Mark Latham Commodity Equity Intelligence Service

Tuesday 1st December 2015
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    China factory activity hits 3-year low in November - official PMI

    Manufacturing activity in China hit a three-year low in November, an industry survey showed Tuesday, supporting the case for more accommodative policies as authorities seek to prop up growth in the world's second largest economy.

    China's National Bureau of Statistics' official Purchasing Managers' Index (PMI) hit 49.6 in November, its lowest reading since August 2012 and down from the previous month's reading of 49.8. This was below a Reuters poll forecast of 49.8 and marked the fourth straight month of contraction in the sector.

    A reading below 50 points suggests a decline in activity on a monthly basis while a reading above signifies an expansion.

    "With soft growth momentum and deflation pressures creeping up, we expect the authorities to further ease monetary policy and continue to implement an expansionary fiscal policy in order to prevent further slowdown of the economy in 2016," Li-Gang Liu and Louis Lam, ANZ economists said in a research note released after the data.

    Separately, the Caixin/Market China Manufacturing PMI edged up to 48.6 in November, beating market expectations of 48.3, which would have been unchanged from the previous month. The index has shown contraction for nine straight months.

    The private sector Caixin survey focuses more on small-to-medium-sized private firms, which are showing more stress from the prolonged economic slowdown and high financing costs, while the official versions look more at larger, state-owned firms.

    The official PMI's sub-indexes showed widespread weakness in manufacturing with new orders - a proxy for domestic and foreign demand - down 0.5 points to 49.8 and exports contracting to 46.4 for the 14th straight month. Input prices declined 3.3 points to 41.1.

    ANZ economists said this points to persistent deflation in upstream prices, which would add pressure to factory gate prices and industrial profits.

    Service sector activity, which has helped offset the wider effects of weakness in manufacturing, improved with the official non-manufacturing PMI up half an index point to 53.6.

    "The services sector appears strong and there are some hints that accelerating credit growth and fiscal spending may have continued to support investment growth last month, following a rebound in October," Julian Evans-Pritchard, an economist at Capital Economics, wrote in a research note.

    Despite a long series of stimulus measures, including cutting interest rates six times since November last year, muted monthly data for October suggests China's economic momentum continues to slow.

    Some analysts expect China's economy will bottom out in the fourth quarter as a burst of stimulus measures rolled out by Beijing gradually takes effect, but many remain wary about the outlook.

    China's Premier Li Keqiang said last week that China was on track to reach its economic growth target of about 7 percent this year, and that the economy was going through adjustments to maintain reasonable medium- to long-term growth.

    But that would still mark China's weakest economic expansion in a quarter of a century, and some analysts believe real growth levels are much weaker than official data suggest.

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    A financial solution for China's smog problem

    As world leaders gather in Paris to debate how to combat the challenge of the climate change, China's capital city is shrouded in heavy smog. Many of Beijing’s landmarks such as the Forbidden City are not even visible from a short distance. One of the jokes going around Chinese social media is about the Beijing mayor’s promise last year to solve the smog problem, or he will serve his head on a platter. Now many people are asking for his head.

    Combating an ever-worsening environmental problem has become one of the top priorities for Chinese policymakers. Even in an authoritarian state, the government cannot ignore citizens’ strong demands for better living conditions forever.

    The chief economist of the Chinese central bank, Ma Jun, believes one of the root causes of the country’s worsening smog problem is the structure of the economy. China has a disproportionately large heavy industry sector compared to other major economies, and the heavy industry is nine times more polluting than the services sector.

    The industrial sector accounts for 41 per cent of the country’s GDP. By comparison, Australia’s industrial sector comprises only 6.8 per cent of the economy. In China, coal is responsible for two thirds of total energy production, and is ten times more polluting than renewable energy.

    Ma argues the key to addressing the structural problem of pollution is through financial innovation. The central bank economist says China needs to develop green finance to channel more money into more environmentally friendly sectors, according to an op-ed piece published on Caixin.

    “There has been too much investment in polluting industries, energy and transport projects. There are not enough investments in low emission and renewable energy projects,” he says. Like elsewhere, many of these projects face problems of low returns. Many private sector investors are reluctant to enter the field.

    China needs two to four trillion yuan in green investment every year for the foreseeable future. The Chinese government, due to its recent profligacy, can only cough up 300 billion yuan a year. Even adopting the most conservative estimates, the Chinese government can only contribute 15 per cent of the total financing needs of the country. It means the private sector has to contribute another 85 per cent.

    How to incentivise private sector investors is one of the key challenges. In September this year, the Chinese government published a policy document on building a better ecological system. Article 45 of the document specifically deals with the issue of developing a green financing system.

    For examples, it calls for interest rate subsidies and credit guarantees to encourage more lending for so-called green projects. Beijing also wants to develop a market for green bonds and a stockmarket index for sustainable companies. It also wants listed companies to disclose more environmental-related issues.

    All of these measures are designed to incentivise private sector investors to move away from polluting industries and invest in more sustainable sectors.

    Ma uses Hebei as an example to talk about the need to develop a green economy. The province is the largest producer of steel, cement and pleat glass in China. All these industries are heavily polluting and contribute to the smog problem in northern China. The province needs to cut 15 million tonnes of steel production, 15 million tonnes of iron production as well as 39 million tonnes of cement. These cuts equate to millions of job losses.

    The central bank chief argues that if the government relies on draconian administrative measures to shut up factories and steel mills, it will result in massive unemployment, which will create social problems as well put more pressure on the slowing economy. He says a better way to deal with the issue is through encouraging more private sector investors to put money into more sustainable sectors.

