPO of Aramco, probably the world’s most valuable company

    The biggest oil of all

    • Timekeeper

    SAUDI ARABIA is thinking about listing shares in Saudi Aramco, the state-owned company that is the world’s biggest oil producer and almost certainly the world’s most valuable company. Muhammad bin Salman, the kingdom’s deputy crown prince and power behind the throne of his father, King Salman, has told The Economist that a decision will be taken in the next few months. “Personally I’m enthusiastic about this step,” he said. “I believe it is in the interest of the Saudi market, and it is in the interest of Aramco.”

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    How pulling the Chinese yuan thread frays the fabric of global markets

    If ever proof were needed of how deeply financial markets are interconnected and dependent on investors' "sentiment", look no further than the worldwide tremors set off by a 1 percent fall in China's currency this week.

    Free-floating currencies routinely fluctuate by greater amounts in a single day. Nevertheless, the yuan's seemingly miniscule move is being blamed for everything from the crash in Chinese stocks to oil's slide to a 12-year low to the worst start to the year on Wall Street since 2001. Few corners of the financial world have been untouched.

    The yuan remains far from a free-floating currency, and is tightly controlled by the Chinese authorities, so the 1 percent fall against the dollar is significant. It's the largest weekly drop since the People's Bank of China's mini-devaluation last August and the second biggest on record.

    This week's turmoil echoes the turbulence of last summer after the Chinese central bank staged the 2 percent devaluation on Aug. 11 in the midst of an emerging market and commodity rout. This culminated in Wall Street's biggest one-day fall in four years on Aug. 24. China matters.

    This GRAPHIC shows how currencies, stocks, commodities, bonds and some economic indicators have reacted to the yuan slippage since last August: title

    The yuan moves suggest Beijing is trying to engineer a weaker currency to cushion the impact of slowing growth in its economy, a slowdown that many analysts believe is much more serious than official statistics indicate.

    As the main driver of global economic growth over the past 15 years, a "hard landing" in China would be bad news for everyone.

    The prospect of weakening demand from China has clobbered the price of oil, industrial metals, energy and resources. This means the budgets, exchange rates and economies of commodity exporting countries - mainly emerging markets - are suffering.

    Falling emerging market demand slows trade and economic activity with the developed world. Together with falling commodities and EM exchange rates, it also creates a powerful global deflationary force that pushes down bond yields.

    It's a vicious circle, one that looks increasingly difficult to break out of until China's economy roars back to life.

    It's also an increasingly difficult one for global policymakers to tackle given that many analysts say central banks and governments have used up all their ammunition fighting the global financial crisis and recession of 2007-09.

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    The most obvious fact about 2015.

    First, a painful look back

    Back in January, we listed the 10 stocks with the highest implied upside potential among S&P 500 SPX, -2.37% companies with majority “buy” or equivalent ratings.

    Here’s how that list has performed since we pulled it on Jan. 5:

    Company Ticker Industry Total return - Jan. 5, 2015 through Dec. 18, 2015 Total return - 2014
    Freeport-McMoRan Inc, FCX, -9.08% Precious Metals -71% -36%
    Nabors Industries Ltd. B, -3.60%NBR, -6.68% Contract Drilling -33% -23%
    QEP Resources Inc. QEP, -4.40% Oil and Gas Production -37% -34%
    Range Resources Corp. RRC, +0.29% Oil and Gas Production -59% -36%
    EQT Corp. EQT, +4.72% Oil and Gas Production -33% -16%
    Noble Energy Inc. NBL, -2.52% Oil and Gas Production -26% -30%
    Wynn Resorts Ltd. WYNN,-9.41% Casinos/ Gaming -55% -21%
    Newfield Exploration Co. NFX, -2.10% Oil and Gas Production 27% 10%
    Williams Cos. Inc. WMB,-10.00% Oil and Gas Pipelines -47% 21%
    Quanta Services Inc. PWR, -2.67% Engineering and Construction -28% -10%
    Source: FactSet

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    China FX reserves fall $512.66 billion in 2015, biggest annual drop on record

    China's foreign exchange reserves, the world's largest, fell $107.9 billion in December to $3.33 trillion, the biggest monthly drop on record, central bank data showed on Thursday.

    The December figure missed market expectations of $3.40 trillion, according to a Reuters poll.

