Mark Latham Commodity Equity Intelligence Service

Wednesday 15th July 2015
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    Brazil police target politicians in new round of Petrobras probe

    Brazilian police carried out their first search and seizure operations involving politicians suspected of taking bribes in a scandal involving state-run oil firm Petrobras on Tuesday, local media and prosecutors said.

    Senators Fernando Collor de Mello and Ciro Nogueira are among the names being investigated in the 16th round of the probe, dubbed "Politeia", TV Globo and newspaper O Estado de S. Paulo said.

    A total of 53 search and seizure operations were carried out in order to prevent evidence from being destroyed, according to statements from the police and federal prosecutors.

    The Globo television network said police conducted a search at one its local affiliates, TV Gazeta, where Collor is a main stakeholder.

    In statements, Brazil's federal police and prosecutors did not confirm the names under investigation but said the operations were ordered by the Supreme Court, Brazil's highest judiciary authority and the only one allowed to order probes on sitting politicians.

    "The search operations are taking place in residences, offices, company headquarters, law firms and public institutions," police said in the statement.

    Previous arrest and search warrants have been ordered by a federal court in Curitiba.

    Since March of last year the so-called "Car Wash" investigation has landed former Petrobras executives and some of Brazil's most powerful construction tycoons behind bars. More than 50 sitting politicians, including the presidents of both Congress houses, are under investigation.

    The massive kickback scandal has paralyzed infrastructure plans of Petroleo Brasileiro SA, as Petrobras is formally known, and undermined President Dilma Rousseff's political standing just as the economy tumbled.

    The police statement said Tuesday's operations were taking place in seven states: Bahia, Pernambuco, Alagoas, Santa Catarina, Rio de Janeiro, Sao Paulo and the Federal District.

    Efforts to contact Nogueira and Collor de Mello, a former Brazilian president impeached in 1992, were unsuccessful.
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    Solar eats Gas.

    Consol begins new round of layoffs

    Against the backdrop of low energy prices, Consol Energy Inc.has commenced a new round of layoffs.

    "We continually evaluate our workforce based on current and anticipated activity levels. These are very difficult but prudent decisions given the depressed nature of commodity prices. We are taking aggressive action so that Consol can continue to operate from a position of strength through the downturn and quickly capitalize on the up cycle when it occurs," it said in a statement.

    Employees had begun to learn the news earlier in the day, sources said, but it is unclear at the moment how many are affected by the decision.

    The layoffs are the latest in a series of cost-cutting moves. In April, the company laid off about 5 percent of its workforce, a move that affected upwards of 190 people. Consol at the time cited weak coal and gas prices.

    Then in May, Consol said it was reducing shifts at its three Pennsylvania longwall mines — the Harvey, Bailey and Enlow Fork locations — moving to a four-day work week. And last month, the company told retirees it had decided to cancel their health insurance benefits four years earlier than it had planned on account of the poor commodities markets.

    Consol earlier had agreed it would end the benefits for current retirees in 2019; however, that date has been moved up to the end of this year.

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    China surprises economists with GDP rise of 7%

    China surprises economists with GDP rise of 7%

    China has confounded expectations that its economic growth would slow further in the second quarter, with gross domestic product rising by 7%.

    Analysts had widely predicted that economic growth would dip from 7% in the first quarter to around 6.8% in the second.

    However, GDP held steady, officials from China’s National Bureau of Statistics claimed on Wednesday morning. The figure still represents the lowest level of growth since the 2009 global financial crisis but is in line with Beijing’s official target for 2015 of “around 7%”.

    “The national economy has been running within proper range and the major indicators picking up steadily, showing moderate but stable and sound momentum of development,” China’s National Bureau of Statistics said in a statement.

    The announcement of stable second quarter growth surprised analysts, offered a boost to Beijing’s attempts to soften the country’s economic slowdown and came after weeks of chaos in the Chinese stock market which saw more than $3tn wiped off shares.