    He makes the following suggestions.

    He says Beijing needs to support more lending to renewable sectors through interest rate subsidies -- he thinks it should be around about 3 per cent.  For every dollar the government spends, it is likely to bring in another 33 dollars from the private sector.

    The government should also establish funds that invest directly in green projects. International experience suggests private sector investors are more willing to get involved if the government kicks in money too. In addition, a green bond market could be used to finance long-term projects such as subways and waste water treatment.

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    China sees first state-owned firm default on bond

    A power company in China failed to make an interest payment on a bond on Tuesday marking the first time a state-owned firm has been allowed to default and adding to evidence that Beijing is slowly withdrawing its sovereign guarantee of low-quality bonds.

    Baoding Tianwei Group said in a statement that it was unable to make the payment on time.

    The default "might destroy the ironclad guarantee reputation of central government-owned issuers", wrote analysts at China Chengxin International Credit Rating Co in a research note before the default.

    But they added that the low grade of Tianwei and the other defaulters limits the market impact of any defaults.

    The news comes shortly after a full default on both principal and interest by Cloud Live Technologies earlier this month, and a more recent offshore default by Kaisa Group , the first Chinese developer to default on dollar bonds. Investors are now eyeing developer Glorious Property Holdings, whose bond payment comes due on Saturday.

    But defaults on bonds sold to foreigners offshore have failed in the past; what the Chinese political system has struggled with is allowing domestic defaults. The first default in 2014 by a small private solar power company ultimately ended in a bailout several months later.

    Baoding Tianwei Group is entirely owned by the Beijing-based China South Industries Group Corporation, which advertises itself as a part owner of Changan Automobile Group on its corporate website as well as a major defense equipment maker. It is directly owned by the central government.

    Calls to the company were not answered, but investors appeared to have taken the lack of a rescue in stride, with bond markets shrugging off the news.

    On April 16, the company had warned investors that it might miss an 85.5 million yuan ($13.8 million) interest payment.

    The 5-year, 1.5 billion yuan bond maturing in 2016 has a coupon of 5.7 percent. It was originally rated AA+, but was later downgraded to BB.

    Despite its links to the government, there were few signs China South Industries would rush to Baoding Tianwei's rescue.

    "This affair has no connection with us," said an employee of China South Industries when contacted, although the employee confirmed that Baoding Tianwei is a subsidiary. He suggested contacting its underwriter, China Construction Bank.

    Read more at Reuters

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    Saudi Interbank Rates Soar, Deposits Flee As Cash Crunch Intensifies

    Exactly a year ago, Riyadh decided to embark on an epic quest to send crude prices plunging on the way to, i) bankrupting the US shale complex and ii) achieving “ancillary diplomatic benefits,” like tightening the screws on Moscow’s energy-dependent economy in hopes of forcing Putin to give up Assad.

    Long story short, the kingdom’s plan didn’t work.

    Thanks to ZIRP, legions of yield-starved investors in the US ensured that capital markets remained open to otherwise insolvent drillers, allowing US producers to stay in business longer than the Saudis anticipated. Meanwhile, not only did Putin not give up Assad, he actually sent the Russian air force to Latakia and to add insult to injury, Moscow’s warplanes are now bombing Saudi-financed Sunni militias in Syria.

    Meanwhile, slumping crude prices wreaked havoc on the kingdom’s finances.As we’ve documented extensively, the Saudis are now staring down a deficit on both the fiscal and current accounts with the former amounting to some 20% of GDP and the latter representing the first negative balance in at least 15 years.

    So what's a despotic, puritanical Islamic monarchy to do? Well, you can tap the debt markets to offset the FX reserve burn and indeed Riyadh has already gone that route, but as we noted earlier this month, it's not clear how far they'll ultimately want to push that given that projections already have the country's debt-to-GDP ratio climbing from basically zero to more than 33% by 2020

    Income from oil and related products contributes more than 80 percent of Saudi government revenue, and crude’s 37 percent plunge over the past year is poised to result in a 10-fold increase in the country’s budget deficit. That’s squeezing liquidity in the banking system, with demand deposits dropping 4.7 percent in October, as those of businesses, individuals and government entities slumped.

    "The drop in deposits in October, in absolute amount, is probably the biggest since the 1990s," Murad Ansari, a bank analyst at EFG-Hermes Holding SAE, said by phone from Riyadh on Monday. "There are payment delays from the government to contractors, which is one of the reasons for the decline in private sector deposits, and public sector deposits are shrinking as the government is running a deficit."

    Well don't look now, but money markets are tightening dramatically in the kingdom as deposits dry up. The 3-month Saudi Interbank Offered Rate has jumped 13 bps in November to its highest level since early 2009.

    In short, the Saudi economy is gradually grinding to a halt, which is what happens when you deliberately tank the commodity that accounts for more than three quarters of government revenue and when government spending is the linchpin for economic growth. While it's not clear how much of this is "priced in" so to speak, you'll note that there's not a lot of breathing for the Saudis in terms of avoiding a recession in the not-so-distant future.

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    Forget Esteves, It's the Other Brazil Bust That Worries Insiders

    When a world-renowned banker and a congressman were busted last week as part of the biggest corruption scandal in Brazil’s history, the international spotlight naturally fell on the young tycoon, Andre Esteves.

    Yet to long-time Brazil watchers, it was the detention of the legislator -- a ruling party dealmaker named Delcidio Amaral -- that marked a far more worrisome development for a country desperately seeking to contain a deepening financial and political crisis. His arrest not only delayed government efforts to resolve this year’s budget dispute, but it also dispels a long-held belief that sitting lawmakers are all but untouchable because of a quirk in Brazilian law that affords politicians special treatment in criminal investigations.

