Mark Latham Commodity Equity Intelligence Service

Monday 30th November 2015
Background Stories on

News and Views:

Attached Files


    A critical shift is taking place in China ― and it could have brutal consequences

    China is beginning to "talk the walk."

    That is according to Wei Yao, a strategist at Societe Generale, who published a note on Friday on the country's need for capacity consolidation.

    Capacity consolidation is another way of saying that China needs to cut back on heavy industry, which sucks up resources and capital.

    That sector of the economy has been allowed to continue production despite overcapacity, or a glut of supply, for too long.

    "To us, capacity consolidation holds the key to addressing China's most pressing economic issues: capital misallocation, looming growth in non-performing assets and deteriorating productivity," the note said.

    Supply-side reform is now the No. 1 catchphrase in Chinese policymaking circles, according to Yao. That marks a key change, as in the past China has focused on three areas of aggregate demand: consumption, investment, and exports.

    "It is encouraging that the authorities are no longer beating around the bush, at least rhetoric-wise, on the inevitability of some serious restructuring programmes. To us, this sudden sense of urgency is a clearly response to negative developments this year."

    To recap, negative developments this year include: A sharp drop in the mainland's stock market, a sharp drop in exports, a devaluation of the yuan, and a fresh round of stimulus measures.

    Yao even goes so far as to set out what a potential restructuring might look like. It is pretty brutal, and involves laying off 1.7 million workers. She said:

    Scale: The program could begin with the most distressed sectors. The obvious candidates are coal mining, ferrous metal mining and ferrous metal manufacturing.
    Size and time horizon for restructuring: SOEs in the three sectors above together have CNY5trn [$780 billion] in liabilities and employ 8.6 million people. Assuming 20% SOE capacity reduction as the target (that is, over average 10% for the sectors as a whole), potential non-performing debt would be CNY1trn [$156 billion] and 1.7 million workers could be made redundant, equivalent to 2% of bank loans and 0.3% of urban employment.
    Size and format of fiscal assistance: The amount of assistance would be determined by the cost of soothing unemployment pains and debt write-down. We estimate that the fiscal support needed would be CNY325bn [$50 billion], thus CNY75bn [$11 billion] per year if implemented over five years.
    Further expansion of the program: If the initial program is successful, the authorities could then adapt the restructuring model to other sectors. The total cost of restructuring of the troubled sectors could run up to CNY1trn. The pace would be subject to social stability, fiscal scope and the financial system's ability to absorb non-performing assets.

    Clearly, such a plan isn't going to be easy. Chinese policymakers and citizens alike are likely to be especially sensitive to the prospect of increased unemployment. But Yao, who is one of the leading lights on China economic analysis, said any kind of programme to speed up capacity consolidation will be a clear positive for China's outlook.

    The note said: "The restructuring programme may still come slowly, but with the authorities shifting their attention to supply from demand, a critical shift in macroeconomic management looks likely."

    Attached Files
    Back to Top

    China gives 14 officials jail terms over 2013 oil pipeline blast

    China has sentenced 14 former officials at state energy firm Sinopec and the local government to jail for up to five years for their role in a massive oil pipeline explosion in 2013, the official Xinhua news agency said on Monday.

    The explosion in the eastern province of Shandong killed 63 people and injured 156, and caused losses worth 751.7 million yuan ($117.53 million), Xinhua said.

    It said the Sinopec officials were sentenced for violating safety regulations while the government officials had failed to fully perform their duties in dealing with the blast.

    The explosion was one of the biggest to hit infrastructure developments in China, raising questions about safety standards in the world's second largest economy. In August, explosions at port warehouses killed more than 160 people in the northeastern city of Tianjin.

    The 2013 oil pipeline explosion occurred at the Dongying-Huangdao II pipeline owned by Sinopec. The government at the time said it was caused by corrosion, irregular work practices and a tangled network of underground pipes.

    The blast highlights the risks involved as both energy pipeline networks and China's cities expand rapidly. Urban development has engulfed many existing pipelines, providing an opportunity for thieves but also leaving lines dangerously close to residents, industry and commerce.

    Read more at Reuters
    Back to Top

    Sichuan sends over 100 GWh of hydropower to E& NW China

    Southwestern China’s Sichuan province has sent 103.8 TWh of hydroelectricity to eastern and northwestern China through three UHV DC power transmission lines and one EHV DC transmission line by November 26 since the start of the year, registering a new high, state media reported on November 30.

    Three UHV DC power transmission lines—Jinping-Jiangsu line, Xiangjiaba-Shanghai line and Xiluodu-Zhejiang line—were key channels of the state’s “West-to-East” power transmission project, with each outbound electricity at over 30 TWh and combined volume rising 21% on year since this year.

    The EHV DC transmission line starting from Deyang in the province to Baoji in Shaanxi sent 7.61 TWh of hydroelectricity during the same period, up 67% from a year ago.

    The hydropower equaled the reduction of over 40 million tonnes in raw coal consumption, plus 150 million tonnes and 500,000 tonnes dioxide carbon and dioxide sulpur emissions, respectively, in eastern and northwestern China.

    The four DC power transmission lines realized full load operation gradually between June and November this year, with combined capacity at 24.6 GW and daily transmission electricity at 500 GWh.

