Mark Latham Commodity Equity Intelligence Service

Monday 11th January 2016
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    China Central Bank Announces More Rate Liberalization, Yuan Internationalization

    China's central bank said it would further liberalise interest rates, according to a statement posted on the People's Bank of China website on Friday. China's PBOC is preparing to further liberalize interest rates while further internationalizing the Yuan, translated: even more devaluation + even less intervention = bad for risk.

    The central bank also said it would make the yuan more international, keep the currency basically stable, further improve the currency formation mechanism and deepen reforms of the foreign exchange management system and financial institutions.

    The central bank will use medium-term loans, and pledged supplementary loans and credit policies to support key areas of the economy.

    The central bank also said it would maintain prudent monetary policy and flexibly use monetary policy tools to keep adequate liquidity in the banking system.

    We wonder how long until the PBOC "retracts" this story following the adverse futures reaction. After all, if this week has taught us anything it is that when it comes to policy, in China everything is now dictated by market.
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    China's premier says market solutions needed to solve overcapacity

    China will use market solutions to ease its overcapacity woes and will not use investment stimulus to expand demand, Premier Li Keqiang said during a recent visit to northern Shanxi province, according to state media.

    "We will let the market play a decisive role, we will let businesses compete against each other and let those unable to compete die out," the state-run Beijing News quoted Li as saying.

    "At the same time, we need to prioritize new forms of economic development."

    Li said the country needed to improve existing production facilities because even during an enormous steel glut last year, China had to import certain high-quality steel products including the tips of ballpoint pens.

    China needs to set ceilings on steel and coal production volumes and government officials should use remote sensing equipment to check companies, the premier also said, according to the article which was reposted on the State Council's website.

    During his visit to Chongqing earlier this month, President Xi Jinping said China would focus on reducing overcapacity and lowering corporate costs.

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    China Dec PPI down 5.9pct on yr

    China’s Producer Price Index (PPI), which measures inflation at wholesale level, dropped 5.9% year on year and down 0.6% month on month in December 2015, showed data released by the National Bureau of Statistics (NBS) on January 9.

    Factory prices of production materials dropped 7.6% on year and 0.8% on month.

    Prices of coal mining and washing industry fell 17.2% on year and down 0.7% on month, and prices of oil and natural gas mining industry posted a plunge of 37.3% on year and down 9.2% on month. Besides, prices of ferrous metal industry dropped 17.6% from the previous year and down 2.3% from November, data said.

    In 2015, PPI dropped 5.2% on average from the previous year, with factory prices of production materials decreasing by 6.7%.

    During the past year, prices of coal mining and washing industry decreased 14.7% on year; prices of oil and natural gas mining industry fell 37.3% on year; prices of ferrous metal industry dropped 20.3% from the previous year, data showed.

    The data come along with the release of the Consumer Price Index (CPI), which rose 1.6% from the year prior and up 0.5% on month.
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    Concerned about yuan's fall, India mulls steps on imports

    India on Friday called the slide in China's yuan a "worrying" development for its flagging exports and said it was discussing possible measures to deal with a likely surge in imports from its northern neighbour.

    Trade Minister Nirmala Sitharaman said the yuan's fall would worsen India's trade deficit with China.

    While the government would not rush into any action, it had discussed likely steps it could take to counter an expected flood of cheap steel imports with domestic producers and the finance ministry, she said.

    The comments came a day after China allowed the biggest fall in the yuan in five months, pressuring regional currencies and sending global stock markets tumbling as investors feared it would trigger competitive devaluations.

    "My deficit with China will widen," she told reporters.

    India's trade deficit with China stood at about $27 billion between April-September last year compared with nearly $49 billion in the fiscal year ending in March 2015.

    India steel companies such as JSW Ltd have asked the government to set a minimum import price to stop cheap imports undercutting them.

    A similar measure was adopted in 1999.

    "We have done ground work but are not rushing into it," Sitharaman said when asked if India would impose a minimum import price for steel.
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    Political risk seen on the rise in these key mining markets

    Low commodity prices will continue to be one of the main drivers of political risk for investors this year in major producing countries across Africa and Latin America, a new report suggests.

    According to the 2016 Political Risk Outlook, released Friday by Verisk Maplecroft, there will be little respite for investors from the political instability, civil unrest, economic volatility, security crises and geopolitical rivalries that defined the last 12 months.

    The experts see Africa and the Middle East —particularly rising tensions between Iran and Saudi Arabia— as one major source of potential crisis.

    Verisk Maplecroft expect more strikes and other industrial actions this year in several resource-rich countries, such as DRC and Zambia, following the massive job losses experienced last year.

    The impacts of depressed oil, gas and metals prices on domestic government spending and rising living costs across the region, in turn, are likely to stoke social turmoil, the experts say.

