Mark Latham Commodity Equity Intelligence Service

Wednesday 11th January 2017
Background Stories on

News and Views:

Attached Files


    China's supply-side structural reform delivers initial results, NDRC

    China's supply-side structural reform has delivered initial results and started to provide new impetus for economic growth, the country's top economic planner said on January 10.

    "China has met 2016 target of reducing 45 million tonnes of steel and 250 million tonnes of coal production capacity ahead of schedule," Xu Shaoshi, head with the National Development and Reform Commission (NDRC) told a press conference.

    He said that steel firms under the China Iron and Steel Industry Association had posted a profit of 33.1 billion yuan ($4.76 billion) in the first eleven months of 2016, compared with a loss of 52.9 billion yuan in the same period of 2015.

    The reform, proposed by Chinese policy makers at the end of 2015 to resolve structural imbalances in the economy, has focused on five tasks: cutting industrial capacity, reducing the housing inventory, cutting leverage, lowering corporate costs and improving weak economic links.

    Xu said that the government's efforts in these areas had paid off and provided precious experiences for solving deeply-rooted problems in the nation's economy, and that China would embrace a new stage of economic growth.

    He said that last year was only a start, and that China was facing a tougher battle in 2017, adding that this year the government would set a higher goal for reducing overcapacity and was determined to shut down "zombie enterprises."

    Besides steel and coal industries, he said the Chinese government would target other sectors with low production capacity utilization rates or serious overcapacity issues.

    Xu said that despite economic downward pressure and external uncertainties, the Chinese economy has not lost its growth momentum.

    He said economic growth in 2016 is expected to be 6.7%.

    Plans for cutting overcapacity this year are expected to be released this month before the Spring Festival holidays, according to Xu.
    Back to Top

    China vows to contain corporate debt levels as inflation heats up

    China vowed on Tuesday to contain high company debt levels and further cut excess coal and steel capacity, as Beijing attempts to maintain solid and more balanced economic growth while avoiding destabilizing asset bubbles.

    The world's second-largest economy likely grew around 6.7 percent last year -- roughly in the middle of the government's target range -- but it faces increasing uncertainties in 2017, the head of the country's state planning agency told a news briefing.

    Global investors are buzzing over whether China's leaders will be willing to accept more modest growth this year, amid worries about the risks from years of debt-fueled stimulus driven by the political obsession with meeting official targets.

    China's credit growth has been "very fast" by global standards, and without a comprehensive strategy to tackle the debt overhang there is a growing risk it will have a banking crisis or sharply slower growth or both, the International Monetary Fund said in October.

    "Although the domestic economy is stable and improving, it still faces contradictions and problems," said Xu Shaoshi, the top official at the National Development and Reform Commission NDRC).

    "We have the confidence, conditions and ability to ensure the economy operates within a reasonable range."

    Xu said China will not allow debt of non-financial firms to rise beyond current levels, and will step up efforts to encourage companies to restructure their debts. China's corporate debt has soared to 169 percent of gross domestic product (GDP).

    China's leaders are likely to accept growth this year of around 6.5 percent, policy insiders say.

    In theory, that would give the government more room to focus on tackling the nation's debt pile, and on tamping down speculation that was seen last year in the housing, commodities and debt markets.

    But an official tap on the brakes that is too vigorous would threaten to stall economic momentum.


    After a rough start to 2016, China's economy performed better than many economists had expected, with higher government infrastructure spending, a housing rally and record lending by state banks fuelling a construction boom.

    Producer prices, in particular, saw a stunning turnaround, emerging in September from nearly five years of deflation and helping to boost reflationary pressures worldwide.

    That helped put the long ailing manufacturing sector on steadier footing, boosting profits and giving factories more cash flow to whittle down a mountain of debt.

    Data on Tuesday showed producer prices continued to rise as 2016 drew to a close, with producer inflation surging 5.5 percent in December year-on-year, the fastest in more than five years, as the prices of coal and building materials soared.

    Along with a rebound in demand, state-mandated cuts in industrial capacity have helped fuel the spike in prices.

    But some analysts worry the strong gains may also be driven by growing speculation in commodities futures markets, adding to the broader risk of bubbles in China's economy even as leaders attempt to control explosive debt growth.

    "I don't think there's an inflation issue in China, it's an asset bubble," said Commerzbank senior emerging market economist Zhou Hao in Singapore.

    While the NDRC's Xu said on Tuesday that China will put more pressure on coal and steel firms to reduce overcapacity this year, analysts at ANZ predict higher prices and fatter profits may thwart those efforts.

    "Producers are tempted to fire their engines again in the face of rising prices. The government will not fully welcome the rapid recovery of the PPI," said ANZ economists David Qu and Raymond Yeung in a note.


    For the first time in nearly five years, economists at HSBC have raised their forecast for global growth and inflation, encouraging by robust manufacturing activity, a resilient China and above all the fiscal boost expected to come in the United States under incoming President Donald Trump.

    Hopes of stronger spending under Trump are sparking expectations of stronger U.S. economic growth and inflation, with more interest rate hikes seen from the Federal Reserve.

    A sharp jump in borrowing costs would heighten the risk of loan defaults, though China's producer price recovery has not yet started filtering into consumer prices, suggesting its central bank will not be under pressure to tighten monetary policy as soon, analysts say.

    "A sharp increase in inflation at the start of 2017 may fuel speculation that rising price pressures will soon force the People’s Bank into more aggressive policy tightening. But

    we think the pick-up will mainly be driven by movements in commodity prices and is unlikely to be sustained," economists at Capital Economics said in a research note.

    Commerzbank's Zhou said that a bubble in commodities, led by coal and steel prices, could complicate policy decisions if economic growth slows and some easing of monetary conditions is needed.

    But policy insiders already expect a tilt towards more conservative monetary policy this year as top leaders struggle to strike a balance between supporting the economy with ample credit and slowly trying to defuse the risks posed by the rapid debt build-up.

    The NDRC's Xu said on Tuesday China will further push forward its debt-to-equity swap program this year as it looks to cut the debt burden on companies.

    The PBOC has reaffirmed it would keep liquidity in the financial system stable while taking steps to prevent asset bubbles and financial risks in its annual work meeting for 2017.

    Attached Files
    Back to Top


    Extremely cold weather has not only gripped much of the US during the past couple of days, but severe cold has hit Europe as well with widespread consequences including power and water outages, cut off villages, frozen rivers and lakes, and, unfortunately, numerous deaths.  

    Temperature anomalies across Europe last 7 days; map courtesy Weather Bell Analytics

    Here is a sampling of the highlights from Europe in just the past few days:

    -the mercury dropped to -22°F in Moscow and -11°F in St. Petersburg.  In fact, the Russians celebrated the coldest Orthodox Christmas (January 7th) in 120 years [coldest Orthodox Christmas was more than 130 years ago in 1881 when it reached -31°F].

    -parts of southern Italy received more than 3 feet of snow and in Rome the fountains at St. Peter’s Square froze.  There was heavy snowfall in central and southeast Italy with numerous airports closed including one as far south as Sicily.

    -in Greece, Athens dropped to 32°F while several Greek Islands including Lesbos experienced heavy snowfall.  Thessaloniki, Greece fell to 19°F and temperatures plunged to near freezing on the island of Crete well south of the mainland.
    -in Sarajevo, Bosnia, temperatures dipped to -16°F, and in the Swiss village of La Brevine, temperatures fell to -22°F.

    - in the mountains of southern Poland, temperatures dropped to -22°F  and the death toll from the cold has risen to 55 since November 1st.

    -in Turkey, a heavy snowstorm paralyzed Istanbul where 25 inches accumulated

    -in Romania, a dozen major roads remained closed due to heavy snow and some ferry services between Romania and Bulgaria (across the Danube) were canceled.  In fact, the Danube River was slowly freezing in Budapest, a rare sight in recent years.

    - in the Czech mountains, several weather stations reported temperatures below -20°F including -30°F in the south-western Sumava mountains.