    Attached Files
    Back to Top

    VW unveils emissions fix for diesel cars in Europe

    Volkswagen has revealed its plans to fix those diesel cars in Europe affected by its cheat emissions tests.

    The measures will bring the cars into line with the clean air standards in the region, according to the company.

    The car manufacturer stated the plans to fix the EA 189 engines affected with a displacement of 1.6 and 2.0 litres will be based on a software upgrade.

    A small tube called “flow transformer” will be installed in 1.6 litre engines to allow more precise measurement of the incoming fresh air flows.

    It will also allow to measure fuel more precisely and improve emissions.

    The plan has been ratified by the Federal Motor Transport Authority (FMTA).

    The final technical solution for the 1.2 litre engine will be presented to FMTA at the end of the month, the company added.

    The car manufacturer is setting aside €6.5 billion (£4.7 billion) to cover the costs of fixing the cars to comply with pollution standards.

    A total of 11 million cars were affected by the emissions scandal worldwide out of which almost 1.2 million are in the UK.

    Volkswagen hasn’t announced any plan to fix the cars sold in the US as vehicles are subject to much more stringent emissions legislation than in other countries but it said it will compensate customers.

    However, the company won’t reward European customers, explaining the market circumstances are different.
    Back to Top

    Oil and Gas

    OPEC officials question upbeat outlook ahead of policy meeting

    OPEC officials questioned an upbeat forecast from the group's researchers in a meeting ahead of next week's gathering of oil ministers, with some sceptical there will be a quick easing of the supply glut in 2016.

    The comments point to a less jubilant mood in the Organization of the Petroleum Exporting Countries, whose oil ministers meet to set policy on Dec. 4, than during their last meeting in June. Oil has fallen to $45 a barrel on oversupply concerns compared to $65 last time.

    "Market data is showing loads of uncertainties," said one source.

    OPEC's national representatives - officials representing the 12 member-countries - plus officials from OPEC's Vienna secretariat - met to discuss the market. The two-day meeting, called the Economic Commission Board, finished on Friday.

    A year ago, OPEC made its historic decision to refuse to prop up prices by cutting supply and focus on defending market share. The shift was led by Saudi Arabia, supported by other Gulf OPEC members. Doubts about the policy among less wealthy members are growing.

    OPEC's research team expects higher demand for the group's oil in 2016 as supply from rival producers declines, reducing the global supply glut. World oil demand is expected to rise by 1.25 million barrels per day.

    One of the differences in views, an OPEC delegate said, was around whether OPEC's demand forecast is too optimistic, while another non-Gulf delegate was downbeat about the outlook.

    "No, it is not," the second delegate said, asked if the market outlook appeared better. "It is complicated."

    "We think it will take a longer time for the market to go back to stability. Maybe another year and half," another delegate said before the ECB meeting.

    Nonetheless, OPEC is widely expected to leave its current policy in place when ministers meet.

    Delegates from Gulf OPEC members have made clear that any U-turn would be possible only if large producers outside OPEC, notably Russia, were to join coordinated output cuts. The chance of that happening currently looks slim.

    "I am not very optimistic any breakthrough will happen during the coming OPEC meeting," said a delegate from a country that wants supply cuts who is yet to arrive in Vienna. "I hope I will be proved wrong."

    Read more at Reuters

    Attached Files
    Back to Top

    The drop in natural gas prices has caused this exporter to become an importer

    The natural gas market is growing interesting. Not in North America where prices continue to languish — but internationally, where the fall in oil has caused a knock-on drop in E&P valuations even as many gas markets are getting tighter.

    News this week suggests that’s the case in northern South America. Where one nation officially announced it will become an importer of natural gas for the first time ever.

    That’s Colombia. Where state oil company Ecopetrol told local press Monday that the firm has struck a groundbreaking deal to import natgas from Venezuela starting in January.

    As reported by Platts, Ecopetrol’s head Juan Carlos Echeverry told reporters that Colombia will start importing 39 million cubic feet per day of natural gas from Venezuela in the new year.

    The move is aimed at shoring up domestic natgas demand. Which is rising in Colombia due to increased use of gas for power generation, as hydroelectric output across the country has been falling.

    At the same time, Ecopetrol’s gas production has stagnated. With output dropping 6% in the third quarter as compared the same period of 2014, to 128,900 boe/d.

    The move toward imports in Colombia is important for a number reasons.

    First because it shows a shift in market dynamics in this part of South America. Where Colombia used to be an important exporter — but is now flipping to being a net consumer.

    That’s happening at the same time as other big markets like Brazil are also struggling with hydropower generation. And Pacific nations like Chile are rapidly increasing gas use via sources like liquefied natural gas.

    There are potential exporters here — Venezuela to some degree, and also countries like Bolivia and Ecuador. Supply in these places could get tighter quickly.

    It will now be critical to watch natural gas prices in Colombia — which could drive up power costs in the country (for industries like mining), but could also provide an unexpected opportunity for E&Ps here.
    Back to Top

    UAE's Dana Gas says wins $1.98 bln Kurdistan judgement

    An international arbitration tribunal in London, ruling in a dispute that has lasted six years, ordered the Kurdistan Regional Government (KRG) in Iraq to pay $1.98 billion to a consortium including Dana Gas, the company said on Sunday.