    “The fact that 31 of sub-Saharan Africa’s 49 countries already fall within the ‘high’ or ‘extreme’ risk category of Verisk Maplecroft’s Civil Unrest Index 2016 underscores the threat of disruption for companies operating in these markets,” the reports warns. Countries to watch in the region, say the experts, are Central African Republic, Sudan, Kenya, Ethiopia, DRC, South Africa and Nigeria.

    Corruption in Latin America

    The end of the commodities boom that fuelled Latin America’s decade-long growth has laid bare the profligacy of South America’s two largest economies, Brazil and Argentina, as well as the region’s largest oil producer, Venezuela, says the report.

    Lower commodity prices, coupled with chronic economic mismanagement, dealt heavy electoral losses to the ruling parties of Argentina and Venezuela in late 2015. Both countries will experience a rise in political instability

    Lower commodity prices, coupled with chronic economic mismanagement, dealt heavy electoral losses to the ruling parties of Argentina and Venezuela in late 2015. Both countries will experience a rise in political instability as they make the painful adjustments necessary to get back on a more sustainable growth track.

    In Brazil, corruption and economic recession will dominate the political landscape. The ongoing impeachment process against President Dilma Rousseff is unlikely to be successful, but it will ensure protracted legislative gridlock during 2016 and prevent the passage of the reforms required to arrest the deteriorating fiscal landscape and restore investor confidence. The mass anti-government protests witnessed in 2015 are set to continue and could spike in the run up to the summer Olympic Games in Rio de Janeiro.

    The region’s economic problems are compounded by social concerns over graft in 2016, increasing the risks of political and civil instability, as the newly formed lower middle class see their socioeconomic gains threatened or reversed. Verisk Maplecroft’s Corruption Risk Index 2016 identifies Argentina, Colombia, Ecuador, Peru, Venezuela and Brazil as posing a ‘high’ or ‘extreme’ risk.

    The analysts conclude that as the public finances of major commodity-producing countries are set to remain under intense strain in 2016, many of them will have to take unpopular fiscal tightening measures, which in turn will increase the risk of societal unrest.
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    Some sensible 'green' analysis

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    Oil and Gas

    Saudi Aramco Confirms

    On Friday, the kingdom confirmed it's mulling plans to sell a stake in the company. Here’s the official statement:

    Saudi Aramco confirms that it has been studying various options to allow broad public participation in its equity through the listing in the capital markets of an appropriate percentage of the Company’s shares and/or the listing of a bundle its downstream subsidiaries.

    Once the study of these various options is complete, the findings will be presented to the Company’s Board of Directors which will make its recommendations to the Saudi Aramco Supreme Council.

    This proposal is consistent with the broad and progressive direction pursued by the Kingdom for reforms, including privatization in various sectors of the Saudi economy and deregulation of markets, which the Company strongly supports.

    Saudi Aramco would like to emphasize that this process will strengthen the Company's focus on its long term vision of becoming the world’s leading energy and chemical enterprise. This includes prudently managing the Kingdom’s hydrocarbon resources, adding value across the value chain, reliably meeting its customers’ demand, and meeting its stakeholder and environmental commitments.

    As we noted before, "Aramco has the largest known oil reserves at around 261bn barrels – almost 10 times more than Exxon Mobil."

    In order to get an idea of the sheer magnitude, consider the following chart which shows that when it comes to crude, no one does it like Riyadh:

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    Oil Producers Here Are Now Getting Double The World Price

    Last month I wrote about soaring profits for resource companies working in Argentina. With local costs for such firms plunging following the devaluation of the Argentinean peso.

    And this week the government here confirmed this as one of the best crude markets going on the planet.

    That’s because of the oil price in the country. Which officials said will be fixed at US$67.50 per barrel for 2016.

    Unlike most global oil markets, Argentina currently mandates oil sale prices — to provide profitability for drillers and ensure development of domestic oil fields and security of local supply.

    That means Argentina’s oil producers will be seeing some of the highest revenues going anywhere in the world.

    The government did say it may adjust the price throughout the coming year — with this week’s announced price being a 10 percent decrease from the $75 per barrel price that prevailed across Argentina in December.

    But even a few more cuts of that magnitude would still leave Argentina’s oil market as the best on the planet. By far.

    The high oil price is especially good news in the wake of the recent peso devaluation. Which should push down costs for labor and local supplies for E&P firms — further ramping up profits.

    Combine that with recent successful work in Argentina’s emerging Vaca Muerta shale oil and gas play, and it looks like this may be the world’s best spot in the petroleum business today. Watch for financial statements from firms producing here to see if profits are super-charging over the coming months.
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    E&P Capex Outlook Grimmer, With U.S. Spending Possibly Falling 40-50%

    Oversupplied oil and natural gas markets, now coupled with sharply declining oil prices, are setting up a dismal year for capital spending by exploration companies, with domestic operators possibly cutting their spend plans by as much as half from 2015, analysts said this week.

