Mark Latham Commodity Equity Intelligence Service

Monday 4th January 2016
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    Weak Caixin PMI revives China slowdown fears

    The Caixin Purchasing Managers' Index (PMI) came in weaker than expected, spurring fresh fears over China's economic growth and sending markets around the region lower.

    The manufacturing PMI fell to 48.2 in December, from 48.6 in November, contracting for a tenth month and coming in below a Reuters poll forecast for 49.0. Levels below 50 indicate contraction. The Caixin PMI is a closely-watched gauge of nationwide manufacturing activity, which focuses on smaller and medium-sized companies, filling a niche that isn't covered by the official data.

    "Data suggested that client demand was weak both at home and abroad, with new export business falling for the first time in three months in December," Markit, which compiles the survey, said in a release. "As a result, manufacturers continued to trim their staff numbers and reduce their purchasing activity in line with lower production requirements."

    Markets around the region certainly weren't cheering. The Shanghai Composite was down as much as 4.1 percent after the data's release, while Australian shares erased early gains, with the S&P/ASX 200 index off as much as 0.4 percent. The Australian dollar dropped from around 72.86 U.S. cents before the reading on one of its largest trading partners to as low as 72.05 U.S. cents.

    The sharp drop in the Caixin PMI contrasted with a small tick up in the official PMI data released over the weekend, which showed the index was at 49.7 in December, in line with forecasts from a Reuters poll and up a tad from November's 49.6.

    The official non-manufacturing PMI, which tracks the services sector, rose to 54.4 in December from 53.6 in November.
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    A Bullish View!

    The pork cycle is to economics what the law of gravity is to physics. You can count on it. Every single time. The only thing that makes economics the trickier science, is timing. Because you never know when the market hits peak or bottom. But economics is not an exact science. Investors don't need to get the cycle exactly right to make money. About right cuts it.

    The key to understanding the broad commodity cycle, which functions just like the pork cycle, is the time lag between the investment decision and the creation of new supply. What would happen in case there wouldn't be a time lag? An uptick in demand causes a price increase. The price increase causes additional investment. And the surplus demand would immediately be filled by new supply. Same thing on the downside: demand drops, price drops, investment falls, and production would be cut instantaneously. Our hypothetical result: steady prices.

    Of course, reality is different. Breeding the hog takes time. When the price of oil or copper rises, companies can probably squeeze out some extra output. But to substantially increase production to fill the new demand, they need to increase exploration budgets. That means hiring new geologists, given that companies probably fired those when prices were low - if they are still around. The geologists need time to search for the treasure. When they find something, engineers need time to figure out how to drill the well or build the mine. Permits need to be arranged. The company might also need to raise capital. And only then, construction would commence.

    By the time the whole new enterprise is up and running, demand starts to drop. Due to the price mechanism, users increased efficiency or switched to substitutes. Or a recession hits. At that point, the commodity producers will be holding the bag. And anyone who invested in commodities lately will know exactly what that means.


    Our current cycle started in December 2001, when China joined the WTO. That event marked the beginning of the greatest commodity boom the world ever witnessed. The hungry Chinese giant craved commodities. Commodity producers were throwing everything at it, but it never seemed saturated. Then the global financial crisis hit in 2008. After a commodity collapse, prices bounced quickly and forcefully. This strengthened the China hypothesis even further. We were now in a new era.

    Except we were not, of course. Multi-billion dollar mines with long lead times came online just as China started slowing down. The law of gravity took commodity prices down to levels not seen since 1974. Continuing our science metaphor, we are witnessing Newton's Third Law applied to economics: the large upward force caused a force equal in magnitude, but opposite in direction. After the Great Boom, we're now in the Great Collapse.

    There even seems to be another new paradigm, which is sort of the mirror image of the boom: China switches its economy from industry to services. With the flip of a switch, every factory worker becomes an app developer. Nobody needs stuff anymore, as everything is now 'in the cloud'. China's pace of growth will continue to fall. Commodity prices will extend their tailspin.

    Well, maybe the pundits are right. We don't have a crystal ball. But just allow us to add some balancing facts to the China discussion. China is ramping up government spending, just as it did after the financial crisis.

    Image title

    We're not sure how this will end, but the business cycle is also a cycle. China has been slowing down for four years already. No matter what, these measures will provide additional Chinese demand.

    Now, more importantly, back to the commodity supply side. The table below shows an extract from a recent Americas Metals & Mining report by Deutsche Bank. Commodity producers are cutting their CAPEX in a huge way. Globally, we see the same picture across the board. That's your pork cycle at work right there. We are once again setting ourselves up for future commodity shortages.

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    What will cause commodity prices to turn? Well, increased demand and reduced supply of course - nothing new here. But the specifics will be hard to predict. For example, in 2011, nobody was yet aware of fracking. We now know this new technology turned the oil market upside down. There will probably again be some factor we're currently not expecting. An example could be rapidly accelerating growth in India, which is now where China was decades ago. China has 1.36 billion inhabitants. India has 1.25 billion.

    It's just a guess. But the commodity cycle will turn. We will know what made it turn only after the fact. But that's not even relevant to you as a shrewd investor. The only thing that matters is that you need to act now if you're serious about making serious money. And gradually expand your exposure to commodities. As the legendary trader Stan Druckenmillernoted:

    "The first thing I heard when I got in the business....was bulls make money, bears make money, and pigs get slaughtered. I'm here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig."