    The tribunal of the London Court of International Arbitration directed that the payment be made within 28 days. The judgement is final, binding and internationally enforceable, Dana said in a statement to the Abu Dhabi stock exchange.

    If enforced, the award could have a major impact on the fortunes of United Arab Emirates-based Dana and other natural gas firms operating in Iraqi Kurdistan, as well as on the KRG, whose finances have been strained by its fight against Islamic State militants.

    Dana's share price soared its 15 percent daily limit on Sunday. Later in the day, however, the KRG issued its own statement saying Dana's description of the ruling was misleading and incomplete.

    "This is a partial award that does not finally determine all issues in the arbitration, and leaves many issues unresolved," the KRG said, adding that it would continue pursuing claims against Dana and affiliates "in all appropriate fora".

    The KRG added that it still had counter-claims worth over $3 billion against Dana, and that the tribunal would hear these claims in the next phase of arbitration.

    In 2007, Kurdistan awarded Dana and the UAE's Crescent Petroleum a 25-year deal to develop the Khor Mor and Chemchamal gas fields. Austria's OMV and Hungary's MOL subsequently each took 10 percent of the venture.

    But the project became entangled in a dispute over legal rights to the fields and allegations that the consortium had been underpaid for condensate and liquefied petroleum gas products supplied from Khor Mor.

    The consortium filed an international arbitration case in London in October 2013. Legal action has also taken place in other courts; last week, Dana said the British High Court had ordered the KRG to pay the consortium $100 million within 14 days.

    "The clear rights of the consortium to both fields for long-term development and production, including title, and of course payment, have now been confirmed beyond any doubt," Majid Jafar, chief executive of Crescent and managing director of Dana's board, told Reuters on Sunday.

    "After almost seven years delay caused by this unnecessary dispute, we hope that with respect for contract we will now finally be able to move forward and prevent further losses for all sides by developing these world class resources as originally envisaged for the benefit of Kurdistan and all of Iraq, as well as the wider region."

    Dana said it had further, substantial damage claims for wrongfully delayed development of the gas fields that would be heard in 2016, along with the KRG's counter-claims.

    It said the consortium had so far invested over $1.2 billion in the project and produced the equivalent of over 150 million barrels of gas and petroleum liquids. 
    Read more at Reuters
    Back to Top

    Move to free natural gas pricing won't help 15-17 Tcf of gas discoveries - Report

    Image Source: EconomictimesPTI reported that government move to free natural gas pricing will not resolve the issue of economically developing already discovered 15-17 trillion cubic feet of gas reserves as the policy will only apply to future finds.

    Industry officials said that the Oil Ministry's proposal to make natural gas prices market driven for blocks or areas awarded in future exploration licensing rounds/auctions is a forward looking policy framework.

    A senior executive at a multinational energy firm said that it "promotes key principles of 'ease of doing business' and 'minimum government maximum governance."

    Another executive at a leading private explorer said that pricing and marketing freedom will help develop and manage a vibrant oil and gas market. Its a very big step forward.

    The executive however, said that it does not resolve the issue of economically developing the already discovered 15-17 Tcf of natural gas, which can yield an additional 100 million standard cubic meters per day by 2022 to help reduce import dependency.

    The existing capped natural gas price of USD 4.24 per million British thermal unit is not enough to support multi-billion dollar investment for developing the gas finds, most of which are in deepsea and difficult areas.

    Market rates are nearly double of the current price.

    The executive said that "Allowing a pricing policy that support developing these finds. It will also brings much needed revenue (USD 30-40 billion), investment (USD 50-60 billion), skills and employment (100,000 during construction)."

    Several discoveries of Reliance Industries-BP combine, state-owned Oil and Natural Gas Corp (ONGC) and Gujarat State Petroleum Corp (GSPC) in Bay of Bengal are economically unviable to produce at current gas price.

    Finding current rates too low to support exploration and production cost, the Oil Ministry on November 6 proposed to free natural gas pricing, bring in open acreage licensing and replace the controversial Production Sharing Contract (PSC) with simpler revenue-sharing regime for all future field auctions.

    In September, the government had allowed pricing freedom for the gas produced from 69 small and marginal fields it plans to auction shortly.

    The Ministry said that "In the recently announced marginal field policy, the government has provided pricing and marketing freedom for the natural gas. On similar lines, it is proposed to provide pricing and marketing freedom for the natural gas to be produced from the areas to be awarded under the new contractual and fiscal regime in order to incentivise production from these areas."

    An executive added that "Economic development of existing discoveries in difficult environment need similar market and price freedom to meet Prime Minister's goal of reducing import dependency by 10 per cent."

    Attached Files
    Back to Top

    Iran gives CNPC priority to develop giant oil field

    Iran has given priority to China National Petroleum Corp. for the second phase of the development of its onshore North Azadegan oil field, a senior Iranian oil official said Saturday.

    Speaking ahead of the launch of Iran's new petroleum contract in Tehran Saturday, state-owned National Iranian Oil Company's Managing Director Rokneddin Javadi outlined CNPC's extended involvement in the field.