    -in Hungary, record lows were broken on Sunday both nationally and in Budapest registering -19°F and -1°F, respectively.

    Sharp drop in Northern Hemisphere temperatures last few days (far right of plot); map courtesy Weather Bell Analytics at (Dr. Ryan Maue)

    The combination of the bitter cold in Europe and much of the US has dropped northern hemisphere temperatures sharply (>1°C) in just the past few days relative to the climatological averages (1981-2010).

    Extreme cold and snow pound the northern hemisphere as some scientists warn of the potential for ice age conditions.

    Attached Files
    Back to Top

    U.S. Small-Business Optimism Index Surges by Most Since 1980

    Optimism among America’s small businesses soared in December by the most since 1980 as expectations about the economy’s prospects improved dramatically in the aftermath of the presidential election.

    The National Federation of Independent Business’s index jumped 7.4 points last month to 105.8, the highest since the end of 2004, from 98.4. While seven of the 10 components increased in December, 73 percent of the monthly advance was due to more upbeat views about the outlook for sales and the economy, the Washington-based group said.

    Image title

    Attached Files
    Back to Top

    BHP Billiton says chairman, CEO hold productive talks with Trump

    A sign adorns the building where mining company BHP Billiton has their office in Perth, Western Australia, November 19, 2015. REUTERS/David Gray/File photo

    BHP Billiton, the world's biggest miner, said its chairman and chief executive held positive talks with U.S. President-elect Donald Trump on Tuesday, 10 days ahead of him taking office.

    "BHP Billiton Chairman Jac Nasser and Chief Executive Andrew Mackenzie had a productive meeting with President-Elect Trump and Vice President-Elect Pence today in New York City," the company said in an emailed statement.

    "They discussed a wide range of subject areas, including the global resources sector, and BHP Billiton's investment in the U.S.," BHP said.

    BHP's U.S. investments include billions of dollars in onshore shale oil and gas production and deepwater oil stakes in the Gulf of Mexico, as well as an undeveloped copper project in Arizona that it co-owns with Rio Tinto.

    Trump has promised to initiate big infrastructure renewal programs in the United States that would draw heavily on industrial raw materials, such as those supplied by BHP.
    Back to Top

    World Bank lowers 2017 global economic growth outlook to 2.7pct

    The World Bank forecasts the global economy will accelerate slightly in 2017 after turning in the worst performance last year since the 2008 financial crisis.

    The 189-nation lending agency said on January 10 that the global growth should expand at a 2.7% annual rate this year. That is down from the bank's June forecast for 2.8% growth this year, but it's better than last year's 2.3% growth.

    The global economy faced a number of headwinds last year, from economic troubles in China to bouts of financial market turmoil.

    "We are encouraged to see stronger economic prospects on the horizon," said Jim Yong Kim, president of the World Bank.

    The World Bank's Global Economic Prospects report projects 2.2% growth in the United States, up from an estimated 1.6% in 2016.

    The U.S. forecast for 2016 is lower than the June projection of 1.9% growth, while the outlook for this year is unchanged.

    In the years since the 2008 financial crisis, the World Bank and the International Monetary Fund have both repeatedly proved too optimistic in their forecasts.

    Attached Files
    Back to Top

    Oil and Gas

    Iraq oil exports

    Iraq plans record crude #oil exports of 3.64 mln bpd from southern Basra port in February - sources


    Iraq plans record Feb Basra oil exports despite OPEC cut in force

    Iraq plans to raise crude exports from its southern port of Basra to an all-time high in February, keeping exports high even as OPEC production cuts take effect this month.

    The country's State Oil Marketing Company (SOMO) plans to export 3.641 million barrels per day (bpd) of crude in February, according to trade sources and preliminary loading schedules obtained by Thomson Reuters on Tuesday, potentially beating a record of 3.51 million bpd set in December.

    The February volume includes 2.748 million bpd of Basra Light and 893,000 bpd of Basra Heavy, the documents showed.

    For January, SOMO had planned to export 2.627 million bpd of Basra Light and 903,000 bpd of Basra Heavy.

    Basra crude accounts for the bulk of oil exports from Iraq, the second-largest producer in the Organization of the Petroleum Exporting Countries (OPEC). SOMO could not be immediately reached for comment.

    Iraq agreed to cut output by 210,000 bpd in the first half of 2017 as part of the OPEC deal despite Baghdad's initial resistance to join the production cuts as it needed oil revenues to fund a war against Islamic State militants.

    OPEC and some non-OPEC producers agreed late last year to tackle global oversupply and support prices by reducing output.

    Iraq's oil ministry said on Tuesday it has cut oil production by 160,000 bpd since the beginning of January in line with the OPEC decision.
    Back to Top

    Non-OPEC Delivers More Than a Quarter of Promised Cuts so Far

    Russia and Kazakhstan said they’ve met or exceeded their initial goals for trimming oil output, bringing cuts by non-OPEC nations in the first 10 days of this year to more than a quarter of the total pledged a month ago in Vienna.

    Russia’s oil production has shrunk by around 130,000 barrels a day in the first week of January from a post-Soviet record of 11.25 million barrels a day in October, an official at the energy ministry’s CDU-TEK unit said Monday, asking not to be identified because of internal policy. The cuts from the world’s biggest energy producer go beyond its initial goal for a cut of at least 50,000 barrels a day this month.

    “The Russian side is fulfilling all articles of the agreement and all the obligations it took,” Kremlin spokesman Dmitry Peskov told reporters on a conference call Tuesday.

    Russia and 10 other non-OPEC nations joined forces with the Organization of Petroleum Exporting Countries on Dec. 10 to end a global glut that’s crashed oil prices and shaken energy-rich economies. The pact -- the first between the two sides in 15 years -- involves a reduction of 558,000 barrels a day from non-OPEC countries starting in January.

    Kazakhstan’s energy ministry said it has met its Vienna commitment of curbing production by 20,000 barrels a day in January. That reduction came after October’s start-up of the country’s $50 billion Kashagan oil field, which is set to increase production from 140,000 barrels a day in the first half of this year to 180,000 barrels in the second half, Energy Minister Kanat Bozumbayev said last month.

    The combined 150,000 barrels a day cut represents 27 percent of the promised reduction by non-OPEC countries.

    “If the cuts get confirmed, this is definitely positive, as compliance improves,” Giovanni Staunovo, an analyst at UBS Group AG said by e-mail. “We should soon see inventory draws materializing.”

    Here are the other reduction announcements that have come out in the past month:

    - Oman: the non-OPEC Gulf country said on Jan. 3 its output was being cut by 45,000 barrels a day to 970,000 this month.
    - Azerbaijan said on Tuesday that it plans to cut output by 35,000 barrels a day as early as this month to comply with the Vienna deal.
    - Malaysian state oil co. will make “necessary adjustment” to the country’s crude output level in line with agreement reached between OPEC and non-OPEC producers, Petronas said last month.
    - South Sudan is in the process of resuming crude production in Unity State, which will boost the country’s output by at least 50,000 barrels a day within two months, Argus Media reported, citing a senior oil ministry official. The nation pledged in Vienna to cut output by 8,000 barrels a day.
    Among OPEC countries, Iraq said it reduced volumes by 160,000 barrels a day. That’s more than three-quarters of its targeted cuts of 210,000 barrels a day. The announcements come after the country’s southern oil exports reached a record last month. “We should wait and see if Iraq’s announced cuts translate in lower exports. So far, they haven’t been visible,” UBS’s Staunovo said, adding that Iraq has limited storage capacity.

    Saudi Arabia, the United Arab Emirates, Qatar as well as Kuwait are complying with their promised cuts, Nawal Al-Fezaia, Kuwait’s OPEC governor, said on Monday.
    Angola, Algeria also ordered oil companies to slash output in order to respect their pledges.

    Venezuela said on Dec. 27 it would implement its pledge to cut output by 95,000 barrels a day starting Jan. 1.