    However, there were immediate doubts over the growth figure’s reliability with the announcement sparking renewed debate over the trustworthiness of Beijing’s statistics.

    The fact that the figure was exactly in line with the Communist party’s 2015 full-year growth target “raises suspicions,” said Yang. “There is the issue of credibility, certainly.”

    China’s premier, Li Keqiang, tried to put a brave face on the recent stock market collapse during a meeting on Friday with economists and business leaders in Beijing.

    Under that “new normal” Beijing is looking to boost domestic consumption as it attempts to move away from its export-fuelled boom.

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    Iraq’s Kurds bypass state oil marketer for all July oil exports

    Iraqi Kurds are independently selling oil produced in their region, bypassing the country’s state crude marketer for all exports so far this month, said Safeen Dizayee, a spokesman for the Kurdistan Regional Government.

    Oil fields in the semi-autonomous region of northern Iraq are producing about 700,000 barrels of oil a day, Dizayee said Monday in a telephone interview from the city of Erbil. The Kurdish enclave is exporting as much as 600,000 barrels of that amount daily, and it hasn’t sold oil via Iraq’s state marketing agency since June, he said.

    “We have the right to resort to any way to provide funds to pay civil servants,” Dizayee said. The KRG needs $1 billion each month to pay for salaries and its operational budget, and it’s financing a war against Islamic State militants that has displaced 1.7 million refugees to the Kurdish region. The KRG also owes money to oil companies.

    The KRG and the central government agreed on Dec. 2 that Iraq’s state-run marketer SOMO would be responsible for the sale of all crude produced in the country. The Kurds have complained they haven’t received their full share of revenue from the sales, while the central government in Baghdad says the Kurds haven’t delivered the agreed amounts of oil. Failure of the two sides to settle differences over how to share oil revenue adds to uncertainty about supplies from northern Iraq.

    “All oil sales that happen outside SOMO are illegal,” Laith Al-Shaher, director general of the legal department at the oil ministry in Baghdad, said in a phone interview Sunday.

    The Kurdish region’s parliament approved a plan to sell as much as $5 billion in bonds to raise funds for infrastructure projects. There is a “clear and good desire by international financial institutions” for a sale, Dizayee said. The KRG may sell as much as $2 billion in a first round, he said.
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    BHP Expects $2B Impairment Charge After U.S. Assets Review

    BHP Expects $2B Impairment Charge After U.S. Assets Review

    The pain keeps adding up for BHP Billiton Ltd. and its investments in U.S. shale gas and oil.

    The company today said it would take a $2.8 billion writedown, most of it on the Hawkville field in Texas. That brings BHP’s pretax charges on its U.S. shale unit to about $5.9 billion since 2012, according to company filings.

    BHP, the biggest overseas investor in U.S. oil and gas pumped out of shale rock, has said it will focus on its so-called four business pillars -- the highest earning petroleum, iron ore, copper and coal units.

    “This is not only disappointing, it poses the question of whether or not those four pillars are the right ones,” Evan Lucas, a markets strategist in Melbourne at IG Ltd. said by phone. “All four of them are under huge price pressure.”

    “While the impairment of the Hawkville is disappointing, it does not reflect the quality of our broader onshore U.S. business,” BHP’s Petroleum President Tim Cutt, said in a statement today. The expected writedown equates to about $2 billion after tax, BHP said.

    The producer expects its U.S. onshore division to be cash flow positive in the year through June 2016 with an oil price of $60 a barrel and a benchmark U.S. gas price of $3 per thousand standard cubic feet, the statement said.

    Gas Drop

    BHP got the Hawkville field as part of its acquisition of Petrohawk Energy Corp. in 2011. Some of today’s charge is a write off on goodwill from the $12.1 billion takeover, according to the Melbourne-based company. It didn’t give a breakdown.

    U.S. natural gas has dropped almost a third since the start of 2014 after four years of record supply as hydraulic fracturing opened up shale reserves from Texas to North Dakota.