    "Based on the original contract of North Azadegan with China's CNPC, the company has been given priority to carry out the second phase of the development of the field," Javadi said.

    The first phase was now complete and commissioning was underway, he said. It has the capacity to produce around 75,000 b/d of crude oil.

    CNPC, which was awarded the project in 2009, was to have completed the first phase late last year. Its performance at North Azadegan is under scrutiny after it was removed from the South Azadegan development because of delays.

    Under a buyback contract signed October 2010, the contractor was to be reimbursed from the field's own production.

    "We are negotiating with it and as soon as we can finalize it, we will proceed. Otherwise, in the second round of the tenders, we will put it out. The same applies to Sinopec in the Yadavaran oil field," Javadi said.

    Sinopec signed a contract in 2007 for the field and was to produce 85,000 b/d in the first phase and 100,000 b/d in the second phase.

    Reserves at Yadavaran have been estimated at 17 billion barrels. Once all three phases of development are completed, the field is expected to produce 300,000 b/d of crude oil.

    North Azadegan has 6.5 billion barrels of oil reserves in place and covers around 460 sq km of the whole Azadegan field, straddling Iran and Iraq.

    International sanctions over Iran's nuclear program -- including a ban on oil and gas investment -- led Tehran to turn to Chinese companies to develop key oil fields.

    Despite complaints about performance, Chinese state-owned oil companies are considered "strategic partners," Javadi said, adding that Iran hoped to maintain this relationship for future upstream projects.
    Back to Top

    UK to use new powers to rule on Cuadrilla shale gas permits

    Britain will use new powers to determine whether to allow shale gas firm Cuadrilla Resources to carry out fracking at two sites in northwest England, overruling local planning decisions.

    Britain is estimated to have substantial amounts of shale gas trapped in underground rocks and Prime Minister Cameron has pledged to go all out to extract these reserves, to help offset declining North Sea oil and gas output.

    Yet fracking applications have struggled to find approval from local communities, concerned about noise and environmental impacts, and to address this the government has changed planning rules to make its own decisions on shale gas appeals.

    Local government minister Greg Clark has informed Lancashire County Council of the minister's intention to himself determine Cuadrilla's appeal on two rejected permits in the area in northwest England.

    "Ministers have decided to recover Cuadrilla's appeals for shale exploration in Lancashire," the government said in a letter to the council dated Nov. 26.

    Cuadrilla's wells in Lancashire would be the first British shale gas wells where fracking is applied since hydraulic fracturing at a separate project near Blackpool, in Lancashire, triggered an earth tremor that resulted in an 18-month ban on the technology in 2011.

    John Williams, senior principal consultant at the consultancy Poyry Management said a decision on the appeal could be made by the second half of 2016 but rules requiring the company to monitor water supplies at the site for 12 months before fracking can start would delay any gas extraction.

    "We could see some drilling in the second half of 2017 but they still have to determine whether there are reserves that can be extracted economically and it would likely be 2018 at the earliest before a decision to move into full production would be taken," he said.

    A spokesperson for Cuadrilla said if the projects are given approval the company would begin water monitoring at the sites as soon as possible.

    Britain changed its planning rules in August to allow government intervention to approve or reject shale gas drilling permits and give priority to appeals involving shale gas projects.

    Lancashire Council earlier this year rejected two Cuadrilla applications for fracking, or hydraulic fracturing, underscoring some local community concerns about the technique.

    Cuadrilla appealed against the rejections.

    "If Cuadrilla is given permission to frack in Lancashire, it will be against the wishes of its residents, and its council, both of which have made their views against this risky process very clear," said Donna Hume, senior energy campaigner at environmental group Friends of the Earth.

    British Finance minister George Osborne on Wednesday confirmed the creation of a shale wealth fund that would receive up to 10 percent of tax revenue from shale gas developments for investments in communities affected by the projects.

    Read more at Reuters
    Back to Top

    Alternative Energy

    Africa's largest wind farm inaugurated in Egypt

    The African continent's largest wind farm with 100 turbines and a total capacity of 200 megawatts has been inaugurated in Egypt, the media reported on Monday.

    The project has been financed by the European Union (EU), German Development Bank, and European Investment Bank, EFE news reported.

    "The wind farm in the Gulf of El Zeit is a leading source of renewable energy that will help bolster Egypt's economy, create jobs and reduce pollution from greenhouse gases," said EU ambassador to Egypt James Moran, who inaugurated the plant along with Egypt's Minister of Electricity and Renewable Energy Mohamed Shaker on Sunday.

    The plant can generate up to 800 gigawatt per year, which is equivalent to the electricity consumption of 500,000 people with savings of up to 400,000 tonnes of carbon dioxide.

    "The new wind farm will increase Egypt's wind capacity by 35 percent and will reduce carbon emissions by 400,000 tonnes a year," said Moran.

    The EU contributed $32 million in the project while the European Investment Bank put in $53 million and the German Development Bank, the project's main donor, invested $203 million.

    The project is part of the Egyptian government's plans to encourage renewable energy to control fuel shortages and diversify energy sources with technical and economic support from Europe.

    EU released a statement saying Egypt has great potential in the field of solar and wind power whose development is fundamental to solving the country's energy crisis, and limit pollution especially in populated areas of the Nile Delta and Cairo.

