Mark Latham Commodity Equity Intelligence Service

Friday 24th April 2015
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RWE boss sees tougher times ahead

RWE Chief Executive Peter Terium offered little hope for a fast turnaround of Germany's largest power producer, warning that government plans for a coal levy would pose a threat to the company.

GermanRWE boss sees tougher times aheady's utilities have seen their profits and share prices tumble as they grapple with a restructuring of the energy sector that has promoted solar and wind generation at the expense of their gas-fired power stations.

"The crisis is far from over," the 51-year Dutchman told shareholders at the group's annual general meeting on Thursday.

"Times will get even harder."

Terium warned that a coal levy, proposed by Germany's Energy Minister Sigmar Gabriel to lower the country's CO2 emissions, would lead to the immediate closure of the majority of the group's lignite-fired plants.

"These plans would lead, in the short term, to a disorganised, rushed exit from lignite-based electricity production," Terium said.

Lignite is RWE's most important energy source, accounting for about 37 percent of its power generation last year.
MGL: Which sent RWE stock spinning back to the lows. 

This in response to an open letter written on April 2nd by Sigmar Gabriel:

'German energy minister Sigmar Gabriel in an open letter to the energy industry has made clear that a planned introduction of a climate levy on older fossil-fired power plants to reduce CO2 levels does not mean Germany will exit coal or other fossil fuels any time soon.'

This is the second outbreak of 'fisticuffs' in the German power sector in recent months. Sweden's largest utility wants out of the German coal generation business.

Policymakers in Germany continue to make a right old mess in the Utility sector. We've had wind farms erected without electricity connections. Electricity surges from renewables spilling into German near neighbours, provoking wrath and consternation.  Forced Nuclear closures, and now this ham fisted carbon levy idea.

About a year ago we averred that Germany did not want to put its utilities out of business, as of today we're no longer sure thats the case!

Unfortunately EU renewable meddling is clouding the outlook for many investors. The general belief is that neither Solar nor Wind work without subsidies, and that is simply no longer the case. 


Cat CEO: We won't be this strong for rest of 2015

Caterpillar on Thursday reported earnings and revenue that beat expectations, but CEO Doug Oberhelman warned on CNBC: Don't expect a repeat.

In premarket trading, shares of the heavy equipment maker jumped more than 3 percent. (Get the latest quotes here.)

"We saw construction in the U.S. and North America up. And that's the bright spot we have right now," Oberhelman told CNBC. "It's fairly anemic but it's growing ... kind of quarter by quarter."

He said the U.S. economy was growing "fairly slowly" but steadily, while the rest of the world was struggling. "China is down significantly year over year. Brazil is weak economically. Europe is still kind of flat, but in our case, down year over year."

Caterpillar said it earned $1.72 per share in the quarter. Revenue decreased to $12.7 billion from $13.24 billion a year ago.

Wall Street forecast Caterpillar would deliver quarterly earnings of $1.35 a share on $12.38 billion in revenue, according to a consensus estimate from Thomson Reuters.

On CNBC's "Squawk Box," Oberhelman said he's pleased with the results, but warned: "We will not repeat this quarter the rest of the year because we're aimed at $50 billion in sales [for 2015] ... which is going to be a challenging year."
MGL: I will confess right now that watching big rallies on 'its not as bad as we thought' when the fundamentals are clearly set thoroughly in reverse is not a investment we like, or favour. Too hard.

Oil and Gas

Saudi Arabia caps crude supply to Asian refiners as demand surges

Saudi Arabia has imposed limits on supply volumes since March for Asian buyers who have been flocking to the kingdom for more oil after it cut official selling prices to record lows, several industry sources said this week.

While the cuts to OSPs have had the desired effect of driving up demand for Saudi oil, the move suggests the kingdom may have underestimated Asia's appetite.

Alongside the volume restrictions that came into force last month, the kingdom has also boosted production to over 10 million barrels/day since March as it strives to meet demand.

Refiners in China, Japan, Taiwan and Thailand said they were not able to maximize purchases from Saudi Arabia because of restrictions on the use of flexible operational tolerance that is typical in term contracts, while some said they had to absorb slightly lower volumes within the negative tolerance limits.

Traders said the restrictions were likely limited to particular grades including Arab Heavy and Arab Extra Light as demand for these rose in recent weeks on the back of strong fuel oil and naphtha cracks.

Supplies of Arab Light were seen to be normal, traders said.

The tightening began in March when demand for Saudi oil surged on record low OSPs. Saudi's March OSP differentials for Arab Extra Light and Arab Light were the lowest since at least 1989, according to Platts data, while Arab Medium was priced at its lowest level since mid-2008. By March, a steep contango market structure in Dubai crude was already driving up demand from companies looking to store oil in the hopes of selling it later at a higher price.