    A similar promise came from Gabon on Dec. 16, pledging a 9,000 barrels-a-day cut.
    Under the agreement, Iran is allowed to increase its output by 90,000 barrels a day as it seeks to regain pre-sanctions’ levels. Libya and Nigeria are exempt from cuts as they aim to recover lost output due to internal violence and sabotage.
    Back to Top

    Big Oil Hits Sweet Spot as New Projects Reap Rewards of Recovery

    Big Oil is poised to reap rewards this year as investments made before the crude-price slump pay off just as the recovery starts.

    Seven of the world’s largest energy companies will together boost oil and natural gas output by 398,000 barrels a day, the most since since 2010, according to data from Oslo-based consultant Rystad Energy AS. In 2018, output will rise even faster.

    The oil majors aren’t increasing their drilling budgets. Instead they’re benefiting from money invested before the rout. Lower costs combined with higher output would allow companies including Exxon Mobil Corp. and Royal Dutch Shell Plc to maximize their gains from improved oil prices. Should crude remain above $50 a barrel, 2017 could be a break-out year, eliminating the need to borrow to pay dividends, according to analysts at Sanford C. Bernstein.

    “They could hit a sweet spot this year,” said Mark Tabrett, a London-based analyst at Bernstein. “Heavy investments of previous years are paying off with more production, costs have been cut and the companies are in a position to take advantage of that when oil prices rise.”

    After reaching an intraday low of $27.10 a barrel on Jan. 20, Brent oil prices more than doubled to a high of $57.89 on Dec. 12. The global benchmark rose 52 percent last year, its biggest yearly gain since 2009. Shares in the majors, meanwhile, rose across the board, led by Shell, whose B shares gained 53 percent in London, the best annual increase since at least 1990.

    Brent averaged about $45 a barrel in 2016, and is expected to rise above $55 this year, according to the median of 45 analyst estimates compiled by Bloomberg. Yet the majors, still smarting from more than two years of depressed prices, have expressed a reluctance to increase spending.

    “For us this will be about not starting to run too fast,” Statoil Chief Executive Officer Eldar Saetre said at a conference in Oslo last week. “There won’t be a lot of new activity initiated when it comes to larger projects in 2017.”

    2020 PROBLEM

    Rystad estimates that the seven companies will boost output by about 670,000 barrels a day next year. Still, years of under-investment during the time when oil prices were low mean the production gains may be short lived.

    “Output should start declining eventually for the majors that slowed project-sanctioning,” said Rob West, an analyst at Redburn (Europe) Ltd, a London-based equity broker. “Field-by-field models suggest that’s a problem for 2020.”

    Much of the expected increase is coming from offshore oil and gas projects approved at the start of the decade, said Espen Erlingsen, vice-president for analysis at Rystad. They’re the kind of mammoth projects that are difficult to shut down once they get going.

    Included is Chevron Corp.’s Gorgon liquefied natural gas project in Australia, which partly resumed operations last week, and Kazakhstan’s Kashagan field, in which Eni SpA, Exxon, Shell, and Total SA all have stakes, which began producing last year. Eni expects oil and gas production to climb to a record in 2017 even as spending continues to fall.

    A plan by the Organization of Petroleum Exporting Countries and 11 other nations to curb their supply and boost prices won’t stand in the way of these companies’ growth plans, Redburn’s West said.

    While they all have production in OPEC countries, “the cuts are mostly concentrated outside of the majors’ portfolios, or cover assets that were declining anyway,” he said.

    “The majors are now starting to harvest from the investments they did at the beginning of this decade,” Erlingsen said. “Production is expected to grow, while investments are falling.”

    Attached Files
    Back to Top

    Oil Discoveries Seen Recovering After Crashing to 65-Year Low

    The amount of oil discovered last year was the lowest since the 1950s as explorers slashed spending amid the worst downturn in a generation, according to Wood Mackenzie. The good news: It can probably only get better from here.

    Oil companies found only 3.7 billion barrels of so-called conventional crude in 2016, 14 percent less than the previous year and the lowest amount since 1952, according to updated figures from the Edinburgh-based consultant. The results for both 2016 and 2015 are better than forecast a few months ago, but still put discovered oil volumes at little more than a tenth of the yearly average since 1950.

    Spending on exploration has been gutted since oil prices started falling in 2014 and may drop further this year, said Andrew Latham, Wood Mackenzie’s vice president for global exploration. However, by making operations more efficient, focusing on easier targets and paying lower fees to contractors oil companies are getting more for their money. Coupled with renewed industry optimism sparked by an OPEC-led deal to curb output and boost prices, that could mean exploration results won’t get any worse, he said.

    “We’ll probably see 2016 as the turning point, the low point,” Latham said. “There will be a lag of at least a year, but we do think that investment will start to grow again and volumes will come back.”

    Oil companies reduced spending on exploration to about $40 billion last year from $100 billion in 2014, and could invest as little as $35 billion this year, Latham predicted. Lower budgets meant fewer wells drilled: 431 in 2016, or about a third of the activity two years earlier. This year, cost savings mean more wells could be drilled for less money.

    Explorers are now passing on the most difficult wells in very deep reservoirs or in harsh environments such as the Arctic. They’ve also lowered the drilling duration of a typical offshore well to 55 days from 75 days, Latham said. Among the 40 leading exploration companies Wood Mackenzie tracks, net spending per well could fall to $40 million from $86 million in 2014, he said.

    Total expenditure on exploration could rise to $40 billion to $45 billion in 2018 and further in 2019 if the oil price recovery endures, Latham said.

    Even as more exploration yields additional discoveries in the years ahead, the recent dismal results will have an effect on global oil supplies in five to 10 years, Latham said. If exploration remained at current levels, the world could see a supply shortfall of 4.5 million barrels a day by 2035, Wood Mackenzie estimates.

    Attached Files
    Back to Top

    Frost to the rescue: cold helps Russia comply with OPEC deal

    It has defeated armies trying to invade Russia in the past, and now the fabled Russian winter has come to Moscow's rescue again, this time helping it comply with a deal among world oil exporters on cutting output.

    Russia, which has in the past been accused of dragging its feet in implementing oil production and exports deals, reduced production by 100,000 barrels a day in the first few days of January, industry sources told Reuters. That is a third of the way towards the total cut Russia promised to deliver by mid-2017.

    That reduction, or at least part of it, is the result not so much of Russian zeal to honor the agreement as it is to unusually cold temperatures in Siberia that have forced work at oil rigs to grind to a shivering halt.

    Late last month and in early January, temperatures fell as low as minus 60 Celsius (minus 76 Fahrenheit) across Siberia, rendering metal brittle, causing power supply disruptions, halting cars' engines and making it impossible for people to work outside in the open air.

    "Usually, all the working activity is stopped when it is minus 48 (Celsius). Otherwise, you have to face the consequences," an oilman who makes regular work trips to Western Siberia said by phone, requesting anonymity as he was not authorized to talk to the media.

    "Once, a crane in Noyabrsk (Western Siberia) just tumbled down. Metal doesn't bend when it is minus 60, it just crumbles," the oilman said in Moscow on Tuesday.

    Harsh Russian winters played a decisive role in defeating the invading armies of French ruler Napoleon Bonaparte and Nazi dictator Adolf Hitler. 

    The Western Siberian region - which occupies a vast territory between the Urals mountains and the Yenisei river, the geographical center of Russia - accounts for around two thirds of Russia's total oil production.

    The winter climate there is always harsh, but it is unusual for temperatures to fall as low as they are now.

    Another oilman, from the Siberian region of Khanty-Mansiisk, said when cold snaps hit, he had to keep his vehicle's engine running round the clock, because if it was switched off it was unlikely to start again.


    Locals say the cold weather has also prevented maintenance and repair work at oil fields and the drilling of new wells.

    "We planned to launch a new well, but the cold of minus 50 struck and there were problems with power supplies. We had to postpone it," said a third Russian oilman, who also did not want to be identified.

    Russia registered one of the sharpest drops in its oil output in the winter of 2005/2006, when Siberia experienced comparable low temperatures. In January 2006, Russian production declined by 180,000 barrels per day, at the time the biggest monthly drop in seven years.