    While that can be seen as a true silver lining in the scandal -- a sign that a legislative branch rife with alleged corruption will no longer be tolerated -- it also injects a wild card into the crisis: Who will fall next and where will it all end? With the heads of both houses being investigated, it raises the possibility that Brazil’s political apparatus could unravel before ever passing the spending cuts and tax increases needed to restore investor confidence and ward off a new round of credit-rating downgrades.

    "The idea that the political leaders have a plan to pull the country out of this crisis died because their very own future is at stake," Gabriel Petrus, a political analyst at business consulting firm Barral M Jorge, said from Brasilia. "Never before in history have we had so little certainty about tomorrow."
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    The commodities bloodbath of 2015 in one chart

    Commodities have been getting creamed in 2015.

    And according to Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices, it isn't going to get any better any time soon.

    "Unfortunately for commodities, there’s no waking up from this nightmare."

    So far, 2015 has not yet been the worst year for any single commodity, Gunzberg noted in a November 30 report, but there are a number of commodities that are on pace for one of their worst years on record.

    "Aluminum is having its second worst year in history and gold is having its sixth worst year in history," Gunzberg writes.

    The S&P tracked each commodity's performance back to 1970 for its research. No fewer than 17 are having one of the their five worst years out of 45.

    Natural gas is down more than 40% this year, according to S&P, and energy is down more than 30% — making 2015 the fifth-worst year for each.

    Already, Wall Street is bracing for big fallout. Wall Street banks areexpecting more defaults in the energy sector as they see more loans underperforming.

    This is S&P's chart tracking the carnage.

    Image title

    S&P Dow Jones IndicesS&P tracks commodities' plunge in 2015.

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    Linde cuts 2017 profit forecast on weak industrial gases

    Linde, the world's biggest industrial gases company by sales, cut its 2017 profit target, citing slower industrial production growth weighing on its industrial gases unit.

    Linde now expects adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) to come in between 4.2 billion euros ($4.4 billion) and 4.5 billion in 2017, down from an initial target of 4.5 to 4.7 billion, it said on Monday.

    It would also not achieve its 2017 target for return on capital employed (ROCE) of between 11 and 12 percent and now expects 9 to 10 percent.

    Linde also said its engineering division would continue to suffer from a weak order book due to the low oil price.

    It said last month that only strong growth at its U.S. healthcare gases business helped it eke out a gain in third-quarter adjusted EBITDA.

    At the engineering division, which designs and erects large plants for the oil and petrochemical industry, clients have kept holding off on large investments, with crude oil prices down about 40 percent from a year ago.

    Read more at Reuters

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    Oil and Gas

    OPEC November oil output rises, led by Iraq, Saudi - Reuters survey

    OPEC oil output has risen in November from the previous month, a Reuters survey found on Monday, led by a rebound in Iraqi exports after bad weather had temporarily halted supply growth from the group's second-largest producer.

    The increase indicates the Organization of the Petroleum Exporting Countries is again pumping close to a record high as Saudi Arabia and other big producers focus on market share. OPEC meets this week to review the policy, with no change expected.

    OPEC supply has risen in November to 31.77 million barrels per day (bpd) from 31.64 million in October, according to the survey, based on shipping data and information from sources at oil companies, OPEC and consultants.

    The OPEC meeting on Friday comes almost a year after its historic decision, led by Saudi Arabia, to refuse to prop up prices. Oil has more than halved in 18 months due to persistent oversupply, but even those in OPEC who want a change in approach do not expect one.

    "I am seeing that Saudi Arabia will not change its position," said an OPEC delegate from a non-Gulf country which favours supply restraint. "No favorable outcome will be reached at the next meeting."

    OPEC has boosted production by about 1.50 million bpd since its November 2014 policy shift. Output is not far below July's 31.88 million bpd, the highest since Reuters records began in 1997.

    The biggest monthly rise in output has come from Iraq, the world's fastest growing source of supply growth this year.

    Exports from Iraq's main outlet, its southern terminals, have risen in November to at least 3.06 million bpd and could top that and set a record if tankers currently waiting depart before Tuesday, according to loading data and industry sources.

    October's figure was lower than expected as bad weather delayed shiptments. Southern exports of 3.064 mbpd in July are the latest record.

    Exports from Iraq's north by the Kurdistan Regional Government via Ceyhan in Turkey have edged lower, while those by Iraq's State Oil Marketing Organisation have remained zero for a second month, the survey found.

    An increase has also come from Saudi Arabia, sources in the survey said, as the kingdom sent more crude abroad and used more in refineries, outweighing a seasonal drop in usage in domestic power plants.

    "November exports and refinery runs are up compared to October by more than direct burn was down," said one of the sources who tracks Saudi output. "So, supply to the market is up in November."

    Saudi output, at 10.25 million bpd in this survey, is not far from the record high of 10.56 million bpd it pumped in June.

    Output declined in OPEC's two West African producers, Angola and Nigeria, the survey found. Libyan output, which was already at a fraction of the pre-conflict rate, edged lower in November.

    Supply from Iran, OPEC's second-largest producer until sanctions forced a cut in exports in 2012, stayed flat in November, the survey found. A lifting of sanctions on Iran has the potential to boost OPEC output further in 2016.

    Read more at Reuters

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    Irans new oil contracts

    Iran unveiled its hotly anticipated new petroleum contracts to dozens of international oil companies in Tehran Saturday, and the first set of new tenders could be released by late January, a senior Iranian oil official said.