    The hope that capital expenditures (capex) by the exploration and production (E&P) sector would increase this year is becoming less likely, one analyst said. The bottom line is simple, he toldNGI's Shale Daily. If commodity prices were to rise, spending would follow, but at current prices, that scenario is tentative at best.

    Cowen and Co. LLC this week issued The Original E&P Spending Survey, the signature report by analyst Jim Crandell, who initiated it in 1982. Worldwide capex plans were reviewed for 450 companies, with analysts asking detailed questions about the composition of budgets and strategic shifts. For 2016, it's going to be a slice and dice world for the E&Ps.

    "In the U.S., the 185 companies that we surveyed are planning an average decrease in their upstream capital expenditures of 24% to $89.6 billion," Crandell said. "In Canada, we estimate that the 103 companies that we surveyed are budgeting upon a 22% decline.

    "The cuts in U.S. E&P spending are broad-based and driven by reduced cash flows and uncertain economics. Under a 24% decline in spending, we estimate the average U.S. onshore rig count will fall by 29% in 2016, to exit the year at 660. We forecast completion activity will drop by 24% for the calendar year of 2016."

    Global capex is estimated to decline by 17% this year to $447 billion, but the estimate is based on $48.50/bbl West Texas Intermediate (WTI). International spend is expected to decline by less than in North America.

    "We did notice that the companies that were among the later ones to respond to our survey used a bit lower oil prices," Crandell said. "Because of the small difference, we treated Brent the same as WTI."

    The latest findings represent the "largest two-year declines" in North American (NAM) and international spending since the survey began more than three decades ago. There are "cutbacks across the board," but "smaller companies are cutting back far more substantially."

    Domestic producers whose capex budgets are less than $50 million are reducing spending by an average of 63%, while the largest spenders -- those with budgets of more than $1 billion -- plan to cut spending by 20%. Canadian E&P spend is similar, with overall reductions of 22%. The companies spending under $50 million in Canada now are planning to reduce their budgets by 41% year/year, while the $1 billion-plus spenders see capex down by 19%.

    The oil majors whose businesses are concentrated in NAM -- BP plc, Chevron Corp., ExxonMobil Corp. and Royal Dutch Shell plc -- are seen reducing their capex on average by 10% from 2015.

    "We forecast a 20%-plus coming from Chevron, but single-digit declines at BP, ExxonMobil and Royal Dutch Shell," Crandell said.

    If oil prices were to stay at current levels, more capex reductions are likely. The "most common answer" to Cowen's survey for what average oil price would cause E&Ps to reduce capex was $40/bbl.

    "Since we are below these levels going into the year, it seems to us that there is a good chance of further reductions," Crandell said. Most of the E&Ps surveyed (60%) said it would take a $60/bbl oil price to get them to increase spending; 21% said a $55 price would trigger a bump.

    Based on the analysis by Cowen colleague Marc Bianchi, "this spending scenario would result in a year-end 2016 rig count of about 660 versus 685 today and an average 2016 rig count of 666 -- down by 29% versus calendar 2015," Crandell said. "The difference is increased capex per rig. Well counts would perform a bit better, down by 24% for calendar 2016.

    "Assuming a 30% spending cut, rigs would need to fall by 75, exiting at 610 with well counts down by 28% for the calendar year."

    E&Ps have changed their thinking about "important technologies," the Cowen survey noted.

    "In recent years it has been a battle between horizontal drilling and fracturing/stimulation for the top spot," Crandell said. "They were joined this year by reservoir recovery optimization. Other notable gainers included deepwater technology and intelligent well completions.

    "It should be of no surprise that the majority of companies in every category called the economics of drilling poor. The one surprise was that there were both independents and majors who called the economics of drilling in the U.S. excellent."

    Evercore ISI's James West said the E&Ps now are "at oil's mercy." West and his analyst team issued an updated capex forecast this week one month after publishing initial findings -- all because of the decline in oil prices. Evercore's initial survey estimated NAM capex would fall by 19% year/year, with U.S. spend down 20% to less than $100 billion total. Today's projections at today's oil price are grimmer.

    "Our initial expectation was formed with E&P companies budgeting WTI prices at $47.60/bbl, roughly 29% above the current spot price and 17% above the current calendar '16 strip price," West said. A "record 74% of operators surveyed originally had selected oil prices as the key determinant of 2016 budgets, followed by cash flow at 59%. In addition, nearly 80% of companies we surveyed are expecting to spend within cash flow this year, up sharply from just 55% in 2015."

    More than half of the companies had stated they would decrease spend if WTI "remained below $40/bbl. Given continued weakness in the underlying commodity, we believe initial 2016 NAM budget announcements over the coming one to two months may amount to as much as 40-50% annual reductions -- significantly steeper cuts than forecasted less than one month ago."