    The EU also confirmed that another wind farm is being built with European funding in the Gulf of Suez, northeast of Cairo, which will be ready in 2016.
    Back to Top

    Precious Metals

    China gold reserves 55.38 mln fine troy ounces at end-Oct

    China's gold reserves stood at 55.38 million fine troy ounces at the end of October, up from 54.93 million at the end of September, the central bank said on Monday.

    China began updating its reserve figures on a monthly basis in June, after reporting an unchanged level for more than six years.

    Read more at Reuters
    Back to Top

    Weak currency encourages Australia's gold miners to dig deeper

    Gold miners in Australia, emboldened by a weakening currency, have been increasing production in the face of a global rout in the precious metal, figures released on Sunday showed.

    Output by the world's no. 2 producer behind China climbed to 72 tonnes in the third quarter, up 1 percent up on the previous quarter and 2 percent higher than the same period a year ago, according to a survey by sector consultants Surbiton Associates.

    "The declining value of the Australian dollar has once again been the great saviour of our gold sector and of the local resources industry in general," Surbiton director Sandra Close said.

    The value of Australian dollar over the third quarter declined from around 77 U.S. cents to around 70 U.S. cents.

    The weaker currency translated into a A$20 lift in the average gold price over the quarter for Australian producers versus the previous period to A$1,550 per ounce, Close said.

    At the current exchange rate of about 72 U.S. cents, the local gold price sits at A$1,468.99 per ounce.

    U.S.-dollar spot gold fell nearly 2 percent to a near six-year low of $1,052.46 an ounce on Friday, which analysts attributed to a strong U.S. dollar and prospects of a U.S. interest rate rise in December..

    Some of Australia's biggest mines increased output over the quarter, according to Close.

    These included the Super Pit mine in Western Australia, a joint venture between Newmont Mining Corp and Barrick Gold Corp, which lifted production by 32,000 ounces in the third quarter versus the second quarter.

    The Newmont-owned Tanami mine recorded a 10,000-ounce rise in output, while the Gwalia lode owned by St Barbara Ltd upped its yield by 15,000 ounces.

    Australia last year produced 285 tonnes of gold, a distant second to the roughly 450 tonnes dug out of mines in China in 2014, according to industry data.

    A decade ago, South Africa was the top gold producer followed by the United States, Australia and then China.

    Read more at Reuters

    Attached Files
    Back to Top

    Base Metals

    Large China copper smelters agree to cut production in 2016

    Nine large copper producers in China have agreed an initial plan to cut refined metal production by more than 200,000 tonnes in 2016 or around 5 percent from this year's level, an executive at one of the producers said on Saturday.

    The agreement followed a meeting by the producers on Saturday in Shanghai to discuss coordinated output cuts to support the market after prices in Shanghai and the London Metal Exchange plunged to their lowest in more than 6 years.

    China, the world's second biggest economy, is the top refined copper producer and consumer but is suffering an economic slowdown adding pressure on the global market.

    The nine producers also will ask the state-controlled industry body, the China Nonferrous Metals Industry Association (CNIA), to request Beijing to investigate high-speed trading and malicious short selling of copper contracts traded on the Shanghai Futures Exchange, the executive said.

    The producers made the initial plan in the morning. In an afternoon meeting, they further agreed that the companies would consider bigger output cuts and would finalise the amounts next week, said the executive.

    He was speaking on condition of anonymity but on behalf of the China Smelters Purchase Team (CSPT) group.

    Chinese growth dipped to 6.9 percent in the third quarter, the weakest since the global financial crisis.

    Zinc smelters and nickel smelters also called for production cuts earlier this week. Sources said on Friday China's state stockpiler was considering buying more than 1 million tonnes of aluminium from local smelters, an initial sign that Beijing could agree to the first major bailout in its embattled metals industry since 2009.

    The nine copper producers involved in the planned cut are members of the CSPT and include Jiangxi Copper Company Ltd and Tongling Nonferrous Metals Group .

    Their production accounted with about 60 percent of China's refined copper production in the first 10 months of this year.

    "We prepare to cut production by at least 200,000 tonnes," the executive told Reuters, adding that the cut could be expanded if copper prices fell further.

    The companies will produce about 4.4-4.5 million tonnes of refined copper this year, he added

    The proposed cut is equal to about a third of China's production in October.

    The producers would mainly cut output that uses scrap as feedstock, the executive said. The firms also use copper concentrates as feedstock.

    "We are very serious about cutting production. We will have a meeting every two weeks to follow up proposed cuts by each company," he said.

    The copper smelters, whose production is mostly registered for the delivery of the copper contract in Shanghai <0#SCF:>, would restrict sales of their metal to players that hold massive short positions, the executive also said.

    CNIA, supported by some large metals producers, has already called for a short-selling probe on metals futures, sources said earlier this week.
    Back to Top

    Codelco production up but profits slump

    Codelco lifted copper production during the first nine months of the year but earnings were almost halved by the slump in copper and molybdenum prices, CEO Nelson Pizarro said Friday.

    The state-owned mining company produced 1.259 million mt from its own mines during the first nine months, up 2.3% from 1.231 million mt in the same period of 2014.