    China's foreign exchange reserves fell $512.66 billion in 2015, the biggest annual drop on record.

    The value of its gold reserves stood at $60.19 billion at the end of December, up from $59.52 billion at the end of November, the People's Bank of China said on its website.

    Gold reserves stood at 56.66 million fine troy ounces at the end of December, up from 56.05 million at end-November.

    China's International Monetary Fund (IMF) reserve position was at $4.55 billion, down from $4.60 billion the previous month. It held $10.28 billion of IMF Special Drawing Rights at the end of last month, compared with $10.18 billion at the end of November.

    The central bank in July shifted to reporting its foreign exchange reserves on a monthly basis after adopting the IMF's Special Data Disseminati.

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    Brazil's industrial production plunges in November

    Brazilian industry contracted in November by even more than economists' dire predictions had indicated, as the country's worst recession in decades deepened.

    Industrial production plunged 2.4% from October in seasonally adjusted terms and 12.4% from November 2014, the Brazilian Institute of Geography and Statistics, or IBGE, said Thursday.

    A survey of economists by the local Agência Estado newswire had produced a median estimate of a 0.9% decline in month-on-month terms, with the even worst forecast calling for a 1.8% drop.

    Struggling with poor infrastructure, rigid labor laws, unproductive workers and crushing bureaucracy, Brazilian manufacturers and other industries are at the forefront of the country's myriad economic troubles.

    Economists surveyed last week by the central bank estimated that industrial production contracted by 7.8% in 2015 and would tumble an additional 3.5% this year. November was the sixth consecutive month of lower output.

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    Shorts: Day to cover.

    Security Name Last Days to Cover
    Athabasca Oil Corporation 1.05 30.12
    Copper Mountain Mining Corporation 0.29 21.97
    Crew Energy Inc. 2.92 20.47
    CARBO Ceramics Inc. 15.87 17.26
    Energy XXI Ltd 1.02 15.23
    Cliffs Natural Resources Inc. 1.83 14.64
    Delphi Energy Corp. 0.58 14.08
    Coeur Mining, Inc. 2.38 10.64
    Fortress Paper Ltd. Class A 3.35 10.52
    Comstock Resources, Inc. 1.51 9.87
    Cloud Peak Energy Inc. 1.98 9.82
    Chesapeake Energy Corporation 4.68 9.46
    Peabody Energy Corporation 7.34 8.84
    AK Steel Holding Corporation 2.52 8.06
    Alacer Gold Corp. 1.9 7.91
    Goodrich Petroleum Corporation 0.26 7.8
    C&J Energy Services Ltd. 4.09 7.7
    Canadian Oil Sands Limited 5.3 7.5
    Detour Gold Corporation 10.89 7.27
    CVR Energy, Inc. 37.73 6.74
    Denbury Resources Inc. 1.71 6.53
    Birchcliff Energy Ltd. 2.68 6.18
    Agrium Inc. 85.65 6.17
    First Quantum Minerals Ltd. 3.38 5.59
    Franco-Nevada Corporation 47.61 5.49
    Gerdau S.A. Sponsored ADR Pfd 1 5.16
    Bill Barrett Corporation 3.69 5.01
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    Cargill reports lower quarterly operating earnings, revenue

    Global commodities trader Cargill Inc on Thursday reported a 13 percent drop in quarterly earnings before special items, citing lower commodities prices and weaker demand in some markets.

    A milder-than-normal start to the winter in North America curbed earnings from products such as road salt and pressured prices of natural gas and power, which hurt the privately held company's energy trading results.

    Earnings in the fiscal second quarter ended Nov. 30 were further weighed down by liquidation of hedge funds managed by its Black River Asset Management subsidiary. Cargill is splitting the unit into three separate firms.

    Minnesota-based Cargill's profit fell to $574 million from $657 million a year earlier while revenue declined 10 percent to $27.3 billion.

    The results excluded gains from the sale of its U.S. pork business in October for $1.45 billion and the $720 million sale of its 50 percent stake in a U.S. steel mill venture as part of a broader restructuring at the 150-year-old company.

    Cargill's animal nutrition and protein segment posted slightly lower results on pressure from cattle and beef businesses in North America and Australia.

    Earnings in its origination and processing unit dropped on weak results from cotton, soft seed and sugar businesses.