    Many E&Ps are "largely at the mercy of the commodity with under-hedged books," according to West. Evercore analyst Stephen Richardson recently noted that 2016 hedged crude oil volumes stood at 27% at the end of December for his coverage universe of independent producers, while operators hedged only 6% of 2017 volumes.

    "With laser focus on spending within cash flow, initial 2016 upstream budgets are now unlikely to start down just 15-20% in North America as WTI crude oil lingers below $40/bbl," West said.

    The "bear scenario would remove an incremental $65 billion of upstream spending this year. Assuming a 45% sequential NAM spending decline and a 15% international spending decline, global upstream capex would post a 23% year/year decline during 2016 compared to our initial forecast for a global spending decline of 11%," which could "effectively remove an additional $65 billion of global upstream spending from this year's market.

    "However, as oil market fundamentals likely improve heading into second half of 2016, we think upward revisions to budgets, particularly for North America, should unfold. One caveat is that consolidation among the majors, which is increasingly likely in a more sustained low oil price environment, could present risks to increased overall spending levels."

    Whichever way the energy industry considers 2016, it looks to be a challenging year, said U.S. Capital Advisors analysts Cameron Horwitz and Omar Zakaria. The "pain trade has to spill over into the New Year. We think '16 will be a period of capitulation, marked by the rationalization of high-cost supply sources that are no longer needed and a broad-based hunkering down of even the best asset/strongest balance sheet operators."

    The first six months "will invariably be painful," they said. However, with "massive efficiency gains and cost structure improvements, we see E&Ps with core asset bases coming out of the '16 abyss in position to more competently compete for global market share."

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    At private Goldman confab, U.S. oil drillers add to glut woes

    Goldman Sachs has diagnosed a new reason for the sudden slump in energy industry sentiment this week: talk of agility, not agony, among leading U.S. shale oil producers speaking at the Wall Street bank's closed-door conference.

    In a research note following its Jan. 5-7 Global Energy Conference in Miami, which was closed to the media, the analysts said that investor sentiment "deteriorated further" during the event for three reasons, including a view that drillers were still overly optimistic about the potential for $50 oil.

    "Investors felt producers were not being responsive to $35 a barrel WTI (West Texas Intermediate crude oil) by focusing more on their agility versus potential for their production to decline," they wrote.

    Unfavorable weather and weakness in the Chinese economy also weighed on sentiment, the analysts said in a note entitled "Are we there yet?". They also said Pioneer Natural Resources' $1.4 billion equity offering this week "increased investor concern that financial stress is insufficient to bring oil markets back into balance".

    While the note is focused on energy companies rather than the oil market, it offers a new perspective on the dramatic 10 percent slump in crude prices this week that traders blamed on a variety of other factors, including a dive in the Chinese stock market and a sharp rise in U.S. gasoline stocks.

    It also reinforces the core thesis underpinning the bank's ultra-bearish outlook on the oil market. Its market analysts have been warning that a $20 a barrel price shock may be necessary to accelerate the slow-down in drilling and prevent global inventories from overflowing with surplus crude oil.

    So far, the U.S. shale oil drillers have proven stubbornly optimistic about the outlook, doing everything they can to maintain output even as cash dwindles and, in the process, feeding the glut that has depressed global prices.

    "Investors were looking for fear and trepidation from producers but got agility and below-expected clarity instead," according to Friday's research note.

    The analysts said that producers such as Continental Resources Inc, Devon Energy Corp and Marathon Oil Corp had assumed a $50 a barrel price, and indicated they would have to cut back on spending if the forward price curve dropped below that level. The balance of 2016 was trading at around $38 a barrel on Friday.

    None of the firms posted any material on their websites by Friday.

    It will likely take several more months to see whether the response among drillers would be enough to shore up prices as drillers get into the "mindset" of $40 crude, they wrote.

    "At our conference, producers largely did not provide specifics on what capex/ production would look like at $35/bbl oil," they wrote. "Instead, producers spoke largely of their agility to spend within cash flow and ... ramp up when needed."

    And when might that be?

    "Commentary suggested $50 per barrel WTI is now where producers would raise activity."

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    PetroChina, Chevron Sichuan Gas Project in China Starts Output

    Chevron Corp. and PetroChina Co. started natural gas production in China’s southwestern regions of Sichuan and Chongqing, eight years after signing a production-sharing agreement.

    Gas well-A in Chongqing’s Luojiazhai gas field began commercial natural gas production on Dec. 30, China National Petroleum Corp., PetroChina’s parent, said in a statement Monday. PetroChina had signed the 30-year agreement with Chevron in 2008, under which the second-largest U.S. oil producer took a 49 percent stake in the parcel and became the operator.

    The Luojiazhai project, the first phase of development, will produce 3 billion cubic meters of gas a year, according to the statement. Both parties will work on phase two and three in the same area. The three phases together, known as the Chuandongbei project, cover about 800 square kilometers (309 square miles), according to the statement.