    The two-day conference, that began Saturday, introduced some 52 projects, including 14 exploration and development blocks, along with major onshore and offshore fields such as South Azadegan and the North Pars gas field.

    Iran introduced some $100 billion worth of upstream projects, but only a fraction of these will be offered in its first round of tenders, National Iranian Oil Company's Managing Director Rokneddin Javadi, who is also the deputy oil minister, said on the sidelines of the conference.

    "I think we will offer around 18 exploration blocks and around 10 development projects, totally worth around $30 billion in the first round," Javadi said.

    "It's just to tell the world how big the opportunity is for work in Iran. What we will offer in the first round will be based on the feedback we see from today's conference," he added.

    The exact date when the tenders will be released would depend on feedback from international oil companies at the Tehran summit, he said. But he said he hoped to finalize the contracts by the end of next year.

    The new Iran Petroleum Contract replaces the buy-back model first introduced in the 1990s.

    Under the new model, developers and investors would get their profit from the production, unlike the buyback model that was based on an agreed interest in advance, he said.

    The contract would also continue for longer, removing the need for a re-tender after a few years as production levels start to fall.

    The launch of a new bidding round and contracts would also have a slightly new structure, he added.

    "We are going to establish a new structure in NIOC -- under the supervision of the managing director -- for the tender procedure ... evaluation, negotiation until the contract. After signing the deal, the contract will be transferred to the executive companies," Javadi explained.

    Oil Minister Bijan Zanganeh said Saturday that he was not worried about the impact of low oil prices on investment in the new contracts and that he hoped to attract around $25 billion worth of foreign investment.

    "These prices and even lower than these, because our oil production costs are low, will cause no problem with repayment on investments or profitability for foreign companies", he said, adding that the production cost in Iran was below $10/barrel for both onshore and offshore production.

    As many as 153 international oil companies from across the globe attended the event. In particular, the oil ministry held meetings with France's Total, Azerbaijan's SOCAR, Russia's Lukoil and Malaysia's Petronas on Saturday on the sidelines of the conference.

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    More Russian oil drilling shows its resolve to OPEC

    Russian oil firms are drilling more, showing the world's top crude producer is ready for a longer fight for market share with OPEC, as its industry can carry on even if oil prices reach $35 per barrel.

    As OPEC prepares to meet on Friday in Vienna, Russia is sending a low key delegation for talks which are very unlikely to result in any output deal.

    OPEC oil ministers have repeatedly said they would only cut production in tandem with non-OPEC.

    According to Eurasia Drilling Company (EDC), the largest provider of land drilling services in Russia and offshore in the Caspian Sea, Russian drilling measured in metres rose 10 percent in the first six months of this year from a year ago, despite a decline in oil prices to less than $50 per barrel from their peaks of $115 in June 2014.

    "Despite the recent fall in oil prices, Russian production continued to accelerate as oil producers remained profitable even in the lower oil price environment, helped by the effect of a weak rouble on costs and lower taxes, which decline in a lower oil price environment," Bank of America Merrill Lynch said in recent research.

    Moscow has surprised the Organization of the Petroleum Exporting Countries by ramping up output to new record highs this year despite low oil prices, which OPEC had hoped would depress production from higher cost producers.

    Moscow responded by steeply devaluing the rouble, giving an edge to its exporters. In many OPEC Gulf producers currencies are firmly pegged to the dollar.

    According to EDC, the Russian drilling market is based on long-term contracting, which results in lower pricing and less margins volatility, as compared to other countries more subject to the spot market.

    Total drilling has more than doubled over the past decade to more than 22 million metres per year.

    Russian oil production, which together with sales of natural gas account for half of state budget revenues, has been steadily rising since 1998, apart from a marginal decline in 2008.

    According to official data, the number of producing wells in Russia has increased in 2014 to 146,279 from 143,875 in 2013.

    The number of horizontal wells - a more efficient method of extracting oil - has increased by more than six times since 2005.

    The number of wells in the Middle East, including in Saudi Arabia, has also risen over the past year, according to data from OPEC - in steep contrast to fast declines in many other producing areas as a result of low oil prices.

    In the United States, the number of oil rigs has fallen by 1,173 over the past year to 744 as the shale oil boom cools due to lower oil prices, according to oil services company Baker Hughes.

    Merrill Lynch said that most Russian oil companies break even at an oil price as low as $35 per barrel comparing to $40-$50 for Latin America's producers.

    Read more at Reuters
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    Iran LPG exports surge

    Iran's Nov LPG exports at 501,000 mt, largest monthly volume since exports resumed May 2013, shipping sources say - Platts Oil
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    Lukoil Third-Quarter Profit Falls 62% After Oil Price Declines

    Lukoil PJSC, Russia’s second largest oil producer, said third-quarter profit dropped 62 percent, a bigger decline than estimated, after crude prices fell amid a global supply glut.

    Net income fell to $623 million in the third quarter compared to $1.62 billion the previous year, according to the Moscow-based company. That was below the $826 million average estimate in a survey of nine analysts by Bloomberg News. Sales fell 40 percent to $23.4 billion.

    Crude prices have fallen to about half the previous year’s level after the Organization of Petroleum Exporting countries reacted to a global supply glut by defending market share rather than cutting output. Russian oil and gas producers Bashneft PJSC, Gazprom Neft PJSC and OAO Novatek also reported a decline in profit or a loss in this period.