    Codelco said it had a profit of $1.22 billion in the January to September period, compared with $2.3 billion in the year-earlier period

    The increase reflected improved out from the Ministro Hales mine (172,000 mt vs 109,000 mt) after the normalization of operations at the mine's roaster plant and higher ore grades.

    But lower ore grades at the giant Chuquicamata pit caused production to fall to 209,000 mt from 255,000 mt a year ago.

    Including Codelco's minority stakes in mines operated by Anglo American and Freeport McMoRan, production rose to 1.379 million mt from 1.36 million mt.

    The company also sold 18,823 mt of molybdenum, down 2.2% from last year.

    Profits fell 47% to $1.218 billion in the same period, as margins were squeezed the sharp drop the prices of copper and molybdenum.

    Copper averaged $2.59/lb, down 18% from the same period last year. Prices have since hit six-year lows below $2.10/lb. Molybdenum prices averaged $16/kg, down 40%.

    "Things have been much worse than we expected," said Pizarro, warning that the company could face even lower prices in the coming weeks if the US Federal Reserve lifts interest rates for the first time in several years.

    As a result, management is planning to continue efforts to boost productivity and reduce production costs.

    A plan to slim expenditures by $1 billion is running ahead of schedule thanks to the appreciation of the US dollar and lower energy and steel prices.

    If these efforts are insufficient, Codelco could be forced to consider halting some operations, starting with its loss-making smelters.

    Pizarro said this is prohibitively expensive unless the company were convinced that prices would remain at rock-bottom levels for an extended period.

    Current expectations are that the market will return to backwardation, indicating a shortage of physical metal, by late 2017.

    Attached Files
    Back to Top

    Weiqiao now largest Chinese Al producer

    Image title
    Back to Top

    Steel, Iron Ore and Coal

    Jiangsu and Xinjiang to further promote coal-to-gas project

    Jiangsu province and Xinjiang Uygur Autonomous Region to further promote the development of the coal-to-gas project operated by Suxin Energy Co., Ltd., local media reported, citing the recent conference jointly held by both sides on November 24.

    Suxin Energy Co., Ltd, a state-owned company jointly invested by top five provincial enterprises, was built as the main body of the Clean Energy Strategic Cooperation Agreement signed by Jiangsu and Xinjiang.

    According to the agreement, Jiangsu province would complete the coal-to-gas project by 2020, with investment totaling 180 billion yuan. The project was designed to have coal-to-gas annual capacity of 26 billion cubic meters and coal production capacity of 130 billion tonnes.

    The first phase of the project was expected to complete construction by 2018, with gas and coal capacity at 4 billion cubic meters and 16.9 million tonnes per year, respectively.

    On June 26 this year, Suxin Energy signed a sales agreement with the Natural Gas Company under Sinopec Co., Ltd.

    Sinopec would buy all the coal-to-gas resources produced by the project after its operation, with volume specified at 1 billion cubic meters per year in 2019, and 4 billion cubic meters per year afterwards, according to the deal.
    Back to Top

    China’s coal-fired power producers face tougher times

    China’s coal-fired power producers face tougher times

    China’s coal-fired power generation industry faces a double whammy of overcapacity and rising competition as a result of gradual power price liberalization, even though profitability has been propped up by sinking coal prices in the past few years, the South China Morning Post reported on November 30.

    Analysts say power producers will have to exercise restraint on new capacity expansion, or else risk seeing utilization fall below last year’s 15-year low and eat into profit margins, especially if coal prices find a bottom after four years of precipitous falls.

    “Power plants built this year were planned four to five years ago, so it will take some time for the large supply of new plants proposed and approved when demand was good to be digested,” the director of Xiamen University’s Centre for China Energy Economics Research, Lin Boqiang, said. “It will be up to the power firms to control the actual amount of plants to be built.”

    Based on recent months’ growth figures on power demand and generating capacity, the trend of worsening over-supply has yet to turn the corner.

    According to a joint research paper by environmental protection campaigners Greenpeace and North China Electric Power University, the mainland’s coal-fired power industry’s capacity utilization is likely to fall 8% year on year to 4,330 hours this year. In the first 10 months of the year it declined 7.9% year on year to 3,563 hours.

    The full-year estimate compares with last year’s 4,706 hours, which was 6.1% lower than in 2013, and is much lower than the 4,719 hours recorded in 1999 in the depths of the previous industry down-cycle and the global financial crisis.

    Lower utilization squeezes producers’ profit margins as more fixed costs like depreciation and plant maintenance have to be borne by the same amount of power sold.

    As Beijing steers the nation from investment and labor intensive manufacturing-led economic growth to a more balanced model with greater emphasis on services and technology-based economic activities, year-on-year power demand growth slowed to 0.7% in the first 10 months of this year.

    This compares to 3.8% last year, and 12% in 2011 when the economy recovered on the back of Beijing’s 4 trillion yuan stimulus programme. Industrial power consumption, which accounted for 72% of the mainland total in the first 10 months of the year, fell 1.1% year on year in October, steeper than the 1% fall in September.

    However, on the supply side, the mainland’s total power generating capacity grew by 82.6 GW in the first 10 months of the year, 43% higher than 57.7 GW in the same period last year.