    Under a deal finalised last year in Vienna, global oil exporters agreed to curb production in order to prop of weak world oil prices.

    Some oil companies in Russia, which had been producing at post-Soviet record levels, were reluctant to cut, but fell into line after the Kremlin said it supported a global deal.

    Under the deal, Russia committed to cut its oil output by 300,000 barrels per day (bpd) from the level of 11.247 million bpd reached in October last year.

    The reduction will come in stages, which Russia cutting output by 200,000 barrels per day by the end of the first quarter, and later by 300,000 bpd.

    Valery Nesterov, an analyst at Moscow-based Sberbank CIB, said it was too early to say if the cuts observed since the start of January were made in line with the OPEC deal, or if it was down to other factors.

    "Of course, the extreme cold affects production and drilling, which are typically lower in winter," he said.

    "There will be a more deliberate decline in the second quarter when Russia will have to catch up with its cuts pledges."

    Kremlin spokesman Dmitry Peskov said on Tuesday that Russia was fulfilling all its obligations under the global deal on output cuts, but referred questions about the reason for the drop in January to the Energy Ministry. A spokeswoman at the ministry declined to comment.

    Russian state weather forecaster Hydrometcentre said it expected temperatures in West Siberia's Khanty-Mansiisk region to stay below minus 30-35 Celsius through to Thursday and at around minus 20 Celsius into next week.
    Back to Top

    Rosneft inks deal to supply crude to Glencore, QIA-backed trader

    Rosneft said Tuesday it had signed a five-year deal to supply up to 55 million mt -- around 403 million barrels -- of oil to QHG Trading, a joint venture between Glencore and the Qatar Investment Authority.

    The deal comes shortly after Glencore and QIA jointly acquired a stake in Rosneft itself, with the purchase completed last week.

    The supply deal, which was signed Monday, envisages shipments for export of between 22.5 million mt and 55 million mt of oil, Rosneft said in a document posted on its website.

    Annual volumes included in the deal are between 4.5 million mt and 11 million mt. The deal is valid for five years starting January 1.

    "The financial size of the deal has not been set, as it depends on the market price for oil in the long term, the price of each shipment will be determined using a formula based on market prices for crude oil at the time of delivery," the document said.

    A Rosneft spokesman declined any further comment. Glencore did not provide immediate comment.

    The deal adds to existing cooperation between the three parties, after Glencore and QIA agreed in December to purchase a 19.5% stake in Rosneft from the Russian government for Eur10.2 billion ($10.8 billion). Last Tuesday Glencore said the transaction had closed.

    When the deal was announced in December, Glencore indicated it would have a significant impact on the volumes of Russian crude it trades. It said the deal included a five-year offtake agreement with Rosneft, representing a sizable additional 220,000 b/d for Glencore's marketing business.

    The Russian state retains control of Rosneft with 50% plus one share. BP is also a significant shareholder, with a 19.75% stake.
    Back to Top

    China LPG demand to continue rising, but at slower rate

    China's LPG demand is expected to continue growing in 2017, driven by strong petrochemical and industrial consumption, but at a slower rate because fewer propane dehydrogenation plants are scheduled to start up this year, analysts and market sources said.

    S&P Global Platts China Oil Analytics forecasts LPG demand growth in 2017 of around 10%, well below 2016's 24%.

    Demand in 2016 -- comprising domestic production and net imports -- was estimated by Platts Analytics at around 49 million mt, up 24% from around 39.55 million mt in 2015, according to calculations based on data from the General Administration of Customs and the National Bureau of Statistics.

    A source from Chinese importer Oriental Energy said they expected net LPG imports to rise by around 3 million mt year on year to nearly 18 million mt in 2017.

    Platts Analytics estimates China imported around 16 million mt and exported around 1.4 million mt of LPG in 2016, the equivalent of around 14.6 million mt of net imports, up by around 40% year on year.

    Growth in both 2016 demand and imports was higher than market expectations early in the year of slower demand growth than 2015's 20% and import growth of around 20%. Platts Analytics is forecasting net import growth of around 22% in 2017.

    Market sources attributed last year's strong growth to increasing demand from petrochemical plants -- including PDH plants -- industrial users, and residential users.


    "PDH plants are expected to run at their maximum rates in 2017, given profitable processing margins," said a source with one PDH plant in East China.

    China's six older PDH plants, with a total capacity of 4.74 million mt, are estimated to have run at around 75% of capacity in 2016, according to data from domestic energy information provider SCI.

    Their run rates are expected to increase by 10 percentage points to 85% in 2017 as the new Yantai Wanhua and Oriental Energy's PDH units reach one year of operations, a market source said.

    According to Platts calculations, this would translate into a year-on-year increase in propane and butane demand of over 470,000 mt to around 4.03 million mt.

    China's two new PDH plants, which came online in the fourth quarter of 2016, are expected to run at around 60% of capacity in the first year of operations, based on the historical performance of other PDH plants.

    The two units -- Hebei Haiwei's 500,000 mt/year unit and Oriental Energy's 660,000 mt/year Ningbo Fuji Petrochemical unit -- are expected to add another 830,000 mt of propane demand in 2017 to an estimated combined propane consumption of around 1.39 million mt/year at full capacity.

    As a result, the total LPG demand from China's PDH plants is estimated to increase by around 1.3 million mt in 2017, lower than estimated growth for 2016.


    Demand for propane and butane from other petrochemical plants and units, including mixed alkane dehydrogenation plants, alkylation units and isomerization units, is expected to rise this year, market sources said.

    Unlike PDH plants, these can use both domestic and imported LPG as feedstock, but many prefer the domestic butane-rich product because it is cheaper and easier to obtain, sources said.

    Demand from processing plants that use butane-rich LPG as feedstock is expected to grow further this year as new plants that started operations in late 2016 are due to be ramped up, while some are scheduled to come on stream in 2017, sources said.

    Qixiang Tengda, a mixed alkane dehydrogenation plant in eastern Shandong province, started operations in late 2016 and is expected to add nearly 300,000 mt of additional LPG demand in 2017 if the ramp-up process goes smoothly, a market source said.

    The PO-MTBE plant in eastern Jiangsu province, a joint venture between Huntsman and Sinopec, is scheduled to start operating in Q2, and is expected to consume around 200,000 mt of LPG in 2017, an SCI analyst said.

    There are also several new petrochemical plants scheduled to come online in 2017. LPG demand from the petrochemical sector is estimated to account for around 40% of total Chinese consumption, industry sources said.

    Around 45% of a refinery's LPG output normally goes into the facility's downstream units for further processing or burning and only 55% is supplied to the market, sources said.


    As a cleaner alternative to coal and fuel oil, LPG attracted more demand from the industrial sector in China in 2016 due to a tightening-up of environmental regulations, and this growth is expected to rise further in 2017, market sources said.

    Demand from the industrial sector is estimated to account for around 20% of LPG consumption.

    The incentive to switch from natural gas to LPG is expected to diminish in 2017, given higher crude oil prices, market sources said.

    On the other hand, LPG demand from households, which accounts for around 40% of total Chinese LPG consumption, is expected to maintain moderate growth in 2017, analysts and other sources said.
    Back to Top

    Australia raises 2016-17 LNG exports forecast to 52.4 mil mt, 2017-18 to hit 67.3 mil mt

    The Australian government has bumped up its forecast for LNG exports for fiscal 2016-2017 (July-June) to 52.4 million mt, and given an estimate for 2017-2018 of 67.3 million mt, the Department of Industry, Innovation and Science said Monday in its Resources and Energy Quarterly.

    In its previous quarterly report, the department had the forecast for fiscal 2016-2017 at 51.50 million mt.

    A rise to 67.3 million mt in fiscal 2017-2018 would be an 82.4% spike from the 36.9 million mt shipped in fiscal 2015-2016.

    "The four LNG projects currently under construction are expected to commence production by mid-2018, bringing Australia's LNG export capacity to around 87 million [mt]," the report said.