    Futures for August delivery on the New York Mercantile Exchange were little changed at $2.839 per million British thermal units at 1 p.m. Singapore time on Wednesday.

    BHP will cut spending on its U.S. onshore unit to $1.5 billion in the year through June 2016, supporting a development program of 10 operated rigs, it said today. The producer spent $3.4 billion on drilling and development in the previous year, BHP said in May.

    The producer booked a charge of $2.8 billion against the Fayetteville shale gas operation in the 2012 fiscal year and a $266 million writedown on its Permian basin assets in the following year.

    BHP in February halted plans to sell Fayetteville in Arkansas as it couldn’t get an acceptable price, Chief Executive Officer Andrew Mackenzie said at the time.
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    Oil and Gas

    Iran to return to oil market with maximum capacity -Shana

    Iran will return to the global oil market with maximum capacity once the sanctions against the country are lifted following Iran's nuclear deal with world powers, a deputy oil minister was quoted as saying on Tuesday.

    Iran views the Asian market as a top priority for selling its crude oil, Mohsen Qamsari, director of international affairs at the National Iranian Oil Company was cited as saying by Shana, the oil ministry's news agency.

    "We will try to maximise our crude export capacity to Europe and restore 42 to 43 percent share in the European market before the sanctions were imposed," said Qamsari.

    Oil Minister Bijan Zanganeh said last month that Iran was aiming to add 500,000 barrels per day (bpd) to production within two months of easing Western sanctions that have halved shipments in recent years, and as much as 1 million bpd in six to seven months.

    But years of underinvestment mean Iran may struggle to get its oil industry anywhere near full potential, analysts say. It will also take time for Tehran to raise output as nuclear inspectors verify Iran's compliance with the terms of any deal and sanctions are slowly removed.

    A Reuters poll of 25 oil analysts from leading banks and brokerages forecast Iran would be able to raise crude oil output by 250,000 to 500,000 bpd by the end of this year and by up to 750,000 bpd by mid-2016.
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    Chinese tankers to carry U.S. shale gas to Europe

    Two gas tankers built by the Sinopacific Offshore and Engineering were named on Tuesday, and will soon be shipping shale gas to Europe from the United States, officials said.

    The ships will join an eventual eight-strong fleet of tankers operated by Swiss-headquartered petrochemical manufacturer Ineos Group Ltd, which will carry 800,000 tons of shale gas annually from the U.S. to its European manufacturing plants.

    Jim Ratcliffe, Ineos' founder and chairman, said the $1 billion project will help revolutionize the European chemicals industry by reducing both feedstock and energy costs.

    "Bringing U.S. shale gas to Europe is a huge undertaking, involving Ineos experts from across the globe. To see these two ships finally completed here in China means that this vast project will soon be fully operational."

    Simon Liang, Sinopacific Offshore and Engineering's chairman and CEO, said more than 2,000 people had been involved in the building of the two "Dragon Class" ships, each of which required about one-million man hours of work.

    The JS Ineos Insight and JS Ineos Ingenuity will join six other vessels in creating what the company described as a "virtue pipeline", to transport over 800,000 tons of gas a year at minus 90 degrees centigrade across the Atlantic to plants in Norway and Scotland.

    Each ship will be the length of two soccer pitches and be able to carry over 27,500 cubic meters of liquefied gas. The first two ships will begin their maiden voyage this month.

    "We have seen U.S. shale gas revolutionize U.S. manufacturing and we believe the completion of this project will help do the same for Europe," said Ratcliffe.
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    UK Q1 gas imports up 9.1 percent

    Gas imports in the UK increased by 9.1 percent to 156.3 TWh in the first quarter of this year, as compared to the same period in 2014.

    Liquefied natural gas imports accounted for 22 percent of total imports, according to data by the Department of Energy & Climate Change (DECC).