"In January, everyone wanted to take a position because of the contango, March-loading spot was tight and if they considered price, Saudi looked cheap," said a second trader with another North Asian refiner.
MGL: Very obviously a bullish story, and strongly implies Saudi cannot satisfy market demand.

The VLCC market is reporting something similiar too:

"The crude tanker market has had a stellar start to 2015 - exceeding expectations by a wide margin. The excess crude in the crude market has led to increased demand for tonnage - boosting fleet utilisation," said Erik Nikolai Stavseth and Kurt Waldeland, shipping analysts at Arctic, in a daily market report.

"Our updated view on the crude tanker market is a situation where 2015 is boosted by a 'steroid shot' from higher oil demand (and potentially floating storage) - driving up rates and contracting activity. The market will be stronger in 2016 than we previously anticipated, but see 2017 as lower again due to influx of tonnage from VLs in 2016 and Suezmaxes in 2017," they stated."

Image titleHere's the IEA's view of supply and demand.  

If we take these figures at face value it appears as if demand has lifted sufficiently to adsorb ALL the excess Oil in the market, which the IEA thinks is 2mbpd.

Indeed, as we've shown here before there has been an amazing lift in tertiary demand for crude products, here for example is Thai retail sales of gasoline in bpd, thats a 16% lift since midsummer last year. Are Thai drivers really driving 16% more  miles in the last 9months?

Image titleIt is easy to construct a bull narrative on crude on the data we are seeing. Prices have halved and demand has increased. The increase in demand has adsorbed all of the excess supply, and therefore crude prices will move higher.

Unfortunately this analysis ignores 3 major facts:

1> IEA data is based on EIA data which is based on rigs and not completions. The existence of a substantial US Fracklog has actually curbed supply by over 1mbpd.  Yet we still have inventory build, and it looks like that inventory build is being financed by the financial marketsImage titleOpen interest at the NYMEX in crude.

2> Saudi is targeting $60, and past behaviour strongly suggests that below their target price they are content to sell  their 'market share' barrels, but not provide increased volume.  They will turn on the taps above $60 again. (Saudi crudes are above $60 today, but its Friday, and most Muslims are at prayer!). At some point Fracklog barrels also return to the market, and with service costs in the US falling we're seeing more and more shale acreage return to IRR levels that incentivise production.

3> At some point tertiary demand returns to 'normal', ie product demand once again equals sales. Now Tertiary inventory is enormous, much bigger than crude storage capacity. We're basically looking at the entire volume of storage in oil products worldwide, and that is multiples of crude storage. 

My point being that the market 'look' tighter than it really is, we have excess demand via tertiary inventory build, and crimped supply because of the fracklog. At the same time we have an ongoing build up of Saudi capacity which is not widely appreciated.  It is going to take some time for the Oil market to find a 'true' level, and its going to take some time for the big data mess out there to 'clear up'.


China's March natural gas pipeline imports rise 41.3% on year to 2.73 Bcm

China imported 1.98 million mt of natural gas via pipeline in March, 41.3% higher than the same month last year, detailed data from the General Administration of Customs showed Thursday.

The customs department reports natural gas trade data in metric tons, similar to LNG imports. March's pipeline imports equate to about 2.73 Bcm.

The increase was largely due to a 26.3% increase in inflows from Turkmenistan to 1.57 million mt.

China National Petroleum Corp. is responsible for importing gas from Turkmenistan's state-owned Turkmengas under a long-term deal expected to hit 65 Bcm/year by 2020.

CNPC also imports gas from Myanmar into China's southern Yunnan province and surrounding areas.

Taking into account LNG imports in March of 1.35 million mt, China's total gas imports were 3.3 million mt, a 15.5% jump year on year.

Discounting pipeline gas exports to Hong Kong and Macau, which amounted to 180 million cu m, and adding domestic production of 11.15 Bcm, China's apparent gas demand in March totaled 15.55 Bcm, rising 5.4% from the same month last year.

Over the first quarter of 2015, China's total gas imports were 11.81 million mt, comprising 6.7 million mt of pipeline gas and 5.1 million mt of LNG.
MGL: Which leaves China satisfying almost its entire growth in Natural Gas consumption from pipelines. No joy for LNG here.


Argentina's YPF sells $1.5 bln of bonds, tripling sale

Argentina's state energy company YPF said it had sold $1.5 billion of new 10-year bonds at 8.5 percent on Thursday, raising its planned issuance from $500 million on the back of strong demand.

Reuters' IFR reported the issue had been launched earlier in the day at 8.625 percent, down from price talk of 8.75 percent.