    The food ingredients and applications segment also recorded lower results, pressured by weakening currencies and recessions in countries like Brazil and Argentina.
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    China Southern Power Grid 2015 power transmission up 10pct on yr

    China Southern Power Grid Co., Ltd, a major state-owned power company in China, transmitted a total 189.1 TWh of electricity from the west to the east of China in 2015, up 10% from the year prior, hitting a new high for the fourth consecutive year, it said on its official website on January 7.

    Of the total, transmission of clean hydropower accounted for 70% or so.

    So far, eight AC and eight DC 500KV-above power transmission lines have been built for the company’s "West-to-East" power transmission project, with maximum capacity at 35 GW per annum.

    During the “12th Five-Year Plan” period (2011-2015), China Southern Power Grid saw the newly-added power transmission capacity for the “West-to-East” project reach 11.4 GW a year, and total electricity sent to eastern China exceeded 715 TWh.

    The energy availability of the company’s DC power transmission lines in 2015 reached 96.7%, maintaining a high level for the fifth consecutive year.

    China Southern Power Grid, established in December 2002, is mainly responsible for the investment, building and operation of the power grids and management of power transmission business in southern China including Guangdong, Guangxi, Yunnan, Guizhou and Hainan.

    By end-2014, total installed capacity of the company stood at 246 GW per year, with 127 GW thermal power, taking 51.5% of the total; 103 GW hydropower and 7.2 GW nuclear power, accounting for 42% and 2.9%, respectively.

    Meanwhile, installed capacity of non-fossil energy accounted for 48% of the total, far above the national average level of 33%.
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    Oil and Gas

    Iran's Bid for Oil Investment Seen at Risk From Saudi Dispute

    Iran’s diplomatic rift with regional rival Saudi Arabia will stiffen the challenge it faces in attracting foreign investment once sanctions on its economy are lifted, according to analysts from IHS Inc., Energy Aspects Ltd. and Emirates NBD PJSC.

    The breakdown in ties stoked tensions just as Iran is preparing for the removal of sanctions. An international agreement to limit Iran’s nuclear program, when it takes effect, would free the country to seek more than $100 billion in investment it says it needs to rebuild its oil and natural gas industries.

    Regional instability stemming from the diplomatic crisis will threaten these efforts, leading to prolonged power struggles that make it harder for companies to evaluate the risks of investing in Iran, Richard Mallinson of Energy Aspects said by phone from London.

    “That adds to the calculus of making a long-term capital investment decision in Iran,” Victor Shum, IHS’s head of oil market research, said by phone from Singapore. “It will slow down investment, possibly by months or even years, and slow the addition of new output.”

    Iran plans to boost crude exports immediately after curbs are lifted and to attract foreign money and technology to revive energy production sapped by years of under-investment. The country was the second-largest producer in the Organization of Petroleum Exporting Countries until sanctions were intensified in 2012. It’s currently fifth-biggest in the group, data compiled by Bloomberg show.

    Saudi Arabia severed relations with Iran, and the kingdom’s Arab allies are taking similar steps. Qatar, which shares the world’s biggest gas field with Iran, has recalled its ambassador to Tehran, state-run Qatar News Agency reported Wednesday. The United Arab Emirates and Kuwait also recalled their envoys, according to those countries’ state news agencies.
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    Venezuela's oil industry could be privatized

    Venezuela’s socialist President Nicolas Maduro says the new majority in the National Assembly plans to privatize the country’s most lucrative industries, the state-run oil and telecommunications sectors.

    Members of Democratic Action, which had made up an opposition party for 17 years under the late President Hugo Chavez and Maduro, his successor, were sworn in Tuesday as the country’s new legislative majority.

    Democratic Action had won a two-thirds majority in last month’s elections, giving it super-majority status in their challenge to change Maduros’ approach to government. But at the last moment, the country’s Supreme Court refused to allow four of them to take their seats because of accusations of electoral fraud, and only 163 of the 167 took oaths of office. The two-thirds majority status is now in limbo.

    Still, Maduro is leery of the plans of the new majority party, which he says is planning to destabilize the country with a threat to privatize the state oil company Petroleos de Venezuela and the state television channel CANTV. On Monday he announced plans to take steps that he said would avert an “economic emergency.”