    "However, some uncertainty surrounds the timing of Shell's Prelude project in the Browse Basin, where start up could be complicated by the cyclone season -- which runs from November to April," the report added.

    Increased exports to Japan, South Korea and China are expected to drive the rise in Australia's export volumes.

    "Australian producers are expected to capture an increasing share of these countries' imports with the commencement of a number of long-term contracts over the outlook period [over 2017-2018]," the department said.


    Despite the expected rise in Australia's exports to Japan -- Japan's overall imports are forecast to fall by 2.1% per year to 80 million mt in 2018, the report said.

    "Subdued energy demand, a forecast decline in thermal coal prices, the expansion of renewable capacity, and the restart of nuclear capacity are all expected to weigh on [Japan's] LNG imports," it said.

    Platts Analytics is even more bearish than the Australian government on Japanese LNG demand, with its 2018 forecast standing at 72 million mt.

    A key uncertainty, the government report said, remains the timing and scale of nuclear restarts.

    South Korea's LNG imports are expected to remain subdued over the outlook period, with the fuel continuing to face competition from other energy sources as it expands both its nuclear and coal-fired power capacity, the department said in its report, but it did not give a forecast figure.

    Platts Analytics expects South Korea's LNG demand to be 33 million mt in 2017 and 32 million mt in 2018.

    The Australian government forecasts that China's LNG imports will rise by 34% year on year to 43 million mt in 2018.

    "China is aiming to raise the share of gas in its energy mix from 5% to 10% by 2020, with policy efforts directed at the electricity generation and transport sectors," it said.

    Platts Analytics, however, expects softer demand from China with 32 million mt forecast for 2018.

    The quarterly report expects world LNG imports to rise by 10% per year to 306 million mt in 2018, which compares to Platts Analytics' forecast of 334 million mt.


    Global LNG supply capacity is forecast to rise by 11% in 2017 and 8.8% in 2018 to 343 million mt, the Australian government said, compared to a forecast of 396 million mt by Platts Analytics.

    A senior advisor from Platts Analytics said the gap in forecasts could be due to a different view on when American and Australian trains will come to the market.

    The unit value for Australia's LNG exports is forecast to rise marginally from $6.6/MMBtu in 2015-2016 to $6.7/MMBtu in 2016-2017, before rising to $8.0/MMBtu in 2017-2018, the report said.

    "The recent rally in spot prices is expected to be temporary, with the entry of new capacity in the US and Australia ensuring that the market remains well supplied," it said.

    "The implications of a potential divergence between contract and spot LNG prices remains to be seen. One scenario is that buyers reduce LNG purchases to 'take-or-pay' levels, and seek to buy largest volumes on the spot market," it added.

    A divergence between spot and contract prices would also encourage buyers' efforts to renegotiate pricing mechanisms in LNG contracts, the report said.
    Back to Top

    Demonetization to hold back India's 2017 fuel demand growth

    India's fuel demand growth is expected to slow by as much as 40 percent in 2017 from last year as a government-induced cash shortage hurts businesses, industry and car sales.

    The dent in demand growth in the world's third-largest oil consumer is expected to be temporary, though, with India still taking up the third-biggest portion - behind China and United States - of 2017's rise in fuel use on a barrel-per-day basis, according to energy consultancy Wood Mackenzie.

    India's fuel demand in 2016 grew at its fastest in at least 16 years as low oil prices boosted demand for gasoline and aviation fuels, but analysts say the nation's currency troubles will put the brakes on this year.

    India's oil product demand growth in 2017 is expected to drop to 160,000 barrels per day (bpd), from 270,000 bpd in 2016, according to Woodmac.

    "We see Indian demand growth slowing ... due to the recent currency demonetization drive by the Indian government," said Suresh Sivanandam, the consultancy's Singapore-based senior manager of Asia Pacific refining research.

    Prime Minister Narendra Modi's currency crackdown has led to a cash crunch that has severely hurt India's overall output and consumer demand, with December factory activity contracting in its biggest monthly decline in eight years and last month's car sales dropping the most in 16 years.

    India's growth in both diesel consumption - used mainly for heavy industrial vehicles - and gasoline burned to power cars, is expected to slow, especially in the first quarter, traders and analysts told Reuters.

    And while this will dent refining margins for diesel, it is not expected to be enough to undercut a strong 2017 profit outlook for the fuel across Asia this year.

    "The cash crunch ... is dampening growth in agricultural and other small-to-medium scale sectors, which are heavily cash-reliant," said Sri Paravaikkarasu, head of East of Suez Oil at energy consultants FGE.

    "It will easily take three to six months for the dust to settle," she said, although long-term prospects remain strong, with spending on infrastructure projects and a resumption in economic growth and freight shipments supporting diesel.

    Diesel demand is expected to grow only 2 percent in the first quarter of 2017 compared with a year ago, less than half of the 5 percent growth rate seen in the first 10 months of 2016, said Tushar Tarun Bansal, director of Singapore-based consultancy Ivy Global.

    Actual oil demand growth may be lower than projected, though, cautioned an Indian refiner source, as consumers have been stocking fuel to take advantage of an exception given to old 500 and 1,000-rupee notes for purchases of diesel and gasoline at retail pumps.

    Attached Files
    Back to Top

    Make Marcellus Drilling Better – by Using a Math Formula?!

    Can you actually use a mathematical formula to figure out better ways to plan how to drill shale gas wells? It turns out the answer to that question is a resounding, “Yes!”

    A chemical engineering professor at Carnegie Mellon University, along with several Ph.D. students have, working with EQT, pioneered research that figured out how to turn 14,000 water truck trips to a well site into 1,400 trips–an “order of magnitude” difference.

    That is a big deal in the drilling industry. Using mathematical formulas–something called “mixed-integer optimization”–Professor Ignacio Grossmann and the other researchers tackled how to make processes in the shale gas industry more efficient.

    They published a paper in the AIChE Journal in 2016 titled, “Strategic Planning, Design and Development of the Shale Gas Supply Chain Network”.

    The paper “presents a mixed-integer nonlinear programming (MINLP) model to optimally determine the number of wells to drill at every location, the size of gas processing plants, the section and length of pipelines for gathering raw gas and delivering processed gas and by-products, the power of gas compressors, and the amount of freshwater required from reservoirs for drilling and hydraulic fracturing so as to maximize the economics of the project.”

    Er, right. As you can tell, it’s complex. But it’s also very interesting and relevant for drillers and others in the industry.
    Back to Top

    EIA ups 2017 Henry Hub spot price estimate

    The U.S. Energy Information Administration raised its forecast for 2017 Henry Hub natural gas spot prices.

    In its latest Short-Term Energy Outlook, the agency said Henry Hub gas prices would average $3.55/MMBtu in 2017, up from an average of $2.51/MMBtu in 2016.

    These estimates are up 28 cents and 2 cents, respectively, from forecasts in EIA’s December short-term outlook.

    “Higher average prices in 2017 reflect price increases in the second half of 2016 because of a hot summer and declining production, which reduced the inventory excess compared with the previous five-year average,” EIA said.

    EIA also reduced its forecast for U.S. dry natural gas production in 2017 to 73.78 billion cubic feet per day, up slightly from 72.4 Bcf/d in 2016.

    This means that dry gas production would drop for the second year in a row when compared to the record high of 74.14 Bcf/d produced on average in 2015.

    Net exporter of natural gas

    According to EIA, the U.S. is expected to become a net exporter of natural gas for the year in 2018, with net exports averaging 0.6 Bcf/d.

    Natural gas pipeline exports increased by 21.7% to 5.9 Bcf/d in 2016, largely because of rising exports to Mexico. EIA expects pipeline exports of natural gas to increase by 0.1 Bcf/d in 2017 and by 0.4 Bcf/d in 2018.

    Liquefied natural gas (LNG) exports rose from almost zero in 2015 to an average of 0.5 Bcf/d in 2016 with the startup of Cheniere’s Sabine Pass LNG liquefaction plant in Louisiana, which sent out its first cargo in February last year.