"There was a lot of demand, about $4 billion, which is why the company decided to widen the offer," a local market source, who asked not to be named, told Reuters.

YPF needs to raise cash to invest in its vast but barely tapped Vaca Muerta shale oil and gas formation in order to reverse Argentina's energy sector trade deficit that is pressuring foreign reserves.

"It's an energy company which is not that indebted that is offering paper with a coupon that is high compared with the rest of the world," said Christian Reos, an analyst at Buenos Aires-based brokerage Allaria Ledesma.

In February YPF sold $500 million of bonds, a third less than it had offered, as many bids were for higher yields than it would accept.

Since then investor sentiment has improved as the October presidential election draws closer. The next government is expected to be more market friendly than that of outgoing leader Cristina Fernandez, whose government's sweeping currency and trade controls are cited by economists as factors weighing on the economy.
MGL: So YPF can finance, but Argentina is still locked out of credit markets? Thats a singular event! 

Betting on oil price recovery, Statoil snips where rivals slash

Norway's Statoil is cutting investments less than any other oil major this year, positioning for a crude price recovery but taking a risk should the slump be protracted.

By continuing to spend on projects that won't start making returns for a up to a decade, the state-controlled energy giant hopes to sidestep the kind of boom-to-bust cycle often seen in the oil sector. Crude oil prices halved last year.

"We as an industry tend to have a permanent bipolar disorder. We are either euphoric or depressed," Statoil Chief Economist Eirik Waerness said.

"Maybe this time it will be slightly different and this will allow us to look through the cycle."

The strategy reflects Norway's tradition of long-term thinking and also some pressure to maintain work from the country's powerful regulator.

But is not without risks. If crude prices recover quickly, Statoil will be better positioned to resume growth, but a long period of cheap oil could increase debt and hurt its credit rating, and force the company to slash dividends.

According to industry-wide budgets finalised this month, Statoil plans to cut spending by 8 percent this year while rivals slash by an average of more than 20 percent. Its spending on exploration will fall just 9 percent, even though an offshore discovery won't produce oil for eight to 10 years.

In Tanzania, Statoil recently took over a well stake from ExxonMobil and drilled alone when its partner declined to go ahead with the project.

It is also continuing expensive Canadian and Gulf of Mexico exploration programmes and has just started construction on the Arctic Asta Hansteen field, a low-margin deepwater gas project that also requires a 480 kilometre pipeline.

"Oil firms know they have an obligation towards the Norwegian people to be allowed to reap and harvest the resource on the continental shelf," oil minister Tord Lien said. "There are obligations toward owning licences."

Unlike other nations, Norway gives away licences for free and provides big subsidies for exploration and development. Companies in return commit to certain spending and pay the world's highest oil tax at 78 percent once production starts.
MGL: Is this really something Statoil should brag about?Image title

Statoil had $85bn of contractual commitments at yr end 2013, thats more than the EV!

Rowan takes Aramco rate cuts

Saudi Aramco has secured further rig rate reductions, with US owner Rowan seeing a plethora of units switched onto lower rates.

Four jack-ups are now to come off their current dayrate to a lower rate for a whole year from 1 April, when they will go back on the previous rate.

The four are: the Hank Boswell (dropping from $180,000 to $163,000); the Bob Keller (dropping from $178,000 to $120,000); the Scooter Yeargain (going from $180,000 to $163,000); and the Bob Palmer (sinking from $235,000 to $198,000).

The jack-up Gilbert Row, which Aramco has on charter until the end of the year, is to drop from $122,000 to $106,000 for the remainder of the term.

The Saudi giant has, however, extended its contract with the jack-up Charles Rowan to now end in June instead of April.

The jack-ups Cecil Provine and Rowan Gorilla III have also had very minor extensions, but not from Aramco.

Earlier this month, Aramco secured rate cuts on seven Ensco jack-ups for a portion of their contract periods.
MGL: Again we see the substantial capital stock in the Oil industry repricing itself back into the market at lower Oil prices.  Its going to take some time for the capital stock to move from expansion to decline. Again, that creates this supply response delay in the market. 

The critical question for Oil analysts is what is real demand doing? There's not much we can do about ongoing supply addition in the short term. (The Fracklog is surely just delayed barrels, rather than supply contraction?)

Cairn India posts loss of Rs 241cr vs Rs 1350cr profit QoQ

Cairn India posted a fourth-quarter loss of Rs 241 crore on revenues of Rs 2,677 crore, compared to a profit of Rs 1,350 crore on revenues of Rs 3504 crore in the third quarter.  