    Oil and gas production in the first nine months of the year rose 3.5 percent to 2.37 million barrels a day. Oil and liquids output increased 3.9 percent to an average 2.05 million barrels a day, mainly due to growth in Iraq, Lukoil said in the statement.
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    Transocean’s Norway deal marks new rig-rate low in oil slump

    Transocean Ltd., the biggest offshore-rig operator, won a contract to drill four wells off Norway for Det Norske Oljeselskap ASA at a day rate of about $180,000, the lowest recorded tariff in the Nordic country since oil began to tumble last year.

    “It’s a clear sign of desperation and how bad it’s become,” Janne Kvernland, an analyst at Nordea Markets, said Monday in an e-mail.

    Det Norske, a Norwegian oil producer controlled by billionaire Kjell Inge Roekke, said last month that the tender had attracted interest from 14 rigs, an unusually high number for this type of contract. The $44.8 million deal, covering an estimated 250 days starting in December next year, corresponds to $179,000 a day.

    The interest from contract-starved offshore drillers underscores the squeeze suffered by Transocean and competitors such as Ensco Plc and Seadrill Ltd. as oil companies trim spending to weather lower crude prices just as new units expand an oversupply. Rig operators have scrapped more than 40 floating units since the end of last year. Seadrill Chief Executive Officer Per Wullf said last week that at least 60 more need to go.

    The rate for the Transocean Arctic, as the rig is called, was as expected given that the machine is almost 30 years old and the contract starts in about a year, Andreas Stubsrud, an analyst at Pareto Securities AS, said by phone. Transocean Arctic will do most of its drilling in 2017, when rig owners are hoping to capitalize on a stronger market to get better rates for more sophisticated units, he said.

    The Transocean Arctic is currently earning $373,000 a day on a contract running to March 2016, Transocean’s latest fleet- status report shows.

    “In spite of the low day rate, we view it as a positive for Transocean to secure utilization at a day rate above operating expenses” of about $130,000 a day, DNB Markets said in a note. “The announcement is on the downside for other rig owners with open exposure in the region, namely Fred Olsen Energy ASA, Songa Offshore and North Atlantic Drilling Ltd.,” a subsidiary of Seadrill.

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    Kurdistan Pays Oil Companies for Third Month to Maintain Output

    The Kurdistan Regional Government paid international oil companies operating in the Iraqi autonomous region for a third consecutive month, disbursing funds that it says will allow production to be maintained.

    Payments will improve when exports increase or the oil price rebounds, the KRG said Monday in an e-mailed statement. The government said the release of funds was in line with those in September and October, which both saw disbursements of $75 million.

    Gulf Keystone Petroleum Ltd., Genel Energy Plc and DNO ASA were awaiting a November payment for the roughly 300,000 barrels a day they jointly produce. Shares of Gulf Keystone pared their losses in London, ending 1.2 percent down after earlier dropping as much as 15 percent. Genel declined 2.8 percent while DNO rose 2.4 percent in Oslo.

    The KRG vowed to re-establish regular monthly payments in August, following an eight-month hiatus after disagreements with Iraq’s central government in Baghdad over how the region should be remunerated for its oil output. The collapse in crude prices and the cost of fighting Islamic State is making it harder for the KRG to balance its books.

    “Any payment they make at this point is encouraging but it’s not transformational,” Shola Labinjo, a London-based analyst at Tudor, Pickering, Holt & Co said by phone. These payments allow the companies to manage their costs, but they’re not enough to reduce the amount that the KRG owes the oil companies, he said.

    The three companies are owed about $1.7 billion from past crude exports, based on their last regulatory filings. Unless this is paid, an increase in crude production isn’t possible, according to top executives at DNO, Genel and Gulf Keystone.

    The announcement comes as the KRG’s prime minister and oil minister are due to speak at an investor conference in London on Tuesday. It also follows a ruling by a U.K. court ordering the KRG to pay $1.98 billion to Dana Gas PJSC and two other energy companies in a dispute over development rights for two oil and natural gas fields in Iraq’s self-governing Kurdish region.

    While the KRG has been supportive of Gulf Keystone, the Dana Gas ruling has caused some concerns in the market, James Midgley, an analyst at Mirabaud Securities LLP, said by phone. “It’s just more stretch on the balance sheet of the KRG, which was already stretched,” he said.

    Kurdistan is a major driver behind Iraq’s record crude production this year, with the region exporting 595,528 barrels a day in October, according to the Kurdish Ministry of Natural Resources. That’s 22 percent of total Iraqi exports and almost double the level it was shipping in November last year.
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    Golar LNG posts loss in Q3

    Bermuda-based Golar LNG on Monday posted a net loss of $143 million for the third quarter of this year.

    Golar LNG’s charter revenues rose to $24.3 million in the third quarter from $16.9 due to an increase in utilization of the company’s fleet that was at 44 percent compared to 33 percent in the previous quarter, the company’s quarterly report reveals.

    Cool Pool

    The “Cool Pool” formation comprising Golar, Gaslog and Dynagas was completed and commenced operations on October 1, with 10 of the 17 spot voyage charters concluded globally during October being with the Cool Pool.

    According to Golar’s report, the LNG carrier spot market is now showing the first real signs of recovery on the back of new production capacity starting up and the “very welcome acceptance” by the market of the Cool Pool. The speed of this recovery will in part be a function of how trade patterns evolve over the coming months.


    The market for FSRU’s has entered into a new phase. Whereas, previously, potential new FSRU projects were frustrated by the inability to secure LNG supply, Golar said the holders of uncontracted LNG supply are motivated to accelerate FSRU projects in an effort to reduce their exposure.