    The partners had promised to produce 2 billion cubic meters of gas by 2010 and 6 billion cubic meters by 2013 from the Chuandongbei project, China’s largest onshore oil and gas exploration venture with a foreign partner.

    Chevron beat Royal Dutch Shell Plc, Statoil ASA and Total SA to win the right to develop the so-called sour-gas reserves at Chuandongbei. Sour gas refers to natural gas that contains a high level of hydrogen sulphide.

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    APLNG ships inaugural cargo

    The ConocoPhilips-operated Australia Pacific LNG project has on Saturday shipped its first cargo of liquefied natural gas from the Curtis Island facility near Gladstone.

    The first cargo was loaded onboard the Methane Spirit LNG carrier, Origin Energy, one of the project partners, said in a statement.

    The second cargo of chilled gas is expected to be shipped soon from the A$25 billion (US$17 billion) APLNG plant.

    However, the first cargo was planned to be loaded before the end of 2015. The delay has caused issues for another APLNG partner, China’s Sinopec that has had the BW Pavilion Vanda LNG carrier waiting at anchor off Gladstone since December 18. As Reuters reports, due to the delay, Sinopec racked up more than US$500,000 in demurrage costs.

    Sinopec has a 7.6 mtpa long-term contract  with APLNG while Japan’s Kansai Electric has booked 1 mtpa of LNG from the facility on a 20-year deal.

    Australia Pacific LNG CEO, Page Maxson said that the full production capacity of 9 million tons per year from the APLNG facility is expected to be reached in 2016.

    With the start-up of APLNG’s first train, all three liquefied natural gas facilities on the Curtis Island near Gladstone have entered operation.

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    US Oil rig count plummets to start 2016

    The number rigs drilling for oil in the U.S. plummeted by another 20 rigs during the first week of 2016 as the energy sector continues to struggle.

    West Texas’ seemingly resilient Permian Basin led the way with the loss of eight rigs, while southern Texas’ Eagle Ford shale dipped by five rigs, according to weekly data released by oil field services firm Baker Hughes.

    The sharp cutbacks starting the new year might represent the first sign of significant budget slashing for the new fiscal calendar, said Andy Lipow, president of Lipow Oil Associates in Houston.

    “The Permian tends to be more resilient, and we might be seeing the impact of producers cutting their new budgets,” Lipow said.

    The oil rig count now stands at 516 rigs, down 68 percent from when oil field rigs were operating at the peak of the U.S. oil boom in October 2014, when oil rigs totaled 1,609. The amount of rigs exploring for natural gas also sunk sharply by 14 down to just 148 rigs.

    The overall rig count is at it lowest point since 1999. Texas still counts 308 rigs, which is nearly half of the nation’s total of 664 rigs. Louisiana picked up one new rig and it was the only gainer in the country for the week.

    The holdouts, essentially, can no longer hold out, said Marshall Adkins, director of energy research at Raymond James in Houston.

    “The last bastions of resistance are being ferreted out by the low price of oil,” Adkins said. “It’s rapidly becoming a wasteland.”

    The price of oil also continued to sink Friday with the benchmark for U.S. oil settling at $33.16 a barrel, down 11 cents for the day and at its lowest settlement since 2004 on the New York Mercantile Exchange.

    “Below $50 the industry doesn’t work, and we’re well below $50,” Adkins said. “Oil prices have been a disaster. At these levels, you’re going to see everyone cut back.”

    Rig count and oil production reductions are likely to continue at least through March thanks to the global glut of oil supply, Lipow said, but also because U.S. refiners will soon enter into spring maintenance periods and their demand for crude oil will temporarily decline.

    The next three to six months are expected to be ugly, Adkins said, but he is bullish heading into the latter half of the year, and even for 2017 and 2018.

    The ongoing U.S. production cuts will eventually put supply and demand back into synchronization, Adkins said. That balance will have a much greater impact than the market’s focus on China’s weakening economy and other concerns, he said.
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    Alternative Energy

    FuelCell Energy Jumps on Approval of Biggest Fuel Cell Project

    FuelCell Energy Inc. surged the most in more than three years after Connecticut approved a proposal for what would be the world’s largest fuel cell power plant.

    FuelCell rose 24 percent to $6.61 at 9:45 a.m. in New York, after earlier climbing as much as 33 percent, the most intraday since May 2011. Before Friday, the Danbury, Connecticut-based fuel cell manufacturer’s market value had declined 70 percent over the past year to about $170 million.

    The Connecticut Siting Council approved Thursday a draft decision for the 63.3-megawatt Beacon Falls fuel cell power plant in the state that will use FuelCell Energy equipment, according to a statement from the project developer. That would be bigger than a 59-megawatt fuel cell plant in operation in South Korea, which also uses FuelCell Energy systems.