    LNG exports are expected to average 1.4 Bcf/d in 2017 as Sabine Pass ramps up capacity in the middle of the year, EIA said.

    In 2018, LNG exports are forecast to average 2.6 Bcf/d. The 2018 growth is driven by the expected start of Cove Point LNG in Maryland in December 2017 and new projects at Cameron LNG and Freeport LNG on the Gulf Coast during the second half of 2018, the agency added.
    Back to Top

    Savanna Commences Strategic Process, Reiterates Recommendation to Shareholders to Reject the Total Offer

    Savanna Energy Services Corp, announced today that it intends to commence the previously announced strategic alternatives process and open a data room this week for parties potentially interested in a transaction with Savanna. Qualified parties interested in accessing the confidential data room will be required to sign a confidentiality agreement.

    “Savanna has continued to receive expressions of interest from potential bidders and the opening of the data room is an important step forward in Savanna’s exploration of the full range of strategic alternatives available to the Company with a view to maximizing value for all shareholders,” said Jim Saunders, Chair of the Savanna Board and Chair of the Special Committee. “As previously disclosed, there can be no certainty of a transaction, but the alternatives may include a merger or partnership with strategic or financial partners, a sale reflecting full and fair value for shareholders of Savanna, or an acquisition by Savanna.”

    Savanna also continues to reiterate its Board of Directors’ recommendation to shareholders that they REJECT the unsolicited and opportunistic offer from Total Energy Services Inc. (“Total”) to purchase all of the common shares of Savanna in exchange for shares of Total (the “Total Offer”). The Total Offer implies a current discount of 7% when over the past five years transactions of this nature have carried a premium of approximately 40% at the time of the offer.

    Said Chris Strong, President and Chief Executive Officer, “Total’s offer does not offer adequate value in light of Savanna’s recent transformational financings that extended its debt maturity to five years and favourable external events such as the nomination to the U.S. cabinet of strong energy industry proponents, the approval of two new Canadian oil export pipelines, and agreements by OPEC members and certain non-OPEC producers to curb production for the first time in eight years.

    “Taken together, the recovery that appears to be underway will benefit Savanna far more than Total because Savanna’s primary business lines, drilling and well servicing, are more highly levered to improving commodity prices and increased industry activity levels. This is especially true in the U.S., where Total has no contract drilling operations, and where Savanna’s contract drilling utilization has more than doubled in the fourth quarter of 2016 from a year earlier, with further gains anticipated in the first quarter of 2017 compared with the first quarter of 2016.”

    Savanna’s Board of Directors unanimously recommends that Savanna shareholders REJECT the Total Offer for these and other reasons, including the following:

    The Total Offer does not provide a control premium for shareholders of Savanna
    The Total Offer substantially undervalues the contribution that Savanna’s assets would bring to a combined entity
    Superior offers from third parties or other more attractive alternatives for shareholders may emerge
    The Total Offer does not attribute any value to the potential for future success of Savanna’s ongoing actions to increase shareholder value

    In addition, Peters & Co. Limited has provided the Special Committee and Board of Directors of Savanna with an opinion that the consideration offered pursuant to the Total Offer is inadequate, from a financial point of view, to shareholders of Savanna.

    Savanna’s fourth quarter 2016 activity levels in Canada were considerably higher than a year ago, led by long-reach drilling, for which utilization was up significantly from the fourth quarter of 2015. The gains were achieved despite wet weather through the start of the quarter.
    Back to Top

    Cove Point LNG Now 78% Complete, On Track to Open This Year

    In October 2014 Dominion announced they had officially broken ground on the Cove Point LNG export plant, a project that will inject between $3.4 and $3.8 billion in Calvert County, Maryland and pump upward of 1.8 billion cubic feet per day of cheap, abundant Marcellus and Utica Shale gas.

    Anti-drilling zealots have been desperate to stop the facility in a vain attempt to stop “fracked gas.” The Sierra Club, among others, has repeatedly launched frivolous lawsuits. They’ve all failed.

    Dominion released a video update that shows the facility is now 78% complete and “on track for an in-service date in late 2017.” There are currently 1,800 construction workers on site.

    All of the concrete has been poured, the sound wall is finished, and more than 50% of the steel has been installed for this project. Some 31 of the 34 barge loads have been received and 68 of the 77 heavy haul deliveries have been transported. It is all systems “go” for this project…
    Back to Top

    Alternative Energy

    Texas $1B Carbon Project To Curb Emissions, Up Oil Recovery

    NRG Energy and JX Nippon Oil & Gas Exploration begin operations at a $1.04 billion carbon capture facility at a Texas coal-fired power plant and use the emissions to extract crude from a nearby field.

    THOMPSONS, Texas, Jan 10 (Reuters) - NRG Energy Inc and JX Nippon Oil & Gas Exploration Corp said on Tuesday they had begun operations at a $1.04 billion carbon capture facility at a Texas coal-fired power plant and were using the emissions to extract crude from a nearby oilfield.

    The facility, the largest of its kind in the world, is the latest in efforts by the power industry to curb carbon dioxide (CO2) emissions as pressure mounts from regulators, investors and consumers to stem climate change.

    The carbon capture facility could become a model for CO2 collection at existing power plants in China and India, analysts said.

    By pumping the plant's CO2 underground to extract oil, the project could ameliorate concerns from environmentalists about emissions from coal-fired power plants while also using a funding mechanism - oil sales - to pay for long-term maintenance.

    The U.S. Department of Energy funded $190 million of the project's construction, with $250 million in loans from the Japanese government. NRG and privately-held JX Nippon split the remaining $600 million cost in a joint venture arrangement.

    At its peak, the Thompsons, Texas, facility should collect 1.6 million tons of carbon dioxide per year, roughly 90 percent of emissions from NRG's nearby power plant, the largest in Texas.

    The facility collects the plant's carbon emissions, known as flue gas, via a pipe 16 feet in diameter and strips out CO2 in a four-step process. The plant, engineered by Mitsubishi Corp , has collected more than 111,000 tons of CO2 since opening on December 29.

    Carbon capture has existed in various forms for decades. Utilities, though, have struggled with what to do with CO2 once it is collected since power plants are rarely near underground storage caverns or existing oil wells.

    A new $7 billion Southern Co power plant in Kemper, Mississippi, slated to open later this month, would chemically alter coal before collecting carbon, a different process from the NRG venture, which connects to an existing power plant.

    NRG, one of the largest power providers in deregulated Texas, said the CO2 project would not affect electricity costs.

    In an agreement with privately-held Hilcorp Energy, the NRG-JX Nippon joint venture built an 80 mile CO2 pipeline to the West Ranch Oil Field, which first opened in 1930 and produces 300 barrels of oil per day (bpd).

    With the help of CO2 injections, production should jump to 15,000 bpd within three years, NRG said.
    Back to Top

    Africa's first grid-connected biogas plant powers up

    A commercial farm in Kenya has become Africa's first electricity producer powered by biogas to sell surplus electricity to the national grid, cutting the carbon emissions associated with oil-powered generation.

    The Gorge Farm Energy Park in Naivasha produces 2 megawatts (MW) of electricity - more than enough to cultivate its 706 hectares (1,740 acres) of vegetables and flowers, and with sufficient surplus to meet the power needs of 5,000-6,000 rural homes.

    The new plant generates not only electricity, but also heat for the farm's greenhouses, with fertiliser as a by-product.

    Gorge Farm, approximately 76km (50 miles) northwest of Kenya's capital, Nairobi, is owned by the Vegpro Group, a leading East African exporter of fresh vegetables and its second largest exporter of roses.

    Biojoule Kenya, the independent power producer that operates the Gorge Farm plant, signed an agreement to sell electricity to Kenya Power & Lighting Company (KPLC) - the country's sole power distributor - in 2016.

    Biojoule Kenya sells the power to Gorge Farm and to KPLC for $0.10 per kilowatt hour (kWh). Diesel-generated power, by contrast, costs $0.38 per kWh to produce.