    “I’m evaluating the strengthening of a strategic plan,” Maduro said in an address to the nation. “We are going to activate an emergency plan and reconstruct our economy.”
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    "Under $65 in equities, but no bottom in sight?"

    But equities, the vehicle most investors use to bet on energy prices, may not be as close. Consider, for example, the widely held Energy Select SPDR exchange-traded fund. Down 43% from its June 2014 peak, it fetched a similar price as recently as October 2011 and is some 50% above its recession low. In other words, a steep loss, but hardly panic territory.

    Analysts at Deutsche Bank estimate that North American exploration-and-production stocks now factor in a long-term oil price of under $65 a barrel. That is low relative to the $110 hit 18 months ago, but that was in a world of seemingly insatiable emerging-market demand. Today, that is in doubt, particularly when it comes to China.

    Energy stocks probably present an attractive buying opportunity since the average Brent crude price of the past decade was a little above $80 a barrel. But those with the willingness, and ability, to hang on to realize a profit must be aware that we are a long way from there—and perhaps even a good distance from the bottom.

    ~Heard on the Street.
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    Petrobras ‘readies leaner budget plans’

    Brazilian state-run player Petrobras will reportedly present a five-year investment plan next month that will be even lower than the $19 billion plan announced last year.
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    Shell sees BG deal working with oil at $50 for two years

    Royal Dutch Shell has told investors its purchase of BG can work even if oil prices average $50 a barrel for two years, its lowest estimate to date as it seeks to secure shareholder support for the $51 billion deal amid plunging crude markets.

    The Anglo-Dutch group is confident investors will back the deal at a Jan. 27 meeting, even though crude prices are languishing near 12 year lows around $32 a barrel and it faces a cut to its credit ratings due to higher debts, sources with knowledge of its meetings with analysts and investors said.

    When Shell (RDSa.L) announced the deal in April 2015, with oil trading around $55 a barrel, many investors saw it as a bold move to buy a weakened rival on the expectation that prices would recover to around $90 per barrel within three years.

    Initially, Shell indicated the combined group would be profitable with prices in the mid $70s a barrel. Last month, it said the merger would work in the low $60s, as it identified new synergies and cost cutting opportunities.

    On Wednesday, finance chief Simon Henry told analysts Shell had conducted stress tests that showed it could withstand oil at $50 a barrel over the next two years, the sources told Reuters.

    A Reuters poll on Monday showed analysts expect benchmark North Sea Brent crude futures to average $52.52 a barrel this year.

    To weather such an environment, Shell plans to cut capital spending further below the planned $35 billion for 2016, delay share buybacks and extend scrip dividends, where investors are offered discounted shares instead of cash, Henry told analysts.

    Shell plans to keep the size of its dividend unchanged, however.

    Henry also met this week in London with several of Shell's top 10 investors, including BlackRock and Capital Group, seeking to address concerns about the deal.

    Chief Executive Ben van Beurden is expected to meet other leading investors in London on Friday and both he and Henry will hold phone briefings with U.S. investors next week, according to company sources.

    The investors are being asked how they plan to vote on the deal. Several so far have confirmed their support, but most have refused to disclose their plans, according to the sources.

    Despite weak oil prices, the deal is expected to win the backing of a majority of Shell's shareholders.

    "I would be very surprised if the deal didn't get the support of the Shell's shareholders. A 50 percent vote is very likely to happen," one top investor told Reuters.

    Ben Ritchie, senior investment manager at Aberdeen Asset Management, a top ten investor in both Shell and BG (BG.L), had previously indicated his company would vote in favor of the deal.

    A Shell spokesman confirmed company executives had held meetings with top investors but would not comment on the content of the discussions.

    Shell shares fell 2.9 percent on Thursday, having slumped more than 30 percent since the deal was announced on April 8, trailing most of its peers.

    In the analyst briefing, Henry said that although the oil market would take time to recover from its worst downturn in three decades, prices would likely average at least $60 a barrel over the next 15 years, the long-term level at which Shell says the deal is profitable, according to sources at the briefing.

    The chief financial officer (CFO) nevertheless acknowledged that the weaker outlook and larger debt Shell will assume to finance the deal means credit rating agencies such as Standard & Poors (S&P) and Moody's will likely lower their ratings.