    The majority of the UK imports originated in Norway (61 percent) and the LNG from Qatar (19 percent).

    According to DECC, the UK’s gas demand rose by 9.6 percent in the quarter reflecting cooler temperatures and an increase in demand for space heating.

    Energy industry saw a 13 percent increase in gas use, domestic and other final user demand also increased by 13 and 12 percent respectively.

    Gas consumption within the iron and steel industries increased 8.4 percent and within other industry by 2.4 percent.

    Total production of natural gas in the first quarter of 2015 was 114.8 TWh, 0.5 percent lower than a year before.
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    Russian Oil and Condensate Production Hits Post-Soviet Record

    Russian oil and condensate production reached a new post-soviet record of 10.7 million barrels a day in 2015, according to the latest analysis from Wood Mackenzie.

    The research firm claims that condensate production will increase by 50 percent by 2018, compared to 2014 levels, although Wood Mackenzie warns that Russia could face a sizeable production gap after 2020, when the impact of Western sanctions kick in.

    "We see Russia defying expectations in terms of 2015 liquid production levels achieving a new post-soviet record of 10.7 million barrels per day. The steady increase seen in the first half of this year is contrary to many pessimistic predictions, due to the turbulent geopolitical situation for the country as a result of the Ukraine crisis and subsequent Western sanctions. We see actual growth in liquids being driven by condensate, but given the unfavourable macro-economic situation with a volatile Rouble and depressed oil price, there is significant uncertainty for Russian production in the longer-term, post 2020."

    "Despite West Siberia's production peaking in the 1980s, the region remains core and is expected to contribute 60 percent of Russia's liquids production this year. Russian operators are looking at deeper and more complex reservoirs such as the Tyumen and Achimov, these areas are widely regarded as 'hard-to-recover' but are still far easier to develop than unconventional shale plays such as the gargantuan Bazhenov expanse. Currently the Tyumen and Achimov areas each contribute between 6-7 percent of West Siberian (4 percent of Russia's overall) production and we expect this could more than double by 2020."

    - See more at:
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    Afren warns on near-term oil production; shares halted

    Oil producer Afren Plc warned that its near-term production would likely be "materially lower" than expected as uncertainty over the results of a business review made it unable to assess its financial position.

    The London-listed company said that the uncertainty spurred it to seek the suspension of trading in its shares.

    Afren, which has been burdened by debt, said it would talk to its bondholders regarding its request for a further $30 million funding.
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    WPX Energy to enter Permian Basin with $2.35 bln deal

    Oil and gas producer WPX Energy Inc said it would acquire privately held RKI Exploration & Production LLC for $2.35 billion, the latest in a series of deals brought on by a steep drop in crude prices.

    WPX, which will also assume $400 million of RKI's debt, said the deal would give it access to the liquids-rich Permian basin of Texas and New Mexico - the biggest and fastest growing U.S. shale oil field.

    The deal comes two months after Noble Energy Inc said it would buy Rosetta Resources Inc for about $2 billion in the first significant shale deal since the oil rout began last summer.

    A nearly 50 percent drop in crude prices since highs of over $100 per barrel in June last year has lead to several big-ticket acquisitions, including Royal Dutch Shell's $70 billion deal for BG Group.

    The assets WPX is buying produce about 22,000 barrels of oil equivalent per day, 69 percent of which is oil and natural gas liquids.

    With the acquisition, WPX expects oil to account for nearly a third of its output in 2016 compared with about 20 percent now. The deal is expected to close by the end of the third quarter.

    WPX said on Tuesday it planned to increase the rig count in the Permian basin to six from four by the end of the year.

    With crude prices steadying at about the $50 mark, several oil producers including EOG Resources Inc, Concho Resources Inc and Devon Energy Corp are putting rigs back to work and boosting production.