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    Macquarie Horror Outlook

    After what can only be described as a horrific year for metals and bulk commodity prices, market attention is now quickly turning to what the new year will bring.

    Some believe that the worst is now over while others think the bear market that has gripped the commodities complex this year is only getting started.

    In a note released earlier this week, analysts at Macquarie research have pondered that very question and it doesn’t make for pleasant reading for commodity bulls.

    They suggest 2016 will be about the three Ds – destocking, divestment and desperation. Unfortunately for commodity bulls, another D – demand – is unlikely to feature in their opinion. As a result, they’ve made aggressive price downgrades across the vast majority of commodities they cover on the back of “the weaker demand outlook and general cost curve deflation”.

    Here’s a snippet from the report explaining their view. Our emphasis is in bold.

    For us, 2016 will be the year of the three D’s for commodities: destock, divestment and desperation. Unfortunately not demand, as it is very hard to see where strong, co-ordinated demand acceleration could come from. We are currently projecting 2016 demand for all major metals and bulk commodities remaining well below the 10-year norms. With financial markets taking an increasingly negative view on the long-term health of the industry, pressures on metals and bulk commodity producers seem set to get worse.Image title

    In their opinion, the chief cause behind the subdued demand outlook for commodities remains weakness from their largest consumer: China.

    The Chinese government used to be like the best company out there – they would give you five-year forward guidance through their five-year plans (backed by a managed political cycle). Now however, the 13th five year plan has little to hang your hat on with few solid targets. Meanwhile, the economy itself has developed a two-speed nature, with the service sector continuing to grow at a fast pace but the old school industrial economy at best stagnating.

    This has clearly added to the uncertainty among Chinese commodity consumers, with a knock-on effect back up the chain to producers. Chinese industry, pretty much across all sectors, has built capacity for demand which has not emerged at the same place.

    What the researchers at Macquarie are pointing out is that investment decisions from miners and industry made in the past were based on the premise that Chinese demand would continue to grow at astronomical rates for the foreseeable future.

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    The three big indicators: update

    Image titleActivity:
    Image titleInventory:
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    La Nina follows El Nino? Bullish Gas for sure.

    “The likelihood that the current El Niño peaks soon and turns into a potentially strong La Niña by late 2016 or early 2017 is something that participants in agricultural markets should track closely,” Mr. Norland said.Image title
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    Capex plans for 2016


    In a 8 December report, Kotak Institutional Equities, which analysed capex plans of 130 large companies, said that capex for fiscal year 2017 may actually decline by 15%. This would be the third year of declines after a 3.9% and 4.1% drop in fiscal 2015 and fiscal 2016, respectively, showed data compiled by the brokerage house.


    Hopes for a capital expenditure (capex) boom remain on hold.

    Morgan Stanley's Capex Plans Index fell to 13.4 in December, the lowest reading since July 2013.

    "Continued softness in capex plans echoes the declining trend in capital equipment orders and a heavy inventory correction that has weighed on the manufacturing sector. The effects of dollar strength and uncertainty over falling energy prices have been persistent themes in regional manufacturing surveys in 2015," Morgan Stanley's Ellen Zentner said in a note to clients on Tuesday titled "Damage lingers."

    Image title

    SEMI sees 0.5% capex rise this year; 2.6% rise in 2016

    Electronics Weekly-11 Dec 2015
    Worldwide semiconductor fab equipment capex growth (new and used) for 2015 is expected to be 0.5% reaching $35.8 billion, says SEMI, ...

    Corporate America likely will continue to focus the greater share of cash it shells out in 2016 on buying back stocks and issuing dividends, according to a Goldman Sachs analysis.

    Image titleMMM plans for Capex of $1.3-$1.5 billion for 2016 (vs. $1.4-$1.5 billion for 2015)


    "While consumption growth is far from cancelling out the ongoing decline in capex spending, the clear uptrend discernible in a range of consumer indicators is pointing to steady and expanding consumption in 2016."

    EU IT:
    Meanwhile, disruptive new services-based business models are undoubtedly emerging as an alternative to the traditional capital expenditure approach. According to Ovum, over 80 per cent of enterprises globally will be using infrastructure as a service (IaaS) by 2016. That is a significant change over a short period. By the same year, IDC predicts there will be an 11 per cent shift of IT budget away from traditional in-house delivery, toward various versions of cloud computing as a new delivery model; 11 per cent of the global market is no less than $385bn. 

    And finally, analysts are projecting a fall in enterprise demand for solutions that fail to deliver the benefits of virtualised, cloud-driven and software defined technology. According to a ComputerWorld survey, 52 per cent of organisations with more than 1,000 employees have increased spending on cloud computing this year. The only standout planned decrease was on hardware, with
    24 per cent agreeing they would cut budget in this area. 

    EU CFO's:

    Image titleBit dated: September polling.

    But hope reigns eternal:

    FXStreet (Delhi) – Janet Henry, Global Chief Economist at HSBC, suggests that a revival in US capital spending feeds through into higher productivity, supporting real wage growth and boosting confidence.