At the EBITDA level, the company notched up profit of Rs 727 crore in Q4 (versus Rs 2,113 crore), the company informed exchanges today. The company incurred higher operating expense (Rs 345 crore) arising out of higher well maintenance cost. It also incurred higher exploration cost write-off as well as forex loss due to rupee appreciation. "Profit after tax (excluding exceptional items) for Q4 FY15 was Rs 193 crores. 

Exceptional item in Q4 FY15 pertained to impairment loss of Sri Lanka amounting to Rs 505 crore (gross of tax) leading to a negative profit after tax for the quarter of Rs 241 crore," the company said. For the full fiscal year 2014-15, Cairn had profit of Rs 6,541 crore on revenues of Rs 14,646 crore.

“Restructuring the organization to align with an SBU structure in the early part of the year geared up the organization to capture value along each line of business. This helped us to respond to the current oil price slump better than most of our global peers," Cairn India CMD Mayank Ashar said. "Our strong functional excellence, coupled with the restructuring, enabled us to focus on the core MBA fields and provided us the operational flexibility to reduce operating as well as capital cost and curtail projects to ensure shareholder value accretion. 

Detailed work is ongoing to allow us to respond faster to a V-shaped recovery in oil prices," he added. The Cairn India Board recommended a final dividend of Rs 4 per equity share, entailing an outflow of approximately Rs 900 crore including dividend distribution tax.

Read more at:
MGL: Expectations of the V in Oil are shaping corporate behaviour everywhere. 

U.S. Shale Fracklog Triples

Think the U.S. is awash in crude now? Thank the fracklog that it’s not worse.

GRAPHIC: Untapped Well Inventory Builds Across the U.S.

Drillers in oil and gas fields from Texas to Pennsylvania have yet to turn on the spigots at 4,731 wells they’ve drilled, keeping 322,000 barrels a day underground, a Bloomberg Intelligence analysis shows. That’s almost as much as OPEC member Libya has been pumping this year.

The number of wells waiting to be hydraulically fractured, known as the fracklog, has tripled in the past year as companies delay work in order to avoid pumping more oil while prices are low. It’s kept crude off the market with storage tanks the fullest since 1930. The fracklog may slow a recovery as firms quickly finish wells at the first sign of higher prices.
MGL: Its actually 1.8mbpd of FLUSH production. We think that 322000 bpd number is likely 1 yr average production per well. IEA seems blissfully unaware of the existence of this fracklog, and persists in telling us that US production is near record levels. State data through february is suggesting production ~1mbpd below EIA numbers. This fracklog is a major factor in keeping the Oil market 'bullish'. 

Saudi crudes this am are above $60, lets see if they hold that price. If our thesis is correct ARAMCO should be freely supplying today. 

Half of the US fracking industry could be gone after this year

One oil executive thinks half of all fracking companies will be out of business or sold by the end of this year, according to Bloomberg.

Rob Fulks, the pressure pumping marketing director at Weatherford International, told Bloomberg that a reduction in spending has put much of the US fracking industry at risk.

Fulks told Bloomberg that of the 41 fracking companies in the US, half will be dead or sold by the end of the year.

Weatherford operates the 5th-largest fracking operation in the US, Bloomberg notes.

Read more:
MGL: That comment makes sense with the current levels of non completions. The state data shows the fracklog, the industry confirms its existence. The fracking companies are visibly starving, yet the EIA persists in publishing estimates of Oil output that ignore its existence. Of course, the EIA is 'official' so it must be right.

We are certain that there is an entire class of investors out there who have no idea what the Fracklog is, or what it means. Its the most enormous landmine out there right now. If you wish to play on the short side, and we do, we have to guess what bulls are thinking, and follow their logic. 

Our short call was simply too early. 

Eagle Ford Production Up Slightly in March

Oil production in the Eagle Ford increased 28 percent from the same month last year, averaging 1.6 million barrel a day in March.

These findings are from Platt’s Bentek Energy, who also reported that there an increase in production of 17,000 barrels per day for the combined shale formations in North Dakota and Texas in March versus February. This slight increase of 1% may signal a slowdown in the record production that has led to an oil surplus. Platt’s daily price assessment shows the value of oil out of the Eagle Ford is up 25% since mid-March due to an average price for the year is $53.30 barrels per day.

Sami Yahya, Bentek energy analyst said that “Producers the Eagle Ford are still maintaining their production levels by high-grading their acreage and pushing for better efficiencies. The current average economic return for the two basins is 17%. However, the downside risk is that some producers may elect to increase their number of drilled-but-uncompleted wells in the near term—until they figure out their cash flow status—which will further flatten or bring down production levels.”
MGL: Image title
Here's the Texas RRC data on Wilson county. It shows a near 50% contraction in production since July.
Image title
Just to the south is Karnes county, which is prolific and contains the really high grade Geology, it shows a production fall to October, but then production starts rising again. 