    Lower credit ratings could make borrowing more expensive but are unlikely to significantly change access to debt markets.

    S&P last July cut Shell's rating by one notch to 'AA minus' from 'AA' due to weaker oil prices, warning of possible adverse effects on credit metrics due to the BG acquisition.

    Shell has outlined plans to sell $30 billion of assets over the next three years in order to finance the deal, but Henry said Shell was unlikely to achieve a third of that total this year due to low oil prices, the sources said.
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    The U.S. EPA Called Fracking Safe. Now Its Scientists Disagree

    A landmark study by the U.S. Environmental Protection Agency that concluded fracking causes no widespread harm to drinking water is coming under fire -- this time, from the agency’s own science advisers.

    The EPA’s preliminary findings released in June were seen as avindication of the method used to unlock oil and gas from dense underground rock. A repudiation of the results could reignite the debate over the need for more regulation.

    Members of the EPA Science Advisory Board, which reviews major studies by the agency, says the main conclusion -- that there’s no evidence fracking has led to "widespread, systemic impacts on drinking water" -- requires clarification, David Dzombak, a Carnegie Mellon University environmental engineering professor leading the review, said in an e-mail. The panel Dzombak heads will release its initial recommendations later this month.

    "Major findings are ambiguous or are inconsistent with the observations/data presented in the body of the report," the 31 scientists on the panel said in December, in a response to the study.

    The scientific panel’s recommendations aren’t binding and the EPA is not required to change its findings to accommodate them. But they already are raising questions about the most comprehensive assessment yet of a practice that has driven a domestic oil and gas boom but also spawned complaints about water contamination.

    An EPA spokeswoman said the agency will use comments from the scientists and the public to "evaluate" possible changes to the report.

    A significant change could be a big blow to an industry that is celebrating major policy wins, including the end of trade restrictions that for four decades blocked the export of most raw, unprocessed U.S. crude.
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    Corporate Raider Mason Hawkins Now Owns 23.1% of CONSOL Energy

    There’s little doubt about who now is, or soon will be, calling the shots at CONSOL Energy: corporate raider Mason Hawkins.

    Hawkins, along with corporate raider buddy Carl Icahn, is responsible for firing Aubrey McClendon from the company he co-founded (Chesapeake Energy) and further firing some 2,000 or more Chesapeake employees–all in a bid to put more money in his pocket.

    Hawkins and Icahn control Chesapeake by owning a combined 20% or so of the company’s outstanding shares of stock. In February 2015, MDN shared the disturbing news that Hawkins and his Southeastern Asset Management had amassed 14% of CONSOL’s outstanding shares of stock.

     By July that number ballooned to 21% and Hawkins was throwing his weight (and money) around.

    Now? We spotted a notice that Southeastern Asset Management’s stake in CONSOL has grown to 23.1% of the company’s outstanding shares. Which means Hawkins can have his way with the company…
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    NYMEX February NatGas futures settle 11.5 cents higher on storage withdrawal

    NYMEX February natural gas futures settled 11.5 cents higher at $2.382/MMBtu Thursday following the report of a larger-than-expected storage withdrawal.

    US natural gas in storage dropped 113 Bcf to 3.643 Tcf for the week ended January 1, the Energy Information Administration said Thursday, above consensus expectations of a withdrawal between 93 Bcf and 97 Bcf. A 4-Bcf reclassification of base gas to working gas made the implied flow from storage for the week 117 Bcf.

    The withdrawal was right around the 116-Bcf withdrawal reported at this time in 2015 yet below the 140-Bcf five-year average withdrawal, according to EIA data.

    "The overall message is that the baseline supply/demand balance has tightened at least somewhat, with either some moderation in supply or greater sensitivity to winter cold than had been anticipated," Tim Evans, energy futures specialist with Citi Futures, said in a note.

    Evans added the pull could carry over into stronger expectations for reports to follow.

    WSI's updated 11- to 15-day forecast showed below-average temperatures across portions of the eastern and southern US. Above-average temperatures were expected across the Northwest and north-central US, as well as much of Canada. The forecast was a bit colder than the previous day's, WSI said.

    The level of natural gas demand that the storage numbers indicate is encouraging for bullish traders, said Aaron Calder, an analyst with Gelber & Associates.