    Key Quotes

    “After years of persistent disappointment, 2016 could finally be the year that we see a strong revival in US capital spending. The worst of the persistent cost cutting, cutbacks in shale investment and uncertainty over fiscal gridlock should now be behind us. Investment is at historically low levels as a share of GDP. Indeed, the capital stock is now shrinking and the efficiency of ageing capital is declining. Moreover, company share prices are no longer responding as positively to share buybacks and, after the strong pick up in M&A activity over the past two years, attractive acquisitions are becoming harder to find.”

    “Not only may investors encourage management to expand capital spending but, with the economy at full employment and nascent wage pressures emerging, companies start to find it harder to find affordable skilled labour so embark on investment projects in an attempt to lift productivity. The recent improvement in final sales, particularly consumer spending, adds to confidence about the outlook for future demand and with dollar strength abating, the profit share in GDP hits a new high. Credit conditions also remain favourable against a backdrop of only very gradual Fed tightening.”

    “The investment revival could quickly feed through into stronger productivity, slower employment growth and more robust nominal wage growth, providing continued support to real wage growth as the boost to disposable incomes from low oil prices fades.”

    The last is from Mckinsey Economic Quarterly:Image title

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    3d printing: ceramics

    With just a $3,000 3D printer, engineers use pre-ceramic resin with materials needed to form the final product. Then, by using a UV laser, the resin turns into a polymer, which is fired at 1,000 degrees Celsius overnight, and converts it into a ceramic. As senior scientist Tobias Schaedler demonstrates, the crystalline ceramic can be held with bare hands while an intense flame does nothing to damage the material. Metal, on the other hand, melts in seconds. 

    3D-printed ceramics have the potential to be used in a ton of different ways from engines in planes and cars to electrical mechanical systems. HRL Laboratories's paper on the ceramics manufacturing was published in the January 2016 issue of Science magazine

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    Moody's cuts Noble's rating to junk, company CEO defends financials

    The chief executive of embattled commodity trader Noble Group Ltd defended its financial position after what it called an "unexpected" move by Moody's Investors Service to cut its credit rating to junk status, slamming its stocks and bonds.

    The one-notch cut to a Ba1 rating by Moody's, which said on Tuesday it had concerns over Noble's liquidity, means financing will become more costly for Asia's biggest commodity trader, investors said. Moody's had put Noble on review for a possible downgrade in mid-November.

    The cut to non-investment grade status came just a week after Noble agreed to sell its remaining 49 percent stake in its agribusiness venture to China's COFCO International Ltd for $750 million in cash. As Noble sought to cut debt swiftly and retain its investment grade rating, the deal was priced comparatively low.

    "We clearly feel this decision does not reflect the positive ratings impact of the recent Noble Agri (NAL) deal," Yusuf Alireza told employees after Moody's downgrade, in a letter reviewed by Reuters.

    In its official statement, Noble said it will work with Moody's to ensure its rating "reflects the financial metrics that Noble will attain".

    Announcing the cut on Tuesday, Moody's said the downgrade also reflected low profitability and consistent negative free cash flow from core operating activities, which exclude proceeds from asset sales. The firm, the first of the three main rating agencies to lower Noble's ratings to junk, said the outlook remains negative.

    Noble's shares fell as much as 10.2 percent on Wednesday, to their lowest in two weeks, in heavy trading that made it the most active stock on the Singapore exchange.

    The shares have shed around two-thirds of their value since mid-February after allegations around its accounting practices by blogger Iceberg Research. Noble rejected the claims and in August a report by board-appointed consultant PricewaterhouseCoopers found no wrongdoing.

    "I expect that ongoing weakness in the company's operating environment could impair Noble's ability to extend the trend of positive cash flow generation," said Mary Ellen Olson, a Hong Kong-based analyst at Credit Agricole.

    Noble's bonds due 2020, which had already been trading at levels considered junk, were quoted at 64/66 cents on the dollar, having traded as high as 83 last month. The firms perpetual bonds were quoted at 43/45, 20 points lower from last month's level.

    "The cost and security required for revolving credit will increase and suppliers will ask for tighter terms," said Robert Medd, an analyst at Hong Kong-based GMT Research, "all of which will reduce margins."

    In its downgrade, Moody's said the worsening year-long rout in commodities, which has punished prices of raw materials that Noble handles from oil to copper, has overshadowed cost-cutting plans and will likely hurt access to funding and challenge its profitability.

    Earlier this month, its peer Standard & Poor's said the agribusiness sale could "weaken Noble's business position, including its business diversity and long-term competitiveness". S&P currently rates Noble at BBB-, a single notch above junk status, but has placed the rating under review with negative implications.

    Meanwhile Fitch Ratings has a stable outlook on its rating for Noble of BBB-, again just one notch above junk.

    "I am sure Fitch and S&P will catch up soon, the bonds are already trading at sub-investment grade levels," said one Singapore-based bond trader, speaking on condition of anonymity.
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    NDRC announces to cut on-grid and retail thermal power tariffs

    China’s National Development and Reform Commission has officially announced to lower on-grid thermal power tariffs by 0.03 yuan/KWh ($0.0047/KWh) on average, starting from January 1, 2016, according to a document released on its website on December 30.
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    Oil and Gas

    Oil: 18 month drop matches all prior bears. Al Naimi: no change in policy.

    Image titleSaudi Arabian Oil Minister Ali Al-Naimi said the kingdom, the world's top crude exporter, does not limit its output and has the capacity to meet additional demand, state television Al Ekhbariya reported on Wednesday.