    Of the total, newly installed coal-fired capacity amounted to 43.4 GW, up 54% year on year from 28.1 GW.

    China Resources Power (CRP) and Huaneng Power International (HPI), the two most profitable mainland power generators listed in Hong Kong, have seen their share prices fall 18-20% in the past month, underperforming a 3.6% decline in the Hang Seng Index, despite the main benchmark power-station coal price index having fallen a further 2.5% in the period.

    Both firms generate 90% or more of their power output from coal.

    But the room for further falls in coal prices is increasingly limited as more high-cost mines are forced to shut down, with the vast majority of China’s coal miners loss-making,

    Even the coal industry’s most profitable firm, China Shenhua Energy, is expected to post a small fourth-quarter net loss, despite having substantial, profitable power generation and coal logistics operations to offset any losses from coal mining, according to a research report by Barclays.

    The mainland’s coal-fired power producers are, however, expected to see their power selling prices cut soon, under Beijing’s pricing mechanism that links price movements for power to coal prices on a lagged annual basis.

    According to Beijing’s price reform guidelines, energy prices are supposed to be liberated by 2017, which means power prices would at least be partially determined by market forces. Currently, the vast majority of power sold is based at state-stipulated prices, except for a small but rising amount sold at prices directly negotiated between producers and large industrial users.

    The coal-fired power industry is also expected to face higher environmental compliance costs from 2017 when carbon emission caps are expected to be slapped on the mainland’s biggest industrial polluters.

    Attached Files
    Back to Top

    Japan says advanced coal technology can help global CO2 cut

    Japanese exports of advanced technology for coal-fired power plants will help fight global warming, the environment minister Tamayo Marukawa told Reuters in an interview on November 24, even though the world's richest nations had decided to restrict subsidies on such exports.

    Many developing countries will continue to look to coal-fired power plants to meet their energy requirements and the key issue was to use efficient technology to curb greenhouse gas emissions.

    Her comments came a week after members of the Organization of Economic Cooperation and Development (OECD) struck a deal to restrict subsidies used to export technology for coal-fired power plants.

    Japan, wary of regional competition from China, had been at the vanguard of opposition to phasing out coal export credits that benefit companies such as Toshiba Corp.

    But Marukawa suggested the final deal to restrict export credits for inefficient coal plant technology may actually help Japan."The OECD agreement basically approved the use of high-efficiency coal-fired power plants," she said.

    "There are countries that have no choice but to build coal-fired power stations due to cost. Countries other than Japan have also been exporting coal-fired power stations to these countries," she said.

    Marukawa said Japan can make "enough contributions" to the global push to trim greenhouse gas emissions by providing the country's coal technology that is more efficient than others.

    Japanese Prime Minister Shinzo Abe pledged in 2013 to triple the country's export of infrastructure that includes power stations to about 30 trillion yen ($244.88 billion) by 2020.

    Asked whether Japan's export of coal-fired power stations will rise further, Marukawa said: "It may rise, but it may not if we lose in cost competition against other countries. It depends on the market."

    Attached Files
    Back to Top

    Brazil's Samarco stops salary, supplier payments as assets frozen

    Brazilian iron ore miner Samarco has suspended payments to employees and suppliers because its funds have been frozen by courts in the wake of a deadly dam burst and destructive flood of muddy mine waste, the company said in a statement on Saturday.

    The company, a joint venture between Australia's BHP Billiton Ltd, the world's largest mining company, and the largest iron ore producer Brazil's Vale SA, has also asked for permission to delay payments to a compensation fund ordered by the government because it cannot access its accounts, the statement said.

    In the statement, the company apologized to its employees and suppliers and promised to resume payments as soon as possible.

    Brazil's federal and state governments plan to sue Samarco and its owners for 20 billion reais ($5.24 billion) for damages caused by the Nov. 5 burst of a tailings dam, Environment Minister Izabella Teixeira told reporters on Friday.

    The dam burst earlier this month unleashed 60 million cubic meters of mud and mine waste that devastated a village, killed at least 13 people and polluted hundreds of kilometers of a major river valley.
    Back to Top

    Vale confirms arsenic found in water days after Brazil dam burst

    Toxic materials such as arsenic were found in the water of the Rio Doce river days after a dam burst at a mine in Brazil earlier this month, an executive for Vale, the co-owner of the mine operator, confirmed on Friday.

    Vania Somavilla, sustainability chief at Vale, cited a report by the Institute for Water Management in Minas Gerais, which found levels of arsenic above legal limits.

    Vale is the first of the co-owners of iron-ore miner Samarco to admit that some tests had found toxic elements in the water of the Rio Doce river after the dam was breached. Samarco was operating dam when it burst on Nov. 5, triggering a mudslide that wiped out the nearby town of Mariana and flooded the Rio Doce river.

    The Brazilian federal government and two states affected by the disaster said on Friday they will sue Samarco, also owned by the world's biggest miner BHP Billiton Ltd , for 20 billion reais ($5.20 billion) in damages and clean up costs.

    The Minas Gerais state prosecutor's office on Friday said that results from another laboratory study showed levels of heavy metals above legal limits in the river.

    The clean up of one of Brazil's main rivers could take a decade or more, authorities and environmentalists said.