    "Producers reported roughly 14 Bcf of freeze-offs last week. Typically we discount freeze-offs as a one-time surprise from the first cold of the year but more could be on the way due to the low-price environment," Calder said in a note.

    "It may not be worth it to freeze-proof wells that are barely breaking even as it is," he added.

    The February contract traded between $2.271 and $2.429/MMBtu during the session.
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    Food Costs at 6-Year Low Trouble Central Banks and Aid Consumers

    Global food prices ended 2015 at the lowest in more than six years, adding to the headache for central banks concerned about deflation while bringing a windfall to the poorest consumers.

    A gauge of average annual food costs dropped for a fourth year, the longest slump since 2000, the United Nations’ Food & Agriculture Organization said in a report Thursday. Ample supplies of wheat to soybeans to milk, a strong dollar and tepid demand from some emerging-market buyers meant that the average price of 73 food items in 2015 fell by almost a fifth year-on-year.

    Lower food costs are a predicament for central banks in Europeand the U.S. that have failed to meet inflation targets at or near 2 percent. The U.S. has missed its goal for more than three years as slumping oil and commodities and a stronger dollar kept a lid on prices. At the same time, that’s given cash-strapped buyers more disposable income to spend on other goods and services. In the euro area, consumer confidence last month was the highest since 2011.

    “Food prices are one of the elements of central banks’ inflation calculations, and obviously the fall in the broader commodity complex, energy prices and industrial metals, has been a factor as well in low inflation rates,” Hamish Smith, a commodities economist at Capital Economics Ltd., said by phone from London. “But from a consumer perspective, falling food prices are beneficial.”

    While importing countries will see some benefits from lower prices, weaker currencies have diminished purchasing power in some emerging nations, Smith said. The global food-import bill was estimated at a five-year low of $1.09 trillion in 2015, according to a UN report in October.
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    Base Metals

    Gloves off in LME's long battle with warehouse operators

    This is set to be the year in which the London Metal Exchange (LME) finally kills off the load-out queues that have plagued its physical delivery network over the last five years. But the cost of doing so has just become apparent.

    Average storage rents and load-out charges, weighted by stock levels at the end of November, will jump by 10 percent and 12 percent respectively from next April.

    Some sort of warehouser reaction to the raft of rule changes targeting the load-out queues was always on the cards.

    The scale of that reaction, however, was unexpected. Some of the increases in exchange storage costs are unprecedented.

    Also unexpected was the identity of those challenging the LME with the most aggressive hikes in charges.

    There is no doubt that some warehouse operators have thrown down the gauntlet. It only remains to be seen how the LME chooses to respond.

    There are no easy options because now laid bare is the true heart of the LME's warehousing problem. The cost of exchange storage has been a bone of contention for as long as anyone can remember.

    The LME has on many occasions shied away from tackling it, fearing the legal consequences of doing so. But the latest rent increases may be the final straw for both exchange and users.

    The increases in rent and load-out charges for the financial year beginning April mark the opening of a new front in the long-running war between the LME and its warehouse operators.

    The exchange had called for "restraint" in cost increases in the last two rent cycles and had been rewarded with stock-weighted average rent increases of three percent in both years.

    Now, however, the gloves have come off.

    This was always a possibility, as the LME itself has warned on several occasions.

    The queue-based rent cap (QBRC) rule comes into effect in March. It will reduce by half the amount of rent payable on metal stuck in a queue longer than 30 days and eliminate rent completely after 50 days.

    That of course fractures the revenue model of those operators with a long load-out queue and hiking rents and load-out charges was always the most likely response.

    All eyes were on Pacorini, the LME warehousing arm of Swiss commodities giant Glencore.

    Not only is Pacorini the largest storer of LME-registered metal, holding just over 53 percent as of the end of November, but it also "owns" the longest queue at the Dutch port of Vlissingen, 471 days for aluminium at the end of the same month.

    Yet Pacorini seems to have carefully calibrated its rental and load-out charge increases for the coming financial year. Aluminium rental charges will rise from 49-51 cents per tonne per day to 50-54 cents, although no surprise that the top end of that range applies to Vlissingen.

    Pacorini's load-out charge, or the "free on truck" (FOT) charge as it is known in LME parlance, will increase by 6.44 percent to 31.40 euro per tonne at the Dutch port.