    "The increase in production depends on ... the demand of the customers. We meet our customers' demand, there is no longer a limit to production, as long as there is demand, we have the ability to meet demand," Al-Naimi said.

    The Wall Street Journal, which reported the same comments as Al Ekhbariya, also quoted Al-Naimi as saying Saudi Arabia's oil policy was "reliable" and would not change. He has made similar comments in the past when asked about plans to boost production.

    On Monday, Saudi Arabia, its finances hit by low oil prices, announced plans to shrink a record state budget deficit with spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatisation.

    Saudi Arabia's planned cuts in spending and energy subsidies signal the kingdom is bracing for a prolonged period of low oil prices which this month hit their lowest levels since 2004.

    "We expect - from now on - efficiency of energy consumption to increase, which means the energy consumed will be reduced," Naimi said, in reference to the recent subsidy reforms.

    On Monday, Saudi Aramco's chairman Khalid Al-Falih said his country was better equipped to wait out low oil prices than other producers.

    The comment by the head of the state oil company was in line with Saudi Arabia's no-cut oil policy on output despite a sharp fall in global oil prices since mid-2014.

    Saudi Arabia led a shift in Opec policy last year by rejecting calls to reduce production to support prices, choosing instead to defend market share.  

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    Iran says boosting oil exports depends on future demand

    A rise in Iran's crude oil exports once sanctions against it are lifted depends on future global oil demand and should not further weaken oil prices, senior officials were quoted as saying.

    Oil Minister Bijan Zanganeh said Iran did not plan to exacerbate an already bearish oil market.

    "We are not seeking to distort the market but will regain our market share," said Zanganeh, quoted by oil ministry news agency Shana.

    Oil prices are likely to come under further pressure this year, when international sanctions on Iran are due to be removed under a nuclear deal reached in July. Brent crude LCOc1 settled at $37.28 a barrel on Thursday.

    Iran has repeatedly said it plans to raise oil output by 500,000 barrels per day post sanctions, and another 500,000 bpd shortly after that, to reclaim its position as the Organization of the Petroleum Exporting Countries' second-largest producer.

    "The decision on the amount of exports highly depends on the future condition of the market. We will raise our market quota steadily," said Mohsen Qamsari, director general for international affairs of the National Iranian Oil Company (NIOC).

    "We will adjust our output to the global market's demand," he told Shana on Saturday.

    "We will exercise great caution to prevent a further decline in international prices and will adopt certain methods and strategies to this end," he added, without elaborating.

    Oil prices fell as much as 35 percent for 2015 after a race to pump by Middle East crude producers and U.S. shale oil drillers created an unprecedented global glut that may take through 2016 to clear.

    The sanctions have halved Iran's oil exports to around 1.1 million bpd from a pre-2012 level of 2.5 million bpd, and the loss of oil income has hampered investments.

    Qamsari said Iran would be looking to export its crude to Asia and Europe giving examples of China and India as potential buyers post sanctions. Another possibility would be buying stakes in refineries abroad, he said.

    "One of the methods to ensure the country's oil sale is buying refineries in other countries but this has to be approved by the administration and the parliament," said Qamsari.

    "This is a method that countries like Saudi Arabia, Kuwait, UAE, the U.S., China and leading oil giants like Royal Dutch Shell and BP have adopted and we should not stay behind them in this field."
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    Russian Oil Output Hits Post-Soviet Record Amid Lower Price

    Russia’s crude output set another post-Soviet record in December, according to Energy Ministry data, as the nation’s producers seek to withstand the slump in oil prices.

    The country’s crude and gas condensate production increased to 10.825 million barrels a day last month, beating the previous record set in November by 0.4 percent, Bloomberg calculations based on the data show. Output for the year increased 1.4 percent compared with 2014, exceeding 534 million metric tons, or almost 10.726 million barrels a day, according to the preliminary information e-mailed from Energy Ministry’s CDU-TEK unit.

    Russian crude producers have been setting post-Soviet records even amid plunging prices and U.S. and European Union sanctions that cut access to foreign financing and technology. The companies have managed to squeeze more crude out of some aging fields in West Siberia and brought a few mid-sized new projects on line.

    Russia’s crude export rose to 5.25 million barrels a day in 2015, according to the data, with supplies to countries outside the former Soviet Union jumping 11 percent to more than 4.42 million barrels.

    The Russian government, which relies on oil for about 40 percent of its budget revenue, doesn’t expect a drop in production this year. Investments made two to three years ago have been supporting output in 2015 and will do so in 2016, Energy Minister Alexander Novak said Dec. 22. Still, production may decline next year if Russia has to increase the tax burden on the industry to narrow the budget gap given the plunging oil price, he said.

    Natural gas output in Russia is declining as the main producer, the state-controlled Gazprom PJSC, faces stronger competition from its domestic rivals and lower sales in former Soviet republics. The nation’s total production decreased 1 percent to 635 billion cubic meters, the lowest level since 2009, according to the data.

    The ministry hasn’t been disclosing Gazprom data since the start of last year, although the company predicted its 2015 output would fall to the record low of about 420 billion cubic meters.

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    Saudi vs Iran, or Sunni vs Shi'a

    Oil gained for a second day as Saudi Arabia cut ties with Iran a day after its embassy in Tehran was attacked to protest the Saudis’ execution of a prominent Shiite cleric.