Here's our best stab at what is occurring in this confusing, and apparently contradictory data:

Fecund Core: Service costs have fallen, and high quality equipment+ personnel are readily available, and IRR's are solid, if not great. So activity is gently rising in these areas.

Marginal areas: Activity, and output are showing large falls consistent with fading output from wells drilled a year ago, but not replaced by new wells. 

Image title
Maverick county, to the far south west, is very marginal on every analysis we've seen, and output in Maverick county has fallen by a third since July. 

Is the Fracklog on the marginal acreage? If that is the case, it may not be coming back! That's a new thought. 


Patterson-UTI, Helmerich & Payne gain on demand for hi-tech rigs

Oil drilling contractors Patterson-UTI Energy Inc and Helmerich & Payne Inc reported higher-than-expected quarterly profits as demand for their hi-tech rigs remained resilient despite the slump in crude prices.

Demand for new, faster rigs continues to be strong as they help oil and gas companies cut costs and operate more efficiently.

The strong demand has helped Patterson-UTI and Helmerich & Payne offset a drop in drilling activities due to a near 45 percent fall in crude prices since June last year.

Excluding one-time items, Patterson-UTI earned 6 cents per share in the first quarter, above the average analyst estimate of 3 cents, according to Thomson Reuters I/B/E/S.

Helmerich & Payne reported adjusted profit of 96 cents per share in the second quarter, beating average estimate of 79 cents.

However, both companies said they expected their rig counts to fall in the current quarter.

Helmerich & Payne forecast contracted land rigs to fall to 165 rigs in the current quarter from 179 at the end of March.

Patterson-UTI said it expects the number of rigs to fall to 101 in the current quarter from 165 in the first quarter.

Helmerich & Payne, which recorded gains of about $47 million due to early termination of contracts, said operating revenue fell marginally to $883.1 million.

Patterson-UTI, which gained $15.8 million from early termination of drilling contracts, said revenue fell 3 percent to $657.7 million.
MGL: Oil service stocks as technology plays? 

That, unfortunately is a non starter, simply not enough volume growth.

But we would note H&P management aren't mugs: new build rigs are driven by 3 year contracts with heavy termination clauses. If the contract completes, H&P recovers 90% of build cost. If it doesn't they collect a chunk of cash, and their rig. Image title

This downturn is accelerating all the technology trends in the US market.

AC drive flexirig market share has shot up over the last 9 months, and operators drop inferior rigs:
Image title

Freeport-McMoRan Reports Loss on Hit From Oil Assets

Freeport-McMoRan Inc. swung to first-quarter loss as the company was hit by another big write-down of its oil-and-gas assets, while its mining business also was hit by weak commodity prices.

Freeport-McMoRan in January said it had slashed its capital budget for the year and is searching for outside funding for its oil-and-gas business as the mining company looks to shield itself from plummeting commodity prices.

Phoenix-based Freeport, one of the world’s largest copper producers, expanded into oil and gas with 2013 acquisitions of energy explorers McMoRan Exploration and Plains Exploration Production. Recent drops in oil and copper prices have pressured the company.

Overall, Freeport-McMoRan reported a loss of $2.48 billion, compared with a year-earlier profit of $500 million. On a per-share basis, which reflects preferred dividend impacts, the company recorded a loss of $2.38, compared with a year-earlier loss of 49 cents.

Excluding asset write-downs and other items, the per-share loss was six cents. Revenue decreased 17% to $4.15 billion.

Analysts polled by Thomson Reuters expected per-share loss of seven cents and revenue of $4.06 billion.
MGL: Freeport's much hated withdrawal of capital from mining, and acquisition of Plain's runs afoul of the Oil bear. It leaves the company wounded, bleeding cash and ill positioned. 

Meanwhile on the Wilcox:

OUSTON -- Freeport-McMoRan Inc. has announced the results of additional production testing on Freeport-McMoRan Oil & Gas’s (FM O&G) Highlander discovery, located onshore in South Louisiana in the Inboard Lower Tertiary/Cretaceous trend.

The production test, which was performed in the Cretaceous/Tuscaloosa section, utilized expanded testing equipment and indicated a flow rate of approximately 75 MMcfd, approximately 37 MMcfd net to FM O&G, on a 42/64th choke with flowing tubing pressure of 10,300 psi.

Our worry now is that this production well is one of many coming down the pipe from Chevron and Freeport, and these wells are so large they could easily disrupt our gathering desire to bull US Natural Gas.


Alternative Energy

Solar Costing a Third of Retail Power Emerges in Germany

Germany’s cost of producing solar energy has shrunk to about a third of the price households pay for power after the nation made developers compete for subsidies.