    "The Gorge Farm plant is physical proof that locally produced feedstock can be used to generate clean and cost-effective power for all Kenyans," said Mike Nolan, chief operating officer at Tropical Power, a developer of biogas and solar plants in Africa.

    It supplied engines for the plant in conjunction with Clarke Energy, a UK-based engine service provider.


    The plant produces biogas through anaerobic digestion, a process in which crop residue from the farm is digested by micro-organisms. The biogas produced is burned in two engines, producing both electricity and heat in a process called cogeneration.

    Producing the same amount of energy using diesel would require 5 million litres of fuel annually, Nolan explained, plus the extra fuel required to transport the diesel inland from the port of Mombasa.

    Tropical Power says the biogas plant contributes to a 7,000-tonne reduction in carbon dioxide emissions per year, since the farm does not have to use electricity from the grid produced by oil-fired power stations.

    Cogeneration currently makes up a tiny fraction of renewable power sources in Kenya, at 0.7 percent in 2015, according to the Kenya Electricity Generating Company (KENGEN), the country's biggest power company.

    Geothermal was the biggest contributor to the electricity generation mix, with 49 percent, followed by hydropower at 44 percent. But some experts see room for considerable biogas expansion.

    "The potential for biogas generated electricity in Kenya is significant," said Helen Osiolo, a policy analyst at the Kenya Institute of Public Policy Research and Analysis. She believes biogas could generate between 29 and 131 MW of power, but says the biggest challenge is that the government will not pay enough for it.

    "There are concerns that the tariff is too low to attract substantive investor interest," Osiolo said. In addition, agricultural and municipal waste is in demand for other uses such as fertiliser, which may limit the expansion of biogas generation.

    Even though anaerobic digestion of waste to produce biogas is an established technology in Europe and Asia, the concept is still new in Africa at large scale. The technology had been deployed in 45 sites globally before debuting at the Gorge Farm plant.


    Osiolo says a further barrier to the expansion of the use of biogas is the perception that it requires a substantial amount of raw material in order to produce any meaningful energy output.

    However, according to Tropical Power, if organic material or crops from 1 percent of Kenya's landmass were deployed in anaerobic plants connected to the grid, it would produce the equivalent of the country's entire current effective installed electrical capacity of around 1,800 MW.

    There are further benefits, according to Tropical Power's Nolan. The 50,000 tonnes of Gorge Farm's residue that can be used annually for biogas can produce 35,000 tonnes of a natural fertiliser by-product.

    That can be used to improve the crop yield of local farms, displacing synthetic fertiliser, he said.

    Nolan said thatTropical Power's experience with the grid operator has been straightforward.

    "Our site is located very close to the grid interconnection point and so engineering challenges were minimised," he said.
    Back to Top

    Precious Metals

    Operations at Yamana gold mine in Chile suspended late last week

    Operations at Canadian miner Yamana Gold Inc's El Peñón mine in Chile have been suspended for five days after one of its two unions representing underground workers went on strike and blockaded access to the mine, a union leader said on Tuesday.

    Workers affiliated with union No. 2 at the mine in Chile's arid north rejected the company's final offer, downed tools and blocked access to El Peñón, the union president, Eduardo Puelles, told Reuters.

    The strike started seven days ago. Two days after that, workers blocked the access roads, said Puelles, whose union represents 500 workers.

    El Peñón is Yamana's second biggest gold mine by output. It produced 164,445 ounces of gold in the first nine months of 2016, equal to about 17 percent of the company's gold output.

    "The company wants to cut benefits we already got in prior negotiations, so we cut access roads to the mine five days ago ... operations are completely suspended," said Puelles.

    Union No. 2 asked for an 8 percent pay increase and other benefits, but the company was only willing to offer a 2 percent salary increase, he added.

    Yamana's final offer took into account current commodity prices, the production and cost outlook for the mine and recent collective bargaining settlements at other mines in Chile, Yamana said in a statement late on Monday.

    "It's true that copper prices have seen its ups and downs, but this mine produces gold and silver and those prices have been more stable, they have remained near their average of the last few years," Puelles said.

    The gold price, which rose sharply in the first half of last year, has fallen about 10 percent in the past four months.

    The other union at El Peñón will begin government-mediated talks with the company on Thursday, the last chance for both sides to reach a deal before those workers can legally strike.

    Puelles said that if those talks fail, "they will join us in the strike."

    Representatives at the other union were not immediately available to comment.

    Yamana said on Monday that striking workers had been picketing and damaged some equipment.

    Asked if further talks with the unions were planned, a company spokesman said Yamana was "committed to reaching a resolution."

    The Toronto-based company also said it had reached collective bargaining agreements with workers at its Minera Florida operation, also in Chile, and that the mine and plant were operating at full capacity.

    Shares in Yamana finished 0.72 percent higher at C$4.22 on the Toronto Stock Exchange, in line with other gold stocks.
    Back to Top

    Base Metals

    MMG hedges on higher prices

    Metals miner MMG has taken advantage of the strong increase in copper prices during the end of 2016, heding some 112 000 t of copper at a net price of $2.50/lb.

    The company said this week that the decision to enter into the hedging was considered in the best interest of MMG, and was taken to provide additional certainty in relation to the company’s financial performance and cash flows for the 2016 financial year, following the increase in copper prices.

    MMG has also flagged potential further hedging, saying that it will continue to monitor commodity prices.
    Back to Top

    Steel, Iron Ore and Coal

    Coking coal price crashes through $200

    It's only been a week of trading, but the year to date fall in the price of coking coal has already reached 17%. The steelmaking raw material is also now $120 below its multi-year high of $308.80 per tonne (Australia free-on-board premium hard coking coal tracked by the Steel Index) hit in November.

    On Tuesday the price dropped another 6.4% to $208.10 a tonne, the lowest since September 9 and one of the biggest declines (for the spot price) on record.

    As it happens, coking coal futures trading on the Dalian Commodities Exchange in China went the opposite way with a jump of 7.8% on Tuesday on news that the country's top steel producing province Hebei is shutting down 32m tonnes of excess capacity this year, more than double the 2016 tally. Coking coal futures ended the day at 1,268 yuan or $182 a tonne.

    The Australian benchmark metallurgical coal contract price is forecast to average $186 a tonne in 2017, a 63% increase from 2016

    Still, metallurgical coal is up 150% from multi-year lows reached in February last year. Coking coal averaged $143 a tonne in 2016 (about the same as it did in 2013).

    There was a more than $100 differential between the spot price average and the fourth quarter contract benchmark, but that situation has now completely reversed.

    According to Australia's department of industry which yesterday released its quarterly report in early December, benchmark contract prices for the Q1 2017 were settled between Australian miners and Japanese steelmakers at $285 a tonne.

    This marked the highest negotiated quarterly contract price in five years according to the report and compares to a benchmark contract price average of  $114 a tonne in 2016. The authors of the report Q1 would be the high point for quarterly contracts and will decline with the spot price:

    In a bid to raise domestic coal output and help ease upward pressure on prices, the Chinese Government started to ease restrictive coal production measures in September, and then took further measures in November. Since the November measures and the expectation of a return to normal production in Australia, prices have started to decline. This trend is expected to continue in 2017. The Australian benchmark metallurgical coal contract price is forecast to average US$186 a tonne in 2017, a 63 per cent increase from 2016.

    In 2011 floods in key export region in Queensland saw the coking coal price briefly trade at an all-time high $335 a tonne.
    Back to Top

    Coal exports from Australia's Queensland state hit record high in 2016

    Coal exports from Australia's Queensland state hit an all-time record high of 221 million mt in 2016, the Queensland Resources Council said Tuesday.

    The state exported 20.7 million mt of coal in December which was also the highest monthly volume on record, QRC said.

    "The export figures were achieved with strong numbers across all of Queensland's ports including Gladstone, Abbot Pint, Dalrymple Bay -- with Hay Point leading the way with a 10% annual increase in volume to 49 [million mt]," it said.

    Last year was the first full year of the Hay Point Coal Terminal operating at a 55 million mt/year nameplate shipment capacity after rising from 44 million mt/year in December 2015 following the opening of a new berth.