    Futures rose as much as 3.5 percent in New York, extending Thursday’s 1.2 percent advance. Iran’s Supreme Leader Ayatollah Ali Khamenei warned of repercussions and protesters armed with rocks and firebombs attacked the Saudi embassy in Tehran on Saturday and set parts of the building on fire. The Middle East accounted for about 30 percent of global oil output in 2014, according to the Energy Information Administration.

    Saudi Arabia and Iran, respectively OPEC’s first- and fifth-ranked producers, are on opposite sides of Middle East conflicts from Syria to Yemen. Prices last week capped the biggest two-year loss on record amid speculation a global glut will be prolonged as U.S. crude stockpiles expanded and the Organization of Petroleum Exporting Countries abandoned output limits.

    “It may be seen by the market as an incremental step in a possible longer-term escalation of problems in the core oil- producing nations of Saudi Arabia and Iran,” Ric Spooner, a chief analyst at CMC Markets in Sydney, said by phone. “It’s likely to lead to some short covering and a bit of risk premium being built into pricing. There’s no immediate threat to production.”

                           Diplomats Expelled

    Iran’s ambassador in the kingdom has 48 hours to leave, Saudi Foreign Minister Adel al-Jubeir said late Sunday in Riyadh. The crisis is the worst between the two regional powers since the late 1980s, when the Sunni-led kingdom suspended ties with Shiite-ruled Iran after its embassy was attacked following the death of Iranian pilgrims during Hajj in Mecca.

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    Egypt cannot pay for LNG


    Egypt is going through a foreign currency crisis and is struggling to pay it debts to international trading partners, among them LNG suppliers, Reuters has reported.

    The currency crisis follows the blow Egypt suffered following the downing of a Russian jetliner on 31 October when flying over the Sinai Peninsula from the Sharam el Sheikh resort to St. Petersburg, Russia. All 224 onboard the flight were killed. Following the incident, tourism to Sharm el Sheikh suffered a sharp decline as European airlines curtailed flights and governments increased security arrangements. ISIS, the terror group which controls large swathes of Iraq and Syria and has an affiliate organisation in the Sinai Peninsula, claimed responsibility for the attack.

    Egypt, according to the Reuters report, is obliged to pay for LNG shipments within 15 days of a shipment's unloading. Now the Egyptian authorities are looking to extend that timeframe. Egypt used to get financial support from the Gulf Cooperation Council (GCC) countries and probably will still get it. However, due to lower energy prices, the support now is more limited. Egypt buys six to eight LNG cargoes monthly, each worth $20-$25 million. It is now in arrears of $350 million for that energy, one source estimated.

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    Egypt arrears owed to oil firms rises to $3 billion at end-2015

    Egypt's outstanding arrears to foreign oil companies rose to $3 billion at the end of December 2015 from $2.7 billion at the end of October, Petroleum Minister Tarek El Molla told Reuters on Sunday.

    The ministry had said in September that Egypt aimed to reduce the arrears owed to foreign oil companies to $2.5 billion by the end of 2015 and to pay them off completely by the end of 2016.

    Delays in paying back foreign petroleum companies had discouraged investment in the sector, but a drive to increase the price paid for domestic production and pay back arrears had encouraged new contracts signed in 2015.

    El Molla did not provide further detail on why total arrears have risen since November.

    Egypt has run short of hard currency since a 2011 uprising drove tourists and investors away. Reserves almost halved to $16.4 billion by the end of November.

    Once an energy exporter, Egypt has turned into a net importer because of declining oil and gas production and increasing consumption. It is trying to speed up production at recent discoveries to fill its energy gap as soon as possible.
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    LNG for Rail: GE's new solution.

    New opportunities for LNG

    We’ve previously discussed opportunities to use liquified natural gas (LNG) in vehicles including apilot program in the Pittsburgh area for towboats. Ms. Trillanes was able to provide insight into how LNG could be used in our rail systems, including the five major segments required. Her explanation highlights one of the possible benefits of the towboat pilot program: locating an LNG filling station near the rivers would also put it in close proximity to railroad lines in the area.

    Please note, all photos below come directly from her presentation and are property of GE Transportation.

    LNG Supply chain

    Obviously there are several factors to determining if LNG is an economical fuel source for locomotives. The reduced cost of LNG compared to diesel is a driving factor, but operators must also include the cost of operations, training, maintenance and securing a gas supply (or building a filling station).

    Another consideration is the replacement rate of diesel by LNG. There are several options when it comes to dual fuel technologies available. Ms. Trillanes explained that GE Transportation had decided the port injection method of using the two fuels as detailed in the chart below.

    LNG Injection

    Next steps

    Currently, GE has three different retrofit kit programs based on the engine technology of the locomotives and they estimate continued testing of the technology in North America throughout 2016.

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    Petronet, RasGas agree new LNG price, penalty waived

    India’s largest LNG importer, Petronet said it has come to an agreement with RasGas of Qatar to revise the 7.5 mtpa LNG import deal terms significantly cutting the price.

    Under the initial deal signed in 1999, Petronet agreed to pay about US$13 per million British thermal units, while the revised price is reduced to around US$6 to US$7, according to India’s minister for petroleum and natural gas, Dharmendra Pradhan.