    It's of course possible that these relatively restrained increases are a compromise resulting from the annual December push-and-shove negotiations between the LME and its warehouse operators before rental and FOT charges are formally announced.

    Evidently resistant to such soft coercion, however, was Metro, the operator of the original load-out queue at Detroit, once controversially owned by Goldman Sachs but since sold to the Reuben brothers.

    It has raised aluminium rents by a third to 72 cents per tonne from 54 cents in the current rental year to March. It has also jacked up its FOT charges by 39 percent to $55.55 per tonne in the U.S. and by even more at its South Korean locations.

    After all, the Detroit load-out queue has been diminishing at a steady rate of around 30 days per month. As of the end of November it was "just" 206 days and, unlike Pacorini, there is relatively little uncancelled metal at Detroit, meaning the queue cannot flex significantly longer.

    Indeed, at its current decay rate that queue should shorten to the LME's targeted 50 days around May, limiting the likely hit from QBRC on rental revenue.

    Metro doesn't have any queues at any of its other locations and has seen its total share of LME storage slide to under 10 percent from close to 20 percent a year ago.

    The LME has no current powers to cap rents and FOT charges and if it tries to do so, it will almost certainly face a legal challenge.

    But the scale of increases just announced may leave it with little option but to throw the legal dice.

    As long as it doesn't, it will still be treating the symptoms not the root cause of its warehousing woes.

    Attached Files
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    Goldman, JPMorgan, Glencore defeat U.S. lawsuit over zinc prices

    A U.S. judge on Thursday dismissed a private antitrust lawsuit in which zinc purchasers accused affiliates of Goldman Sachs Group Inc, JPMorgan Chase & Co and Glencore Plc of conspiring to drive up the metal's price.

    In an 87-page decision, U.S. District Judge Katherine Forrest in Manhattan said purchasers failed to show that the defendants artificially inflated zinc prices by violating the Sherman Act, a federal antitrust law.

    "It remains possible that shenanigans drove up the price of physical zinc," Forrest wrote. "But, at long last, plaintiffs have not adequately alleged that such price movement was due to a plausible antitrust violation, as opposed to parallel, unilateral conduct beyond the reach of that statutory scheme."

    Christopher Lovell, a lawyer for the purchasers, did not immediately respond to requests for comment. Goldman spokesman Michael DuVally, JPMorgan spokesman Brian Marchiony and Glencore spokesman Charles Watenphul declined to comment.

    The lawsuit echoes a similar case alleging aluminum price manipulation. It is among several in Manhattan in which investors and businesses accused banks and other defendants of conspiring to rig prices in financial and commodities markets. U.S. and European regulators also have examined such activity.

    Zinc purchasers accused the defendants in a proposed class-action lawsuit of conspiring since May 2010 to ensure lengthy queues for the metal at their warehouses, which were licensed by the London Metal Exchange.

    The purchasers said the alleged conspiracy included hoarding, moving zinc from one warehouse to another, falsifying shipping records and manipulating LME rules. They said the moves caused artificial supply shortages that boosted prices.

    Forrest, however, said other factors independent of any alleged conspiracy may have influenced prices.

    "Plaintiffs cannot adequately plead their broad, five-year conspiracy simply by noting developments in the zinc market, particularly when many of those developments occurred at vastly different times over the class period such that the possibility of causation is hard to assess," she wrote.

    Forrest said the plaintiffs may replead some claims against Glencore, the Anglo-Swiss mining company, or its Pacorini Metals USA unit, which operates several warehouses. A lawyer for Pacorini did not immediately respond to requests for comment.

    Zinc is used to coat steel to protect against corrosion and also is used in batteries, castings and alloys such as brass. It is, according to court papers, the world's fourth most widely produced metal by weight, trailing iron, aluminum and copper.

    The case is In re: Zinc Antitrust Litigation, U.S. District Court, Southern District of New York, No. 14-03728.
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    Alcoa to shutter Warrick smelter, Indiana

    US aluminium specialist Alcoa will permanently close its 269 000-metric-ton Warrick Operations smelter, in Evansville, Indiana, by the end of the first quarter. 

    The NYSE-listed firm noted that the Midwest transaction aluminium price had dropped by about 30% and that the Alumina Price Index fell about 40% during 2015.