    The company expects the uncontracted FSRU capacity to be absorbed shortly based on the customer inquiries.

    Earnings increase

    Golar LNG  forecasts an improvement in its operating earnings in the coming quarters, driven by an improved shipping market and Golar Tundra commencing operations in the second quarter of 2016.

    It also expects positive outcomes from the ongoing contract discussions in the FLNG business within the next six months.

    GoFLNG conversion

    GoFLNG Hilli conversion progress remains on schedule as during the quarter the vessel re-entered Keppel drydock and prefabricated sponsons are in the process of being attached to the hull which will continue for the remainder of this year.

    Pre-fabrication of the process topside modules and pipe racks has now commenced with most major equipment items for the conversion now delivered to the shipyard.

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    Snam to snap up Statoil's TAP stake

    Italian player in exclusivity agreement over Norwegian company's 20% share in gas pipeline project

    Snam revealed Tuesday it had agreed a purchase price with Statoil of €130 million and will also enter in the term credit facility agreement currently granted by the Norwegian company to TAP for a nominal amount of €78 million.

    “TAP is crucial to the diversification of gas sources in Europe through the development of the Southern Corridor from the Republic of Azerbaijan and potentially other producing countries,” Snam chief executive Carlo Malacarne said.

    “Snam’s entry in the project will reinforce its primary role and that of Italy’s infrastructure in boosting competition among supply sources and strengthening security of supply for the European gas system.”

    The 882 kilometre pipeline will deliver gas from the Shah Deniz field in Azerbaijan to Europe and will have an initial capacity of 10 billion cubic metres per annum.

    Upstream reported earlier this year Statoil was looking to offload its stake in TAP after selling its shares in Shah Deniz as well as the South Caucasus Pipeline.

    In a separate statement on Tuesday, Statoil said it expected to wrap up the sale of its TAP stake by the end of the year.

    “We are pleased to announce this agreement with Snam which will realise value from our stake in TAP, of which we have been a part-owner since 2008,” Statoil's executive vice president for marketing, midstream and processing, Jens Okland, said.

    “This divestment increases our financial flexibility and is in line with our strategy of portfolio optimisation and capital prioritisation.”

    The deal is still conditional on the remaining TAP partners, which includes BP, Socar, Fluxys, Enagas and Axpo, not exercising their pre-emptive rights over Statoil's stake in the gas pipeline project.

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    North Dakota rig count flirts with historic low

    North Dakota rig activity indicates the No. 2 oil producer in the nation is still flirting with an all-time low in the exploration and production sector.

    State data show 64 rigs in the active process of exploring for or producing natural reserves in shale-rich North Dakota. That's down one from last week and one above the historic low of 63, set in November 2009. Rig counts for November are down about 8.5 percent.

    Lower crude oil prices, off about 9.5 percent for the month, are forcing energy companies to spend less on exploration and production. Last week, oil field services company Baker Hughes reported a total U.S. rig loss of 13, or 1.7 percent, from the week ending Nov. 20. Year-on-year, total U.S. rig counts are down 61 percent and off 65 percent for North Dakota.

    North Dakota's rig loss is comparable to Texas, the No. 1 oil producer in the nation, which recorded a 65 percent drop in activity year-on-year.

    More than 90 percent of new oil production in North Dakota comes from the Bakken shale reserve. Of all shale basins contributing to new growth in the United States, only the Permian shale basin in Texas is expected to report an increase for December, according to the U.S. Energy Information Administration. Bakken production next month is expected to decline by 27,000 barrels per day.

    Oil production in North Dakota in September, the last full month for which data are available, was 1.16 million bpd, down about 2 percent from the previous month.

    The North Dakota Industrial Commission said in its latest monthly report that operators are running fewer rigs, though they're more efficient than in the past. Rig counts may drop further, however, as the weakened oil economy persists.
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    Alternative Energy

    India’s solar power cos’ funding struggle slows transition to green tech

    Business Line reported that Indian solar power developers are struggling to find cheap sources of finance, slowing the process of switching to greener technologies.

    Mr Vinay Rustagi, Managing Director at consultancy firm Bridge To India, said that “There are very limited options for raising debt financing from abroad (for solar power developers in India). Typical sources include multi or bilateral agencies such as IFC, ADB, US Exim, KFW, OPIC and others. But all these agencies have long and costly credit assessment processes and that’s why such financing is usually viable only for large projects of over 100 MW.”

    Mr Rustagi said that typically, while foreign money has been coming into the solar power sector from the US and Western Europe, recently Japan and China have also showed interest.

    Most India-based solar power developers get financing at 11 per cent while those with access to foreign funds get it at much cheaper rate of 7-8 per cent; sometimes even lower.

    As a result, India is insisting that climate funding be an integral part of any agreement as part of the 2015 Paris Climate Conference so that companies have access to cheaper finance.

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    Dow sells portfolio of herbicides amid consolidation drive

    Dow Chemical Co has struck a deal to sell a part of its global herbicide business, as low crop prices continue to drive talk of consolidation in the agriculture industry.

    Dow on Monday said it agreed to sell a portfolio of weed killers known as dinitroanilines to privately held Gowan Company. The deal comes a month after Dow said it was reviewing all options for its farm chemicals and seeds unit, which has reported falling sales for nearly a year.

    The companies did not disclose terms of the deal. It is expected to close by the end of the year, they said.

    The farm sector is struggling to cope with falling crop prices and diminished demand for crop protection products, which have hurt sales in the agricultural businesses at companies including Dow, Monsanto Co and EI du Pont de Nemours & Co.