    The two companies said in a joint statement last week that the revised price will be linked to the oil index that closely reflects the prevailing oil prices.

    Additionally, Petronet has avoided paying the US$1.5 billion penalty for taking less LNG than it contracted for 2015, but under the new agreement, it will have to take and pay for all of the volumes it has not taken in 2015 during the remaining term of the 25-year SPA.

    Petronet also agreed to buy additional 1 mtpa of LNG from RasGas for further sale to Indian Oil, Bharat Petroleum, GAIL and Gujarat State Petroleum, with the delivery starting in 2016.
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    Gladstone LNG secures more gas

    The Gladstone liquefied natural gas (GLNG) participants have executed a sales agreement with AGL Energy to purchase 254 petajoules of gas for supply to the GLNG project. 

    The gas would be delivered at Wallumbilla over a period of 11 years starting in January 2017, with pricing based on an oil-linked formula. The gas will be sourced from coal seam gas fields in Queensland. GLNG’s VP for downstream, Rod Duke said the agreement with AGL added to GLNG’s diverse gas supply portfolio, comprising supply from GLNG’s own coal seam gas fields, Santos portfolio gas, underground storage and third party supply. 

    “When combined with GLNG’s quality LNG off-take contracts with project partners PETRONAS and KOGAS, this supply portfolio delivers significant value to the project.” “Since our first LNG cargo in October, ramp-up of LNG train 1 has progressed well with the train having already produced well above nameplate capacity. 

    Six LNG cargoes have already been shipped to our customers.” “Commissioning work on GLNG’s second LNG train has commenced with a number of its subsystems now operational, and we are on track for first LNG from train 2 in the second quarter of 2016,” Duke said. 

    The $18.5-billion GLNG project involved the development of gasfields from the Bowen and Surat basins in south-western Queensland and transporting the gas through a 420 km underground pipeline to a two-train LNG plant on Curtis Island, off the coast of Gladstone, with the capacity to produce 7.8-million tonnes of LNG a year at full capacity. 

    The project is jointly owned by ASX-listed Santos, which has a 30% interest in GLNG, and PETRONAS, which holds 27.5%, Total, which also holds 27.5%, and KOGAS, which holds a 15% share.
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    First U.S. Oil Export Leaves Port; Marks End to 40-Year Ban

    The first U.S. shipment of crude oil to an overseas buyer departed a Texas port on Thursday, just weeks after a 40-year ban on most such exports was lifted.

    The Theo T tanker has left NuStar Energy LP’s dockside facility in Corpus Christi, Texas, along the western shore of the Gulf of Mexico, Mary Rose Brown, a spokeswoman for NuStar, said in an e-mail. The ship is carrying a cargo of oil and condensate to Italy from ConocoPhillips’s wells in south Texas that was sold to Swiss trading house Vitol Group.

    A campaign by oil explorers including Continental Resources Inc., Chevron Corp. and Exxon Mobil Corp. to lift the 1970s-era export prohibition culminated in a Dec. 18 congressional decision to end the ban.

    Vitol, which owns stakes in refineries from northern Europe to Australia, has a second cargo of U.S.-sourced crude scheduled to depart a Houston port within days.
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    U.S. oil drillers cut rigs for a sixth week in seven - Baker Hughes

    U.S. energy firms cut oil rigs for a sixth week in the last seven, data showed on Thursday, a sign drillers were still waiting for higher prices before returning to the well pad.

    Drillers removed 2 oil rigs in the week ended Dec. 31, bringing the total rig count down to 536, oil services company Baker Hughes Inc said in its closely followed report.

    That decrease brought the total rig count down to about a third of the roughly 1,500 oil rigs operating a year ago. Since the end of the summer, drillers have cut 136 oil rigs.

    Baker Hughes issued the report a day ahead of its usual weekly release, due to Friday's New Year holiday.

    The rig count is one of several indicators traders look to when forecasting whether oil production will rise or fall in the future. Other indicators include productivity gains and the completion of previously drilled wells.

    Crude oil prices were up about 3 percent on Thursday on short-covering and buying support in a thinly traded market ahead of the New Year holiday.

    Global oil benchmark Brent and U.S. crude's West Texas Intermediate (WTI) futures were both poised to end 2015 down by 30 percent or more, weighed by an unprecedented global supply glut. [O/R]

    Higher crude prices encourage drillers to add rigs. The most recent period that prices were much higher than now was in May and June, when WTI averaged $60 a barrel. In response, drillers added 47 rigs over the summer.

    The drop in oil prices since then has coincided with declines in U.S. production.

    Federal energy data showed U.S. oil production declined for a fourth straight month in October, slipping to 9.3 million barrels per day from 9.4 million bpd in September.

    Beyond the front month contract in WTI, U.S. crude futures were trading above $40 a barrel for the rest of 2016 and closer to $50 a barrel for 2017. That could entice some producers to return to drilling later in 2016, traders said.
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    Cheniere’s Sabine Pass LNG hits homestretch

    Houston-based LNG player Cheniere recently informed that the overall construction on its Sabine Pass liquefaction project is nearing completion, although slightly behind the projected plan.

    According to Cheniere’s filing to the Federal Energy Regulatory Commission (FERC), Train 1 and 2 overall project completion is 96.9 percent against the plan of 98.7 percent, while Train 3 and 4 project is at 78.2 percent against the plan of 83.3 percent.