    Attached Files
    Back to Top

    Tianjin port 2016 coal handlings hit record high

    Tianjin port, the largest port in northern China, saw its coal throughput hit a record high of 109.7 million tonnes in 2016, gaining 16% year on year.

    Despite a rapid growth of coal handlings in the first three quarters last year, the truck overload rules rolled out in late September still brought some negative impacts to the port, as the coal trucking cost increased by some 20-30 yuan/t.

    Over October-December last year, coal throughput at Tianjin port stood at 22.44 million tonnes, with the volume down from 8.65 million tonnes in October to 6.12 million tonnes in December.

    As a major coal transfer port, Tianjin port mainly takes coal from Inner Mongolia, Shaanxi and other major production bases delivered via both trucks and railways. Those cargoes are delivered to some major coal consumers, including Zhejiang Zheneng Electric Power Co., Ltd, China Guodian Group and China Huadian Group, etc..

    To deal with market slackness since 2014, the port made the best of low trucking cost and cheap Shenhua coal to boost coal handlings.

    Tianjin port consists of old Tianjin port and Shenhua Nanjiang wharf. The old Tianjin port has a designed handling capacity of 40 million tonnes per annum and storage capacity of 3 million tonnes. Coal is mainly delivered via trucks.

    Tianjin Nanjiang wharf, the second largest coal transfer port of Shenhua Group in northern China, has a designed handling capacity of 45 million tonnes per annum. It is mainly responsible for coal shipment of the group transported via Shuohuang and Huangwan rail lines, and it also takes coal from western Inner Mongolia and northern Shanxi.

    Coal handlings at Tianjin port are likely to decline to 70-80 million tonnes in 2017, as more coal is directed to Qinhuangdao port and truck transport is restricted by the overload rules.

    Attached Files
    Back to Top

    Daqin 2016 coal transport down 11.52pct

    Daqin railway, China's leading coal-dedicated rail line connecting Datong City of coal-rich Shanxi province with northern Qinhuangdao port, hauled 351.25 million tonnes of coal during 2016, down 11.52% from 2015, said a statement released by Daqin Railway Co., Ltd on January 10.

    In December, Daqin line transported 38.41 million tonnes of coal, rising 2.18% month on month and 16.68% year on year.

    Daqin has always played an irreplaceable role in delivering coal from main production bases – Shanxi, Shaanxi, west Inner Mongolia -- to Qinhuangdao port; while its market share has been greatly squeezed since 2015, and the condition worsened with the operation of Zhunchi railway line (Zhunger, Inner Mongolia – Shenchi, Shanxi).

    In 2015, Daqin transported a total 396.99 million tonnes of coal, down 11.82% from 2014. By contrast, Shuohuang railway, China's second largest coal-dedicated rail line from Shenchi County in Shanxi province to Huanghua port in Hebei province, transported 217.25 million tonnes of coal with the commission of Zhunchi line.

    Coal transport via Daqin line has improved since October 2016, when the National Development and Reform Commission put forward directive to boost coal stockpiles at Qinhuangdao port and ensure coal supplies for winter heating demand.

    Under the directive, Taiyuan Railway Administration allocated more rail wagons to ensure daily coal transport of 1.25 million tonnes during non-maintenance days in November and December, aiming to move 8,000-9,000 wagons of coal each day to Qinhuangdao port.

    China's leading miners, including Datong Coal Mine Group, China National Coal Group, Shenhua Group and Yitai Group among others, have considered increasing coal shipment via Daqin to Qinhuangdao next year, which may spur a growth in its whole-year transport volume.

    Coal transport of Daqin is forecast to increase more than 30 million tonnes in 2017, and coal shipments at Qinhuangdao may also increase.
    Back to Top

    Shenhua CTL project break-even point at $40 a barrel

    Shenhua Group's newly-operated coal-to-liquid (CTL) project is capable of making profit as long as the international oil price keeps above $40 a barrel, said Chairman Zhang Yuzhuo.

    With a production capacity of 4 million tonnes per annum, the CTL project is run by Shenhua Ningxia Coal Industry Group, subsidiary of Shenhua Group, and was put into operation on December 28, 2016.

    The break-even point of CTL project is generally around $50-60 a barrel, according to a source with a coal chemical company. He said Zhang's comment is conservative as Shenhua is able to compete against oil companies owing to low mining cost.

    Shenhua's coal price is said to be 90 yuan/t ($13.00/t) at its Shendong Mine, on mine-mouth basis, equivalent to oil cost of 1,200 yuan/t, the source said.

    Shenhua Ningxia Coal Industry Group has built six large-scale coal chemical projects including CTL, methanol, dimethyl ether, coal-based olefin, daicel, and methnol-to-olefin. Of these projects, the coal-to-methanol project with annual capacity of 500,000 tonnes was started in March 2011. It reached the full capacity in September 2014 and has realized profit of more than 100 million yuan.
    Back to Top

    Brazil’s S11D iron-ore mine a reality check for Australian politicians – CME

    The Western Australian Chamber of Minerals and Energy (CME) has warned that the commercial start of the $19.7-billion Eliezer Batista S11D iron-ore mine, in Brazil, is a reality check for Australian politicians looking to use the sector as a “bottomless cash cow”.

    CME CEO Reg Howard-Smith said on Tuesday that commercial operations at the world’s largest iron-ore mine were expected to start this month, with mining giant Valetaking advantage of Brazil’s lower-cost taxation and royalty regime.

    The Brazilian major inaugurated the new iron-ore project in December, with the mine ramping up to 90-million tonnes a year by 2020. Once the ramp-up is completed, about 2 700 employees will be working directly at the plant and mine and, at least, 10 000 indirect jobs will have been created.

    “At the same time as the world’s largest mine creating thousands of jobs is getting under way, Brendon Grylls and the Western Australian Nationals are proposing a new iron-ore mining tax, which will make us even more uncompetitive on the world stage against our major competitor Brazil, destroy 3 400 Western Australian jobs and kill off investment,” Howard-Smith said.

    Grylls has proposed imposing a A$5/t iron-ore production levy on BHP Billiton and Rio Tinto, to replace the current 25c/t payment.

    “Australia is currently the second-highest taxing jurisdiction for iron-ore, but the Western Australian Nationals’ new tax would make us the most expensive jurisdiction in the world. Royalties here are currently four times higher than our biggest competitor, Brazil. They would become the equivalent of seven times higher with the Western Australian Nationals’ new tax,” Howard-Smith said.

    He noted that significant decision-makers from Japan and China have indicated concern over the Grylls mining tax and added that the Brazilian project was a “very real reminder” that Australia is not the only player in the iron-ore market.

    “At least one of the miners directly targeted by the Grylls tax has placed a question mark over further mine investment in Western Australia due to the high costs that will be in place as a result of the Grylls tax.”

    “The repercussions of this tax are real. We must remain competitive on the world stage otherwise we lose jobs and investment.

    “For Brendon Grylls and the Western Australian Nationals to ignore this reality and the damage their new tax will wreak is irresponsible and a huge threat to Western Australia’s future.”
    Back to Top
    Commodity Intelligence LLP is Authorised and Regulated by the Financial Conduct Authority

    The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only.

    Officers and employees, including persons involved in the preparation or issuance of this material may from time to time have "long" or "short" positions in the securities of companies mentioned herein. No part of this material may be redistributed without the prior written consent of Commodity Intelligence LLP.

    Company Incorporated in England and Wales, Partnership number OC334951 Registered address: Highfield, Ockham Lane, Cobham KT11 1LW.

    Commodity Intelligence LLP is Authorised and Regulated by the Financial Conduct Authority.

    The material is based on information that we consider reliable, but we do not guarantee that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only.

    Officers and employees, including persons involved in the preparation or issuance of this material may from time to time have 'long' or 'short' positions in the securities of companies mentioned herein. No part of this material may be redistributed without the prior written consent of Commodity Intelligence LLP.

    © 2018 - Commodity Intelligence LLP