Most bids to build large ground-mounted solar plants in the first solar auction came in at 9 euro cents (9.7 U.S. cents) to 10 euro cents a kilowatt-hour, Deputy Economy Minister Rainer Baake said. German retail consumers are paying on average 29.8 cents a kWh, according to Eurostat.

“The auctions were very well received,” Baake said at an energy conference Thursday in Berlin. The previous “feed-in tariffs were wonderful to introduce the technology. That era is over.” He didn’t say which bids were accepted, and there’s no guarantee all of them will result in projects.

Germany introduced auctions to try to lower the cost of solar installations as it seeks to more than triple the share of its power consumption coming from renewables by the middle of the century. The Bundesnetzagentur regulator received 170 bids for more than the 150 megawatts it offered. It will auction off a further 350 megawatts this year, 400 megawatts next year and 300 megawatts in 2017.

Coal-fired plants still generate power cheaper than solar in Germany, which has less sunshine than Italy and Spain in the south. That didn’t stop the country from jumpstarting a photovoltaic installation boom when it introduced above-market subsidies to developers more than a decade ago.
MGL: Image title
At the lower end of the recent solar range, and still 2x the cost of coal. Note however how close Solar cost is to natural gas in Germany. 


Yara core profit beats forecasts, net income lags

Norwegian fertiliser producer Yara beat quarterly core earnings forecasts on Friday, though net profit missed expectations due to foreign exchange losses and a writedown in Libya.

Yara, the world's biggest nitrate fertiliser maker, said the global outlook for farming profits and various farming incentives continued to support demand, despite lower commodity prices, but high exports from China have pushed commodity nitrogen prices down during the quarter.

Global nitrogen-based fertiliser capacity dropped over the past year because of lost production in Ukraine and Egypt but China, which produces at a relatively high cost, filled that gap and its exports will continue to move prices, Yara said.

"The planned capacity additions outside China over the next years will not fully displace Chinese urea exports, indicating that the latter will continue to be key to global nitrogen pricing also going forward," Yara said in a statement.

Its earnings before interest, taxes, depreciation and amortisation (EBITDA) before one-off items rose to 5.74 billion crowns ($732 million) from 3.83 billion crowns a year ago, beatinganalyst expectations for 5.42 billion crowns. .

But its net profit fell to 729 million crowns from 1.77 billion a year earlier, well short of forecasts for 2.71 billion, as it took a 1.8 billion crown currency loss from the dollar's firming and a 929 million crown writedown on its Libyan business.

Although the strong dollar had a negative impact, a weaker euro and lower gas prices have improved the relative competitiveness of European fertilizer capacity and Yara expects its European energy costs for both the second and third quarters to fall.

The firm previously disclosed the Libyan charge but analyst expectations did not reflect this item.
MGL: For the last five years our thesis has been simple in these big Urea stocks:

1> Natural gas bear= Urea bull.
2> CF is a better company than Yara.
3> New build IRR's are too low to really end the cycle.

Thats worked.

Now there's an enormous cloud on the horizon:

China has an enormous coal fired urea capacity that exports when prices work, or seasonally when domestic demand is weak.
If Beijing follows through on water pollution projects, one of the consequences could be a dramatic falling urea usage per acre, and China uses 6-7x the amount of OECD countries per acre.  That would leave an enormous overhang in global urea capacity, and we're not sure at what price the Chinese could export permanently. We've a distinct feeling its a lower price point than China's current 'opportunistic' urea exports.


Uralkali sets $1.5 bln buyback, changes dividend policy

Russia's Uralkali, the world's largest potash producer, will buy back up to $1.5 billion of its shares until May 22, it said on Friday, after its board changed policy and proposed no dividend payment for 2014.

Uralkali posted a net loss in 2014 due to non-cash write-offs caused by a slide in Russia's rouble currency, hurt by low oil prices and Western sanctions, and announced plans to increase capacity.

Uralkali plans to invest $4.5 billion over five years to boost capacity and maintain its position as the world's largest producer of crop nutrient potash despite production being halted at its Solikamsk-2 mine.

"Taking into account Uralkali's current cash reserves, its expected future cash requirements, available cash flows and other funding resources, we are able to return up to $1.5 billion of cash to security holders," Dmitry Osipov, the company's chief executive, said in a statement.

The board of directors also changed its dividend policy from a previously fixed payment of at least 50 percent of net income. The level of payment will now be determined by the board.

As part of the buyback, Uralkali, part-owned by Russian tycoon and politician Mikhail Prokhorov and by fertiliser firm Uralchem, aims to buy up to 468,750,000, or almost 16 percent of its shares, at a price of $3.20 per share and $16 per Global Depositary Receipt
MGL: Is this good news?