    Somavilla told a news conference in Rio de Janeiro that the material had not been in the mining waste stored in the dam but might have been flushed into the river from the surrounding area by the mud flow.

    Read more at Reuters

    Attached Files
    Back to Top

    Brazil to sue BHP, Vale for $5 bln in damages for dam burst

    Brazil's federal and state governments plan to sue the owners of the Samarco iron ore miner for 20 billion reais ($5.24 billion)in damages caused by the burst of a tailings dam, Environment Minister Izabella Teixeira told reporters on Friday.

    Samarco is a joint venture between the world's largest mining company, BHP Billiton Ltd , and the biggest iron ore miner, Vale SA .

    The dam burst earlier this month unleashed 60 million cubic meters of mud and mine waste that devastated a village, killed at least 13 people and polluted a major river valley.

    Teixeira said the suit will be filed on Monday. The proceeds will be put in a fund and used for environmental cleanup in the Rio Doce valley over 10 years, Attorney General Luís Inácio Adams said.

    Samarco has already been fined 250 million reais by Brazil's environmental agency, Ibama, for the disaster, which covered the flood plain in mud for 80 kilometers as well as polluting the river. Fish died and drinking water supplies for a quarter of a million people had to be closed off.

    Ibama is planning additional fines against Samarco on top of the 20 billion reais in damages and clean-up charges the government is seeking, Adams said, but he did not specify an amount.

    The dense orange sediment in the river reached the ocean on the weekend, hurting local tourist businesses.

    The United Nations' human rights agency said on Wednesday that the mud from the dam burst was toxic, contradicting claims by Samarco and mine co-owner BHP Billiton that the water and mineral waste posed no risk to human health.

    The minister announced the lawsuit after the close of the Sao Paulo stock market. The share price of co-owner Vale fell 5.78 percent on Friday.

    Vale and BHP announced earlier on Friday that they would create a fund with Samarco to help in the clean-up of the Rio Doce and its tributaries affected by the disaster. They did not detail the size of the recovery fund.

    Read more at Reuters

    Attached Files
    Back to Top

    Rinehart’s iron ore shipments to commence as vessel nears

    A Capesize carrier scheduled to be loaded with the first shipment from billionaire Gina Rinehart’s Roy Hill iron ore mine has arrived off Australia’s coast, signaling the start of further supply for a global market grappling with shrinking demand and prices at multiyear lows.

    The 289-meter (948-foot) Anangel Explorer is anchored off the Western Australia coast close to Port Hedland, the world’s biggest bulk-export terminal, according to data complied by Bloomberg. The vessel is scheduled to collect Roy Hill’s first export cargo, Roy Hill Holdings confirmed in an e-mail.

    Iron ore is headed for a third annual drop as demand contracts in China for the first time in a generation and the biggest miners, including Australia’s BHP Billiton and Rio Tinto Group, boost low-cost output. The Anangel Explorer is set to be loaded about two months after Rinehart’s $10 billion operation missed an initial deadline to begin shipments.

    According to Australia & New Zealand Banking Group, the pace at which the project comes onstream will determine its impact on prices. Roy Hill is targeting output of 55 million metric tons a year. By comparison, Brazil’s Vale, the biggest exporter, reported total iron ore production of 332 million tons in 2014.

    Rinehart’s mine in the country’s Pilbara region had been scheduled to begin exports on September 30, though indicated in July that it was experiencing delays. Almost 90% of its output is under long-term contract, meaning that it won’t directly pressure prices, the producer said last month.

    The operation’s first fine ore has been loaded onto trains and sent to Port Hedland, Rinehart, chairman of Hancock Prospecting which controls Roy Hill, said in a November 26 speech in Melbourne after visiting the site. “This ore will be loaded onto the first ship when she arrives in Port Hedland in the next few days,” Rinehart said.
    Back to Top

    Iron Ore futures sink below $40 in Singapore

    Most-active iron ore futures in Singapore sank below $40 a metric ton for the first time on concern that the economic slowdown in China will cut demand as supplies from the largest miners climb.

    The SGX AsiaClear contract for January fell 2.6% to $39.74 a ton at 2:38pm in Singapore, heading for the lowest close since trading started in April 2013. On the Dalian Commodity Exchange, futures for May delivery sank as much as 3.1% to 293 yuan ($45.81) a ton, a record low.

    The raw material has been pummeled since the start of 2014 as surging supplies from low-cost producers including BHP Billiton and Rio Tinto Group in Australia and Brazil’s Vale combine with faltering demand in China to spur a glut. Losses in Singapore and Dalian could presage a drop in the benchmark price for spot ore in Qingdao, which will be updated later in the day. The latest sign of new supply came from Australia, with a vessel waiting offshore on Monday to load the first cargo from Gina Rinehart’s Roy Hill mine.

    “Supply continues to rise while port inventories are starting to climb, weighing on iron ore prices,” analysts at Maike Futures Co said in a note on Monday. “The overseas producers are still profitable and are greatly reducing costs.”

    The top miners are betting that higher output will enable them to cut unit costs and defend market share while smaller rivals shut. Mills in China, contending with overcapacity and depressed margins, will cut steel production by almost 3% next year, according to the China Iron & Steel Association.

    Attached Files
    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