    In its November report, Cheniere said Train 1 completed mechanical runs on all six compressors and commenced piping restoration. Startup completed leak checks on the amine and wet/dry gas treatment systems.

    The ethylene compressor piping system leak check was underway in preparation to run the ethylene compressors on nitrogen to heat up the waste heat recovery units and commence the dry out process for the system. Insulation of flanges and valves post system leak checks was underway.

    Cheniere expects Trains 1 and 2 to achieve substantial completion by March 2016 and June 2016, respectively. Trains 3 and 4 targeted substantial completion dates are April 2017 and August 2017.

    However, Genscape, the Kentucky-based commodity and energy market intelligence provider, informed earlier this month that its monitors recorded first substantial deliveries of 46 mmcf of gas to the Sabine Pass liquefaction facility which goes in hand with reports that the first LNG cargo will be dispatched from the facility in January 2016.

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    US sees ‘huge jump’ in ethanol exports to China

    The US has seen a “record increase” in ethanol exports to China.

    According to the US Department of Agriculture (USDA), the figure has jumped from $8 million (£5.4m) to more than $86 million (£58m) since May 2014.

    In October, the country exported 32.5 million gallons of the renewable fuel to China – more than the previous 10 years combined, it added.

    That was 46% of total US ethanol exports for the month, valued at around $57 million (£38m).

    It follows the USDA’s partnership with 21 states to nearly double the number of fuelling pumps nationwide earlier this year, expanding the ethanol refuelling infrastructure by nearly 5,000 pumps.

    USDA Under Secretary for Farm and Foreign Agricultural Services Michael Scuse said: “These are the kind of initiatives that strengthen our rural communities and open new doors and help our farmers and ranchers capitalise on the tremendous export potential for American agricultural products.”

    China is the largest market for US food and farm products, with agricultural exports to the country tripling over the last decade, now accounting for nearly 20% of all foreign sales of US agricultural products.
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    U.S. oil 'strippers' manoeuvre to keep pumping amid crude slump

    U.S. "stripper well" operators, the nation's smallest oil producers seen as most likely to succumb to the crude price slump, are hanging in tough, reducing the chances of near-term production cuts needed to rebalance the domestic oil market.

    The conventional wisdom is that "strippers" would be the first to fold in the face of oil's slide below $40 given their tiny size - some may pump as little as few hundred dollars' worth of oil a day - limited access to capital and high costs compared with bigger, more efficient shale producers.

    Yet interviews with executives and experts show those smallest, often family-owned, businesses are also among the most resourceful, keeping the oil flowing even as prices near 11-year lows and a growing number of their wells lose money.

    While hopes for a rebound are fading, "strippers" are doing everything they can to keep their "nodding donkey" pumps working so they can hold on to land leases that give them access to oil reserves.

    “The small operators of the stripper wells are pretty resilient," says Mike Cantrell, head of the National Stripper Well Association. "They’ve always made it through and will still make it through."

    Stripper wells pump no more than 15 barrels of oil per day but together over 400,000 wells scattered across the nation's oilfields produce over a tenth of U.S. oil output, enough to affect the market supply-demand balance and prices.

    Drawing analogies to the 1980s oil slump, some analysts had warned that half of stripper wells could shut if crude prices held below $40 a barrel, helping ease the supply glut and possibly underpinning the prices.

    The tenacity of the stripper well producers is challenging that view.

    For example, Nelson Wood who runs Wood Energy, a family business founded by his parents more than 60 years ago, has laid off 14 of his 32 employees and closed 10 of 150 wells in the Illinois Basin, but so far the production is down only 4 percent.

    He may have to shut more wells, based on electricity, labor, maintenance and salt water disposal costs, but said one key concern was meeting the requirements of oil and gas mineral rights.

    "We run some wells at a loss to keep the lease active," he said.

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    Alternative Energy

    Hanergy Thin Film founder to sell 6 percent stake; firm valued at just $1.2 billion

    The founder of Hanergy Thin Film Power Group Ltd (0566.HK), once China's wealthiest man on paper, plans to sell a 6 percent holding at a fraction of the shares' last traded price in May, valuing the embattled solar technology firm at just $1.2 billion.

    The solar panel-making equipment manufacturer has been under investigation by the Hong Kong securities regulator after its shares tumbled 47 percent in 24 minutes on May 20 - a sudden rout that left it with a market value of around $21 billion at the time and which had followed a long run-up in its stock that had puzzled many analysts.

    Founder and chairman Li Hejun plans to sell stock at 0.18 yuan per share, a deal worth 450 million yuan ($69.4 million) according to a filing to the Hong Kong bourse. On May 20, it last traded at HK$3.91.

    Hanergy officials could not be immediately reached for comment on the buyer or buyers of the shares.

    Li's holding would be reduced to 74.75 percent from 80.75 percent.

    Hanergy had been criticized by analysts for relying on its parent company - Hanergy Holdings Group Ltd - for most of its revenue and profits.
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    World Population Growth below Ag productivity?

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    Base Metals

    Malaysia seeks to suspend bauxite mining after environmental scare

    Malaysia is pushing to suspend bauxite mining due to concerns about its impact on the environment, a cabinet source said on Saturday, threatening to interrupt supply of the aluminum-making ingredient to China.