    Jeffrey Osborne, a Cowen & Co. analyst in New York, estimated that the revenue from the project would be almost triple the company’s market value.

    “We expect the total value to FuelCell Energy to be close to $500 million,” Osborne said in the note. “We see this project as a huge win for the company.”

    Fuel cells turn natural gas or hydrogen into electricity through a chemical reaction that produces little greenhouse-gas emissions.

    “This is a good milestone. It clears a hurdle,” Kurt Goddard, FuelCell Energy’s head of investor relations, said in an interview Friday.
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    Rare earth miner Molycorp to start bankruptcy sale of business

    Rare earths producer Molycorp reached agreements with its junior creditors on Friday that clear the way for the bankrupt company to accept bids for the company and to ask creditors to vote on a plan to exit bankruptcy.

    Molycorp, the only U.S. producer and processor of the rare earth elements that are used in cell phones and military equipment, has been battling its bondholders who have alleged it is doing the bidding of its lender, Oaktree Capital Management.

    Lawyers for Greenwood Village, Colorado-based Molycorp told a U.S. Bankruptcy judge it would allow advisers for the official committee of unsecured creditors and a group of bondholders to join calls and meetings about potential bids.

    Molycorp has said in filings with the U.S. Bankruptcy Court in Wilmington, Delaware, it had received 20 potential bids. On Tuesday, Bloomberg reported that potential buyers from China and Australia submitted nonbinding bids of more than $700 million for Molycorp's processing operations. The company has estimated the operations were worth less than $450 million.

    Bids for the company's bonds have jumped this week from less than 5 cents on the dollar to more than 12 cents as the prospects for repayment have improved for bondholders.

    An auction is scheduled for March 4.

    The auction would include the company's closed mine in Mountain Pass, California, which was once one of the world's main sources for rare earths.

    If bids fall short of a certain threshold, Molycorp has proposed exiting bankruptcy through a reorganization plan, excluding the Mountain Pass mine, under the control of Oaktree. U.S. Bankruptcy Judge Christopher Sontchi on Friday cleared the way for Molycorp to begin seeking creditors' votes for its reorganization by approving the so-called disclosure statement, which describes the plan.

    Molycorp and Oaktree still face struggles with junior creditors, who convinced Sontchi on Friday to strike a provision in the reorganization plan that would deny payments to objecting creditors.

    Luc Despins, a lawyer for the creditors committee, said he plans to sue Molycorp's directors and officers over the company's agreements with Oaktree. The committee also plans to press claims against Oaktree, including for unjust enrichment, at a confirmation trial beginning March 28.

    Molycorp filed for bankruptcy in June with more than $1.7 billion in debt after prices for rare earths fell when China lifted export restrictions.

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    Precious Metals

    Chinese Central Bank Buys Another 19 Tonnes Of Gold In December

    The PBoC has been continuing to bolster its officially announced gold reserves with an uptick of 19 more tonnes in December bringing them to 1,762.323 tonnes. As we have pointed out beforehand, though, although China supposedly came clean on its official reserve figures back in June this year, and has been announcing monthly increases since in the interest of transparency in line with its pending inclusion in the SDR currency basket, it is still widely believed the total reserve figure is, in reality, hugely understated, as may well be the size of the announced monthly purchases.

    With the Russian central bank also continuing to increase its gold reserves there is an anticipation that 2016 could well see a continuation of the good level of overall central bank purchases we have been seeing over the past couple of years. However, Russian forex reserves are not nearly as robust as those of China and any need to protect a continuation of the ruble downturn could be limiting. But with Russia relying so much on oil and gas exports, ruble devaluation is at least helping those companies involved in the resource sector stay afloat. Russia is less reliant on imports from countries whose currencies are not tied to the ruble anyway than many western economies would be in a similar situation. The lower ruble thus has less effect on the general populace than many in the west might surmise.

    Regarding its gold reserves, China may well be unwilling to report its full total and monthly purchase figures in order to keep the gold market ticking over at a level which suits its long term financial aims. A major rise in the gold price, which would likely ensue should it report far higher monthly purchases and a possible tripling or quadrupling of its total reserve figure, may not be in its best interests. There is no auditing process on the level of gold reserves reported to the IMF on a monthly basis so, in effect, a country can just report these as it may suit its political and economic aims. It is known that China considers gold to be a key element in the future world currency and economic power scenario, and at the moment, it may well just be keen to be seen to carry on raising its gold reserves at a rate which won't make future purchases raise any red flags among economic analysts.