    Dow's sale includes global product registrations and trademarks for herbicides including Treflan, which can be sprayed on field corn, cotton and some fruit and vegetables, according to a statement. A formulation and packaging facility in Alberta, Canada, is also part of the deal.

    Dinitroanilines, or DNA herbicides, have been a part of weed management programs for more than 50 years, according to Dow. The company will "invest in innovative and differentiated products," Ramiro De La Cruz, vice president of crop protection for Dow AgroSciences, said in the statement.

    A company spokeswoman did not immediately answer questions seeking more information.

    "We are grateful for the opportunity to defend and evolve the DNAs for niches that have long been our sweet spot, such as vegetables and turf," said Juli Jessen, chief executive of Gowan Group.

    Dow rival Monsanto has said it is studying every possibility for consolidation in the seed and agrochemical sectors.

    Monsanto, the world's largest seed company, abandoned a $45 billion bid for Syngenta AG in August and since then, nearly all of the major players in the farm chemicals and seeds business have been the subject of consolidation talk.

    Read more at Reuters
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    Precious Metals

    Gold Rout Oversold?

    Image title

    One week ago, gold market observers were surprised when in the span of four days, gold held in the JPM Comex vault declined by nearly 50%, starting on November 16 when the 668,498 ounces held in the vault below 1 Chase Manhattan Plaza declined precipitously to just 347,899 ounces, a new all time low.

    Furthermore, as of the latest Comex activity update, on Friday the Registered gold held by JPM dropped another 2,802 ounces to a record low and virtually negligible 7,975 ounces, essentially equivalent to zero as shown in the chart below, even as JPM's eligible gold has also been seeing a substantial decline in recent months.


    But while the decline of JPM gold has long been noted, it was the latest drop in total Comex registered gold which has again raised eyebrows, and which contrary to expectations it would be replenished either from external inflows or by conversion from Eligible both of which have not happened, has instead continued to decline. According to the latest data, total Registered gold dropped by another 11% overnight to just 134,877 ounces, just over 4 tonnes and another all time low...

    . and since the gold open interest remains largely unchanged, the physical gold coverage ratio, or the ratio of gold claims to Registered gold, has just hit an all time high of 294 ounces of paper for every ounces of physical.
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    India to discuss changes to gold monetisation scheme after muted response

    India is set to discuss changes to a scheme to unlock the country's massive stash of gold at a high-level meeting on Tuesday, after a muted response to the programme in the first month of its launch, according to banking sources.

    Prime Minister Narendra Modi launched the scheme on Nov. 5 to lure an estimated 20,000 tonnes of gold hoarded in households and temples into the banking system. But only 400 grams trickled in over the first two weeks as low returns and worries over income tax kept Indians away.

    Last week, the government announced several steps to make the scheme more attractive for consumers, including measures such as eliminating capital gains and income taxes on the interest earned. The meeting on Tuesday is expected to focus on incentives for banks.

    Officials from the finance ministry, the central bank, and banks that will play host to the gold deposit scheme will attend the meeting in Mumbai, said the sources, did not want to identified as they were not authorised to speak to media.

    "They would like to see if we (banks) require incentives to make it work," said a banking source, who will be attending the meeting. "Senior (government) officials are getting involved a bit more now to make it work. They are open to feedback."

    Support from banks is crucial for the success of the gold monetisation scheme. Similar programmes in the past have failed as they were not profitable for the banks.

    Under the current scheme, Indians are encouraged to deposit jewellery, bars or coins with banks so it can be refined to meet fresh demand and cut the need for imports. The consumer would earn an interest and, at the end of the deposit term, get the gold back in the form of bars.

    But public response has been lacklustre. Indians' penchant for bullion spans centuries and they would not part with their gold, which is seen as providing financial security, unless they are offered incentives such as higher interest rates.

    Banks, however, say they cannot offer attractive rates.

    "For a deposit accepted at a higher rate, you should always have a borrower who is willing to pay you an even higher rate," said a second banking source. "If we disturb the equilibrium, somebody has to be willing to pay higher."

    Bankers are hoping the government can compensate them for the loss from higher rates - a topic likely to be discussed on Tuesday, the sources said.

    "There can be recommendations (from the government) on this. I won't be very surprised," said the first source.

    Meanwhile, India's sovereign gold bond programme, which was launched along with the deposit scheme and meant to reduce investment demand for the physical metal, has seen an "overwhelming" response, according to the government.

    About 63,000 applications were received as of Friday for a total of 917 kg of gold.

    Read more at Reuters

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    Steel, Iron Ore and Coal

    Shenhua said it was forced to lower prices, not a market disturber

    Shenhua Group, China’s top coal miner, said on November 26 that its price cuts this year were forced by the market, and it has been working to reduce output and stabilize the price.

    The statement, published on its official Wechat account, was a response to recent claims by some established coal firms that Shenhua’s successive price cuts have left them into great trouble.

    "Our price downward policy has always lagged behind market changes and stayed higher than market levels, leading to shrinking profits," Shenhua said.

    Since the start of this year, Shenhua has adjusted its pricing by month for 11 months, with three times of stabilization in July, October and November, six times of decline and two times of rise in June and September.

    Take the 5,500 Kcal/kg NAR coal as example, Shenhua lowered its price to 390 yuan/t in November, down 139 yuan/t from 529 yuan/t at the beginning of 2015, with the declining extent smaller than 154 yuan/t for the Fenwei CCI 5500 Index for domestic 5,500 Kcal/kg NAR coal traded at Qinhuangdao port, which was assessed at 352 yuan/t with VAT on November 30, FOB basis, down from 506 yuan/t at the start of the year.