    The largely unregulated industry has grown rapidly in the last two years to meet Chinese demand. Bauxite mining was blamed for turning the waters red on a stretch of coastline and surrounding rivers in eastern peninsula Malaysia after two days of heavy rain earlier this week.

    The cabinet wants to temporarily halt bauxite mining until regulations, licensing and environmental protection can be put in place, the source told Reuters on Saturday.

    "The idea is to suspend it for a time until all this is sorted out, but ultimately the prerogative for licensing lies with the state," the source told Reuters on condition of anonymity as he was not authorized to speak to media.

    Prime Minister Najib Razak has asked the resource minister to resolve the issues with the government of Malaysia's third-largest state and key bauxite producer Pahang, the source said.

    Waters and seas near Pahang's state capital Kuantan ran red earlier this week as downpours brought an increase in run-off from the ochre-red earth at the mines and the stockpiles, stoking environmental concerns.

    The state official in charge of the environment Mohd Soffi Abd Razak, however, said the pollution was caused by illegal mine operators and not by mines run by companies approved by the state government, according to local media reports.

    "We believe the illegal miners are causing the waters to be murky," local daily Malay Mail quoted the official as saying.

    Bauxite mines have sprung up in Malaysia since late 2014, notably in Kuantan, which faces the South China Sea.

    The mines have been shipping increasing amounts of the raw material to China, filling in a gap after Indonesia banned bauxite exports in early 2014, forcing the world's top aluminum producer, China, to seek supplies elsewhere.

    In the first 11 months of 2015, Malaysia exported more than 20 million tonnes of bauxite to China, up nearly 700 percent on the previous year. In 2013, it shipped just 162,000 tonnes.

    But the frantic pace of mining in Kuantan has brought in its wake a growing clamor of voices complaining of contamination of water sources and the destruction of the environment.

    Natural Resources and Environment Minister Wan Junaidi Tuanku Jaafar had previously said that Malaysia has come up with a raft of new regulations and guidelines for the industry, but needs the consent of the state government to impose them.
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    China's Aluminium Demand To Surge 34% In 2016-20 On Growth In Transport Sector:

    China's aluminium consumption is expected to surge 34% in the 13th Five-Year Plan period (2016-20), on anticipated demand growth by the transport industry, a source with China Nonferrous Metals Industry Association said Wednesday.

    CNIA forecast China's aluminium demand to reach a maximum 44 million mt/year by 2020, up from an estimated 32.8 million mt/year in 2016, with the zenith value of 44 million mt/year to sustain for a long period of time after 2020.

    Besides demand from the traditional aluminium-consuming industry -- the construction sector -- the CNIA source told Platts that the transport sector, including new energy vehicles (Nevs, or vehicles partially or wholly powered by electricity), lighter weight vehicles, airplane manufacturing, aluminium alloy flyovers -- is also expected to be a principal driver of domestic aluminium consumption in the next few years.

    China's new energy vehicles' output and sales volume in January-October hit 181,225 and 171,145 units, surging 2.7 times and 2.9 times year on year, figures from Ministry of Commerce showed.

    State-owned Chinese metals consultancy Beijing Antaike, CNIA's affiliate, forecast China's per capita aluminium consumption to reach 30 kg by 2020, up from 17.4 kg back in 2012. It attributed the consumption growth to mainland China's ongoing urbanization.
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    Steel, Iron Ore and Coal

    No new coal mines to be approved for three years to cut stockpiles

    China is suspending the approval of any new coal mines for three years to eliminate stockpiles and increase new-energy consumption, according to a report in Economic Information Daily.

    Nur Bekri, director of the National Energy Administration, was quoted as telling a conference on Tuesday that with production overcapacity expected to last for quite some time, green and low-carbon forms of energy will be the main focus of the 13th Five Year Plan (2016-20).

    Bekri said the administration also plans to shut down 60 million tons worth of outdated production capacity next year.

    During the same time period, he said, more effort will be put into coastal nuclear power plants with new installed wind power capacity expected to reach more than 20 million kilowatts and that for solar power to 15 million kW.

    Bekri highlighted that different regions need different energy strategies. Western regions, for instance, must increase local energy consumption while high consumption industries in eastern and central areas of the country should gradually reduce lower reliance on transported energy sources.

    At the same time, the widespread practice of not using installed wind and solar power sources, due to difficulties in integrating resources to the national power grid, needs to be addressed, he said.

    National coal consumption has been slowing since 2012 after years of rapid growth, and last year saw its first fall in more than a decade. Coal-fired power plants account for around half of the country's coal consumption.

    It grew by an average 9.8 percent between 2002 and 2013, when it peaked at 2.05 billion metric tons, before dropping to 1.95 billion tons in 2014.

    Current figures suggest some 30 percent of installed wind power capacity in northern regions of China remains unused, and the amount of solar power not being fed into the national grid is also growing.

    Wu Jiang, an economics professor at Renmin University of China in Beijing, said coal will still remain China's dominant energy "for a very long time", as not every region has an overcapacity of coal because of widely different energy structures.

    "The problem with new-energy consumption is that it's not easy to integrate it into the conventional power grid.

    For that reason, a lot of wind and solar energy capacity has been suspended.

    "The central government has run some regional pilot programs to experiment such integration. Clean-energy consumption will be a lot higher if such technologies could be replicated elsewhere," Wu said.
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