    The company also announced that it would decrease alumina production by one-million tons by the end of the second quarter, which included curtailing the remaining 810 000 t of refining capacity at its Point Comfort operations, in Texas. 

    Alcoa expected to book an associated charge of about $120-million after-tax, or $0.09 per share, in the fourth quarter – of which about 45% would be non-cash. 

    Once fully executed, Alcoa expected to have curtailed or closed 812 000 t of smelting capacity and 3.3-million tons of refining capacity since it announced a review in March last year of 500 000 t of smelting capacity and 2.8-million tons of refining capacity.
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    Steel, Iron Ore and Coal

    Coal India Apr-Dec sales up 10pct on year

    State-owned Coal India (CIL) sold 389 million tonnes of coal in the April-December period this fiscal, up 10% year on year, CIL said in a filing to BSE.

    That was 10 million tonnes lower than the planned sales during the same period, mainly due to high stocks at utilities, which has reached 31 million tonnes at present.

    The December sales was 97% of the targeted volume of 48.2 million tonnes, CIL said.

    Meanwhile, the company produced 373.45 million tonnes of coal over April-December this fiscal, which missed the target of 383.08 million tonnes for the period, but grew 9.1% from the previous year.

    Production in December stood at 52.07 million tonnes as against the target of 51.08 million tonnes for the month.

    CIL accounts for over 80% of the domestic coal production. Coal India missed the production target for 2014-15 by 3%, recording an output of 494.23 million tonnes.

    The government had set a production target of 550 million tonnes for the coal PSU for the current fiscal.

    Attached Files
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    Ansteel funding doubts for Australian iron project

    China's Angang Steel Co (Ansteel) won't be able to inject new funds to shore up the Karara iron ore mine in Australia, according to an email to Karara staff cited in a newspaper report on Friday.

    Ansteel's minority partner in the A$3 billion Karara project, Gindalbie Metals Ltd, called a trading halt in its shares after the report, saying it would make an announcement on Karara by Tuesday, Jan. 12.

    The mine, 52 percent owned by Ansteel, produces mainly magnetite that has to be processed heavily to produce high quality iron ore concentrate, and has been hit like most iron ore producers by a plunge in iron ore prices.

    In an email to staff, Karara's chief executive Zhang Zhao Yuan said the project was making losses and facing "significant cost pressure", according to a report in the West Australian newspaper on Friday.

    "Firstly, its parent company is unable to continue providing funding support to Karara due to the impact of economic and industry downturn," the email was quoted saying.

    A Karara Mining spokesman declined to comment on future funding for the mine, but said the main point of the email was to focus on the business strategy for this year, including cutting costs and improving the mine's production performance.

    "Ansteel remains committed to Karara," the spokesman who is a senior executive, told Reuters.

    "What we're trying to emphasise is that Ansteel continues to provide support to the board and the leadership team of Karara," he said.

    Karara, which started exporting magnetite in 2013, has a capacity of 8 million tonnes a year and last year produced 5.9 million tonnes of magnetite concentrate, a tiny fraction of Australia's total 748 million tonnes of iron ore exports in the year to June 2015.

    Gindalbie, which booked an A$11 million loss in the year to June 2015, said in its annual report: "Karara is a highly geared project and needs the ongoing financial support of Ansteel to continue."

    Attached Files
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    China key steel mills daily output down 0.6pct in mid-Dec

    China's key steel mills saw their average daily crude steel output post a fourth straight ten-day fall of 0.62% to 1.57 million tonnes in mid-December last year, showed data from the China Iron and Steel Association (CISA).

    In the same period, the national average daily crude steel output was 2.08 million tonnes, edging down 0.3% from ten days ago, according to the CISA.

    Stocks in key mills stood at 14.67 million tonnes by December 20, edging up 2.32% from December 10, indicating a recovery from two consecutive ten-day fall.  

    Domestic prices for steel products witnessed a rebound in late-December due to the improvement of downstream demand, with rebar price rising 2.2% from ten days ago to 1,847.9 yuan/t in late-December.

    China’s steel output in December may stay in a low level, due to a long-term loss and intensified environmental protection campaign at steel mills.

    Steel prices in January were estimated to rise first then fall, but to remain higher than that of December, said analysts from the CISA.

    Attached Files
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