    During the peak time of the coal industry over 2002-2011, coal firms in Shandong, Anhui, Hebei, Henan, Liaoning, Heilongjiang, Jiangsu and Shanxi marched into main production areas in Inner Mongolia, Shaanxi, Ningxia and Xinjiang to explore coal, with their combined added capacity in Inner Mongolia during that period exceeding 200 million tonnes per annum.

    Large power firms also expanded investment in coal projects in those years to raise their self-sufficiency rates.

    Shenhua seemed more far-sighted, putting more efforts into diversifying its business in power and transport businesses when profit of coal mining was sizable. And thanks to its large scale and high modernization, Shenhua’s coal production cost was far lower than its peers.

    So, even in today’s sliding coal market, Shenhua is still lucky to earn profit on low costs and good performance in other business segments like power.

    Shenhua has been responding to government’s call to cut coal production, with its listed arm -- China Shenhua Energy – posting a 9.2% year-on-year drop in total commercial coal output to 233.8 million tonnes over January-October.

    But it was still far from easing oversupply in the country. From January to October, China’s coal consumption amounted to 3.23 billion tonnes, equating to 3.9 million tonens for the whole year. By contrast, China’s coal capacity may have surpassed 5 billion tonnes per year so far.

    Actually, both established miners including Heilongjiang Longmay Jixi Mining, Huaibei Mining, etc., and Shenhua, as well as large comprehensive power firms should be blamed for the deterioration of the Chinese coal market.

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    Indian utilities’ thermal coal imports down 7.5pct on yr in Apr-Oct

    Indian power utilities’ imports of thermal coal over April-October fell to 47.6 million tonnes, down 7.5% from the same period a year ago, according to the latest data from the Central Electricity Authority (CEA).

    Of the total, 22.4 million tonnes coal was imported by 34 utilities for blending with domestic coal while 25.2 million tonnes was imported by eight utilities for power plants using only imported coal.

    Seven utilities did not import any coal during the first seven months of the current April-March fiscal year.

    Private sector power producer Adani Power imported the most thermal coal shipments during the period at around 10 million tonnes, followed by state-run power generator NTPC Limited at 7 million tonnes and Tata’s Mundra ultra mega power project at around 6 million tonnes.

    On a monthly basis, India’s October thermal imports were 6.3 million tonnes, down 21% from the corresponding month a year ago.

    Utilities are expected to import 84 million tonnes during the current fiscal year ending March 2016. Of the total, 42 million tonnes will be imported for blending with domestic coal and an equal amount for those plants which use only imported coal.
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    Iron Ore swaps plunge leaves 2016 FOB Brazil near $20 dmt

    Falling iron ore swaps prices Monday after a recent run of daily falls has left benchmark FOB Brazil prices potentially hedge-able into the low $20s/dry mt for loading in 2016, according to Platts analysis.

    The Calendar-2016 swap based on the IODEX 62% Fe fines assessment was assessed by Platts at $36.45/dmt CFR China on Monday, the lowest ever price so far for the contract.

    Bid-to-offer levels for Cal-16 on the more liquid TSI 62% Fe fines CFR China contract was at $36.25-$37.00/dmt around 5:30 pm Singapore time, with TSI assessing the contract at $38.25/dmt as of 6:30 pm Singapore.

    As industry formulas in long-term multi-year contracts between miners and steel mills use fixed freight rates and bunker fuel oil adjustments to netback CFR China iron ore references to an FOB Brazil basis, the slide in iron ore swaps has made new lows in FOB prices visible.

    This type of netback formula is similarly extended and adapted for loading points around the Atlantic.

    Some contracts are now said to be referencing a fixed freight factor of around $17/mt, with 380 CST bunker fuel oil prices in Singapore used for further adjustments.

    For 2016, an iron ore FOB Brazil price below $25/dmt is now hedgeable, according to market swaps values, with Singapore 380 CST bunker swaps for first quarter 2016 at $218.25/mt Monday, indicating a new low for the quoted period.

    Even in the low $20s/dmt, there may be margin left as Vale brings on further new capacity in its Carajas system later next year. The weak Brazilian real and cost improvements took Vale's average iron ore FOB costs down to $12.70/mt in the third quarter.

    In the freight market, reference Brazil, Tubarao-China, Qingdao Capesize rates were assessed Monday at $9.40/mt, recovering after breaching below $8/mt around November 20.

    For contract iron ore buyers exposed to the main China CFR fines indexes in purchases of varying fines, concentrates, pellets and lump ores, the gap between netting back on industry freight formulas, or using spot freight rates, may leave the former longer-term accords preferential.

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    Vale CEO Ferreira quits as chairman of Brazil's Petrobras

    Murilo Ferreira quit as chairman of Brazil's Petroleo Brasileiro SA, the state-controlled oil company said on Monday, without disclosing the reason for his decision.

    Ferreira had been on a leave of absence since Sept. 14, and Nelson Carvalho replaced him on an interim basis. In a securities filing, the company known as Petrobras said Carvalho would stay in that position until the board convened to elect a new chairman.

    Ferreira, who has been chief executive officer of Brazilian iron ore miner Vale SA since 2011, became Petrobras chairman of Petrobras in April, as the company was sinking deeper into its the worst crisis in history.

    Prosecutors have accused Brazil's leading engineering firms of colluding to fix prices on contracts with Petrobras and other state companies and kicking back bribes to members of the ruling coalition, in what is considered as the country's worst corruption scandal ever.
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