Cynics might note that everybody received a dividend, but only a select few seem to benefit from Uralkali's share buybacks.

Precious Metals

Newmont Mining earnings are 50 pct higher in Q1

American gold major Newmont Mining touted $628 million in operating cash flow in its Q1 that it released today. Here are the highlights directly from the company's news release:

Net income: Achieved net income attributable to shareholders from continuing operations of $175 million, or $0.35 per share, compared to $117 million or $0.23 per share the prior year quarter; adjusted net income1 was $229 million, or $0.46 per basic share, compared to $121 million or $0.24 per share the prior year quarter.

Consolidated cash flow: Generated cash from continuing operations of $628 million and free cash flow from continuing operations of $344 million, compared to $183 million and $(52) million the prior year quarter.

Consolidated adjusted EBITDA: Delivered adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $815 million in the first quarter, compared to $493 million in the prior year quarter.

All-in sustaining costs: Gold and copper AISC was $849 per ounce and $1.73 per pound, respectively, compared with $1,034 per ounce and $3.67 per pound, respectively, in the prior year quarter

Newmont's outlook was largely unchanged.

"Total 2015 CAS and AISC are unchanged, but the Company’s revised outlook reflects a three percent reduction in Asia Pacific region costs, offsetting an increase in Africa costs. Boddington and Tanami CAS and AISC outlook for 2015 are lower than previous estimates due primarily to lower Australian dollar exchange rates and oil prices."
MGL: Nothing here.

If we were big bulls on gold we would buy the GDXJ. Franco, and Silver Wheaton.

90% of Juniors have been wiped out in this bear, and whats left is largely high value. We have juniors trading below NPV, which we have never seen before.  

We struggle to imagine an environment where Newmont would make the buy list. 

Steel, Iron Ore and Coal

China’s Mar coking coal imports hit 29-mth low

China’s coking coal imports fell 21% year on year and down 26% from February to 2.95 million tonnes in March, hitting a 29-month low since October 2012, showed data from the General Administration of Customs showed on April 23.

Imports from top supplier Australia dropped 29% from the previous month but up 7% from a year ago to 1.53 million tonnes in March.

Coking coal imports from Mongolia – China’s second largest supplier -- rose 28.3% year on year but down 13.2% month on month to 919,625 tonnes in March.

Imports from Russia reached 319,017 tonnes in March, down 53.6% from a year ago but up 11% from the previous month.

In the first quarter of the year, China’s coking coal imports decreased 16% on year to 10.92 million tonnes.

Meanwhile, China’s exports of coking coal rose 4% from the previous month and up 3.3% on year to 142,589 tonnes in March, mainly due to China’s export tariff cut to 3% from 10% starting January 1, 2015.

The export volumes included 80,884 tonnes to South Korea, 37,838 tonnes to Iran, and 18,380 tonnes to Japan.
MGL: Obviously this data is from the end of the faction fight. Chinese steel output has bounced some since then on the stimulus measure rolling out of Beijing to keep the 'growth' in 'clean growth'. 

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Nevertheless this is the new secular trend for China, even if it is at an extreme now. Strategically we fret that China could become a net coking coal exporter.


Peabody posts bigger-than-expected loss

Coal miner Peabody Energy Corp reported a bigger-than-expected loss due to lower prices and declining Chinese demand.

Shares of the company, which also forecast a bigger-than-expected loss for the current quarter, fell as much as 6.4 percent to a near 13-year low of $4.56 in early trading.

Peabody said on Thursday it expects a second-quarter adjusted loss of 59-49 cents per share. Analysts on average were expecting a loss of 35 cents per share, according to Thomson Reuters I/B/E/S.

The company, which sells both higher-margin metallurgical or steel-making coal and power-generation coal, cut its 2015 U.S. sales forecast to 180-190 million tons from 190-200 million tons. The United States accounts for nearly 60 percent of the company's total revenue.

Peabody and its rivals have been hurt by weak demand for thermal coal as utilities switch to cheap and abundantly available natural gas. Sluggish demand from Europe and Asia, especially China, has also weighed on metallurgical or steel-making coal prices.

Peabody's smaller rival, Arch Coal Inc, on Tuesday reported a bigger-than-expected quarterly loss and cut its full-year production forecast.

Net loss attributable to Peabody's common stockholders widened to $176.6 million, or 65 cents per share, in the first quarter, from $48.5 million, or 18 cents per share, a year earlier.

The company said the results included an impact of $103.8 million related to currency and fuel hedging.

Peabody said sales from its Australian operations, which contributes nearly 40 percent to its total revenue, fell 7 percent to 8.8 million tons.

On an adjusted basis, the company's loss was 39 cents per share, bigger than analysts' average estimate of 32 cents.