    That gold plays such a huge part in the Chinese psyche - as it does in that of many other nations, particularly in Asia - is already evident in the enormous level of withdrawals from the Shanghai Gold Exchange this year. By December 25th, these had reached 2,555 tonnes (See: Chinese 2015 gold demand equates to around 80% of total global gold output) - already a huge new record - and by the year-end, will have almost certainly reached a fraction short of 2,600 tonnes. Whether SGE withdrawals are an accurate representation of the nation's actual gold demand or not (there are conflicting opinions on this), the record levels involved are certainly a great indicator of the national sentiment towards the yellow metal.
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    Base Metals

    Union at BHP Billiton's Cerro Colorado copper mine in Chile to strike

    The union at global miner BHP Billiton's Cerro Colorado copper mine in Chile said on Friday that it will go on strike on Monday over failed contract negotiations.

    "If the company doesn't offer anything better we will go on strike on Monday," said Leoncio Parra, president of Union 1 at the mine.

    The union, which represents 682 workers at Cerro Colorado, said the strike is set to begin at 07:35 am Chile time (10:35 GMT) on Monday.

    "Unfortunately, the latest proposal by Cerro Colorado only considered a real (wage) increase of 1 percent, which we consider to be a mockery of the workers, whose efforts are the lifeline of the company's profits," said Parra.

    Cerro Colorado produced 55,600 tonnes of copper in January to September 2015, according to Chilean state copper commission Cochilco.
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    CHALCO unit to cut or halt output within weeks: media report

    A subsidiary of China's largest aluminium maker, Aluminum Corp of China (CHALCO), is reportedly poised to slash or even stop production in the first quarter of 2016, a move experts said shows just how sluggish the market is and how crucial it is for producers to tackle the sector's supply-demand imbalance.

    CHALCO Shanxi Aluminum Co, a unit of CHALCO that produces alumina (an input for aluminum), has warned that it will lose 162 million yuan ($24.67 million) just this month, and the weak market means it can't keep operating, domestic news portal reported Saturday, citing a document posted on a public WeChat account named "Bo Sheng Da."

    However, the company is operating normally and it still isn't confirmed whether production will be cut or halted, a spokesman surnamed Jiang with CHALCO told the Global Times on Sunday.

    Based in Hejin in North China's Shanxi Province, CHALCO Shanxi Aluminum Co was formerly known as Shanxi Aluminum Plant.

    The annual production capacity of the company could reach 2.3 million tons, the largest alumina production firm under CHALCO, the website of CHALCO Shanxi Aluminum Co showed.

    According to the report, any disruption in the company's production will weigh on the business of two other subsidiaries of CHALCO in Shanxi, which would have to obtain alumina from other provinces at a higher cost.

    The aluminium industry is being challenged by a domestic economic slowdown and slack market demand, Wang Guoqing, director of the Beijing-based Lange Steel Information Research Center, told the Global Times on Sunday.

    Sun Yonggang, an analyst at Chaos Ternary Futures Co, agreed and said it's unavoidable that some of CHALCO's subsidiaries will have to close. Sun said the group's costs are relatively high within the industry, which is grappling with excess capacity.

    "Dealing with the industry's overcapacity is the priority in the next few years," Sun told the Global Times on Sunday.

    CHALCO Shanxi Aluminum Co's woes suggest that the parent company also faces a tough situation.

    Attached Files
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    China’s top aluminium maker aims to raise $490m with stock

    China Hongqiao Group, the world’s biggest maker of aluminium, will raise nearly half a billion dollars from a rights offer underwritten by its founder, highlighting the difficulties of producers amid five-year-low commodities prices. The company’s shares fell in Hong Kong.

    The Shandong province, China-based company aims to bring in HK$3.84 billion ($490 million) by offering seven shares for every 50 held by shareholders, the company said in a statement to the Hong Kong stock exchange. Chairman and founder Zhang Shiping, who has pledged to underwrite 99% of the issue, holds more than 78% of Hongqiao through a holding company, according to the statement.

    “Strategically the raising will address working capital needs and highlights the challenging environment of aluminium markets at current prices,” analyst Daniel Kang at JPMorgan Chase & Co said in a note on Monday. “While the parent’s role may provide some confidence to the market, it could reduce the company’s free-float further.”
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    Steel, Iron Ore and Coal

    India imports 18.9 mln T coal in Dec

    India imported around 18.9 million tonnes of coal in December through 29 major ports, up 11.2% month on month, according to data released on January 8 by Indian shipbroker Interocean.

    Of the total, thermal coal accounted for 15 million tonnes, up almost 14% from November, while coking coal imports rose 0.4% to 3.85 million tonnes, data showed.

    Mundra port on the west coast received the highest volume of coal shipments at 2.9 million tonnes, up 49% from November, consisting of 2.83 million tonnes of thermal coal and 79,756 tonnes of coking coal.

    Goa port on the west coast received the highest volume of coking coal shipments at 951,087 tonnes, up from 888,644 tonnes in November.

    Of the total 18.9 million tonnes of coal imported in December, Indonesia supplied 11.3 million tonnes, Australia 3.32 million tonnes, South Africa 3.64 million tonnes, and the US 415,888 tonnes. Imports from other countries totaled 233,035 tonnes.