Revenue fell 5.5 percent to $1.54 billion, below the average analyst estimate of $1.61 billion.
MGL: In 2011 Peabody bought Macarthur Coal for cash. The stock was $70. Its now $4.50. Nothing in readings suggests this is the end of Peabody bear market either, but mind your eye for a rally on the latest round of Chinese stimulus.

Only 1 pct of firms in China's Hebei met 2014 emission standards - Greenpeace

Only 1 percent of firms in China's top steelmaking province of Hebei met state emission standards in 2014, environmental group Greenpeace said on Friday, underscoring the challenges facing industrial regions as the government's war on smog intensifies.

In a review of official emissions data submitted last year by major coal-fired power, steel and cement producers in Hebei, Greenpeace said just two of the 183 monitored firms managed to meet standards.

"While we welcome how transparently the government is reporting this data, it does paint a bleak picture of what the reality is on the ground," said Zhang Kai, climate and energy campaigner at Greenpeace East Asia.

Hebei, which surrounds the capital, Beijing, produces nearly 200 million tonnes of steel a year, more than the whole of the European Union. Last year it was home to seven of China's 10 most polluted cities, according to official air quality data.

The province said in an action plan published this month that it would cut hazardous airborne particles known as PM2.5 by 25 percent from 2013 levels by 2017. Cities closer to Beijing, including the major steel-producing city of Tangshan, faced an even higher target of 33 percent.

Hebei has promised to cut coal consumption by 40 million tonnes over the 2014-2017 period and steel capacity by 60 million tonnes.

It has also said that all steel mills in the province would be forced to install the equipment required to comply with state emission standards by the end of this year, and it has arranged $100 billion in financing from banks to help firms pay for upgrades.

Growth in Hebei slipped to 6.5 percent last year, among the lowest in the country, and it has long urged Beijing for more support. Last month Premier Li Keqiang said the state should offer it preferential financing policies.

"Hebei was given preferential treatment to clean up its air because of its proximity to the capital," said Yang Shuying, a researcher with the Policy Research Centre for the Environment and Economy, an environment ministry think tank.

Yang said Hebei had been granted 4 billion yuan ($645 million) from the central government budget in 2014 to help clean up heavily polluted industries.

"We still need to see how the local authority is spending the budget," she said.

Greenpeace also examined data from 168 companies in coastal Jiangsu province in the east, a major manufacturing hub, and found that only four met emissions standards last year.

"We believe that if current emissions are not improved soon, Jiangsu will find it very difficult to meet its 20 percent emissions reduction target by 2017, and Hebei will also struggle to shake off its reputation for being a heavily polluted province," Greenpeace's Zhang said.
MGL: 1% meet Chinese standards on emissions? This is amazing data, we might reasonably have expected that after two years on its anti-pollution crusade, Beijing had managed to achieve more robust results. What this really tells me is that you need to poke your capital goods analysts hard to find out who can supply the remediation equipment. 

The market is clearly there, and now we have the finance in place to buy the goods. Its only a question of time before the orders show up. Any and all Chinese counters in this space have gone haywire. 

Steelmaker Outokumpu cuts Americas sales outlook, shares plunge

Shares in Outokumpu tumbled on Thursday after the stainless steel manufacturer cut its sales forecast for its Americas operation because of exports from Asia and weak demand from distributors.

The Finnish company cut its 2015 volume outlook for the Coil Americas business to 540,000 tonnes from 620,000 tonnes, sending the shares down 9.8 percent by 1012 GMT.

Shares in the company had risen sharply last month after Reuters broke the news on European anti-dumping duties on stainless imports from China and Taiwan.

However, Outokumpu said it has been hit by increasing steel imports from Asia into the Americas while demand from regional distributors has been weak because of high stock levels and low nickel prices.

Inderes Equity Research said that growing Asian exports to America were a reflection of the EU duties.

"The producers of stainless steel do not seem to be able to overcome the problem of global overcapacity", its analysts said on Twitter.

Outokumpu also said that first-quarter underlying operating profit would be higher than the same period last year. The company publishes full results on April 29.
MGL: EU investors love the idea of a cartel hiding behind a big solid tariff barrier. In stainless steel, we've seen repeated attempts by Thyssen, Outokumpu and others to create an EU stainless industry controlled by 3 players. 

As we see above, this cartel thesis does not survive the real world. Either stainless surpluses simply move somewhere else, impacting EU exports, or stainless units move downstream into partially fabricated product, where there are minimal tariff restrictions. The stainless industry reckons its product disappears into about 10000 different semi fabricated forms between rolling mill and end consumer. Image title
Is this EU stainless? How would you know?

The market is simply too porous for the cartel thesis to work in practice.
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