    Adani Enterprises, JSW Group, Swiss Singapore, Tata Group, Agarwal Coal and Steel Authority of India Limited are the leading importers of coal into India.
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    US coal production hits lowest level in 30 yrs

    U.S. coal production has fallen to its lowest level in nearly 30 years as cheaper sources of power and stricter environmental regulations reduce demand, according to preliminary government figures.

    A report released by the U.S. Energy Information Administration estimated 900 million tonnes of coal were produced last year, a drop from about 1 billion tonnes in 2014. That’s the lowest volume since 1986.

    The slump has led to bankruptcies and layoffs at mining companies, but the effects have rippled outward, stressing state budgets and forcing layoffs in other sector such as railroads, which are transporting less coal.

    Power plants are increasingly relying on cheaper and cleaner-burning natural gas to provide electricity and comply with regulations aimed at reducing pollution that contributes to climate change. The average daily spot price for natural gas at the benchmark Henry Hub fell to $2.61 per million British thermal units last year, a 40% decrease from 2014, according to the government report.

    A sweeping agreement adopted last month by nearly 200 countries determined to further reduce greenhouse gas emissions is likely to make coal an even less viable choice in the decades ahead.

    Last year’s drop in demand hit hardest in the central Appalachian basin, where production plunged 40% below its annual average from 2010 through 2014, according to the report.

    The U.S. coal industry didn’t get any help overseas last year either, as exports to the United Kingdom, Italy and China plummeted by more than 50%. Overall, U.S. exports of coal dropped by about 21% last year, the report estimated.
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    Indonesia coal export to focus on India market than China

    Indonesia's Ministry of Energy and Mineral Resources expected coal shipments to India to rise in 2016, while coal exports to China are expected to decline further.

    China is experiencing a persistent slowdown and curbing imports of coal with a lower calorie grade. But coal demand from India has not fallen, said Adhi Wibowo, director for Coal at the Energy Ministry. Moreover, India is highly dependent on Indonesia for its thermal coal.

    The sluggish global economy, particularly China's slowdown, has been plaguing global coal prices hence making the coal mining industry an unattractive one.

    The benchmark thermal coal reference price of Indonesia (Harga Batubara Acuan, or HBA), set by the Energy Ministry each month, declined 1.69% on month to USD $53.51/t (FOB) in December 2015, touching a new all-time record low level.

    Over January-November 2015, Indonesia’s coal exports to China fell over 30% from the same period last year.

    Hendra Sinadia, Executive Director at the Indonesian Coal Mining Association (APBI), said Indonesia - given the current situation - cannot rely on China for its coal exports. Indonesia's coal industry should focus on the domestic market, particularly now as new coal-fired power plants are set to start operations in 2016.

    Data from Indonesia's Energy Ministry show that in 2014 China was Indonesia's largest export market for coal shipments. During 2014 Indonesia shipped a total of 41.54 million tonnes of coal to China.

    India was the second largest export market for Indonesian coal in 2014, which imported 37.48 million tonnes.

    Wibowo added that - besides India - the Philippines, Pakistan and Malaysia are still interesting export markets for Indonesian coal and form an opportunity for Indonesian coal miners.

    In the January-November 2015 period Indonesia exported 253 million tonnes of coal, down 27.71% from the same period one year earlier. Meanwhile, Indonesia produced 335 million tonnes of coal in the first eleven months of 2015, down 20% on year.
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    Japans Tepco agrees floating price for Jan-Dec coal

    Japanese utility Tokyo Electric Power Co. has opted for a floating market price for its 2016 supply contract for Australian thermal coal, several market sources said Friday.

    The reference price for the January-December contract is believed to be trading platform globalCOAL's floating index for Newcastle 6,000 kcal/kg NAR thermal coal, said a number of market sources.

    It is the second straight year Tepco has agreed to a floating contract price with its major Australian supplier Glencore for imported thermal coal, sources said.

    "There hasn't really been a fixed-price January contract negotiated since 2014," said another market source.

    For the first time in its negotiations with Australian suppliers, Tepco handed responsibility to Jera, a 50:50 joint venture between Tepco and Chubu Electric Power, another major Japanese utility.

    Several market sources said Jera was responsible for all of Tepco's imported thermal coal buying, including its January and July annual requirements.

    Jera took over fuel buying for Tepco and Chubu on October 1.

    Their total demand for thermal coal imports is about 17 million-18 million mt/year, and there are plans to expand this through coal trading with third parties, according to company data.

    Chubu Electric had a joint venture with the trading arm of European utility EDF -- Chubu Energy Trading -- that did its thermal coal buying and was effectively the forerunner of Jera.

    The Tokyo-based joint venture is to gradually assume responsibility for all of the two utilities' supply chain management for imported fossil fuels and of their investment in overseas coal mines, according to information on Jera's website.
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