    The deal excludes RKI's operations in the Powder River basin in Eastern Wyoming, WPX said. RKI will divest or transfer the assets before completion of the deal.
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    Suncor, Partners Test Radio-Frequency-Based Crude Extraction

    Canadian oil-sands company Suncor Energy Inc. said Tuesday that it and several partners will begin a pilot project using radio frequencies to produce heavy crude, which the company said was the first such production test of the technology on subterranean oil-sands deposits.

    The consortium, which includes oil-sands producers Devon Energy Corp. andCnooc Ltd. unit Nexen Energy ULC, along with Melbourne, Florida-basedHarris Corp., will start small-scale test production at a pair of wells on Suncor’s Dover site in northern Alberta and run the pilot for about two years.

    Radio-frequency-based extraction holds the promise of being more environmentally friendly and cheaper than standard oil-sands production. It could reduce or eliminate the need for steam generated by heating water with natural gas, an expensive and carbon-intensive process.

    “If successful and commercially viable, it has the potential to improve economic and environmental performance in the oil sands by eliminating the need for water” to produce oil, Gary Bunio, Suncor’s general manager of oil-sands strategic technology, said in a statement.

    The pilot project will cost about 44 million Canadian dollars (US$34.6 million) and, if successful, will lead to a full commercial scale field test, according to a Suncor spokesperson.

    The new technology involves sending electromagnetic waves into hockey-puck-hard deposits of oil embedded in sand underground, something like an underground microwave oven. The liquefied crude, or asphalt, is then mixed with a recyclable chemical solvent and retrieved via a horizontally-drilled well.

    Known as enhanced solvent extraction incorporating electromagnetic heating, it is one of a handful of developing technologies that may be used in the future to exploit large-scale deposits of oil sands that are too deep underground to reach by strip mining.
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    Is There Any Hope Left for SandRidge Energy Inc. Investors?

    SandRidge Energy Inc. was supposed to be an undervalued turnaround story with the potential to double its stock price in short order. That was when the stock was at $5 per share and oil was persistently in the triple digits. Now, however, with oil hovering around $50 a barrel, the stock is under a buck per share. It's a stock price that suggests that there isn't much hope left for SandRidge Energy investors that this company will ever turn around as its issues continue to mount.

    While the persistently weak oil price is at the center of SandRidge Energy's troubles, it is far from its only issue. A more pressing issue is the gargantuan amount of debt it borrowed to fund its growth over the past few years. It's debt that is becoming a nearly insurmountable weight as the company doesn't stand a chance of drilling its way out of it as it had planned to do in years past.

    After its most recent $1.25 billion debt issuance, SandRidge now has $4.6 billion in debt outstanding. That's an incredible amount of debt and, for perspective, there are oil companies 10 times its size with similar levels of outstanding debt. Worse yet is the fact that the PV-10 value of SandRidge's reserves, or the present value of its proved reserves discounted by 10%, is a mere $3.04 billion at recent projected forward oil and gas prices. It's an imbalance that suggests that SandRidge Energy could be insolvent if current prices persist.

    To make matters worse, SandRidge's ability to repay that debt is in serious jeopardy. For example, last quarter 64% of SandRidge Energy's revenue didn't come from its oil and gas sales, but from oil and gas hedge gains. It's a safety net that Bloomberg recently reminded investors is going away as SandRidge's hedges begin to roll off as we head into 2016. In fact, as Bloomberg pointed out, SandRidge hedged 90% of its production in 2015, but only has about a third of 2016 production hedged. That suggests its cash flow will drop significantly in 2016, leaving it with less cash to drill new wells along with less cash to maintain its debt.

    Another emerging concern is the rash of earthquakes to hit the state of Oklahoma, where SandRidge Energy operates. The state's energy regulator recently called the spike in quakes a "game changer" and is now considering tougher restrictions on drilling activity. The driving force behind these quakes is believed to be high-volume wastewater injection wells, which are critical to the operations of companies like SandRidge Energy as these wells significantly reduce the costs of trucking wastewater away from wells.

    Not only is this system critical to SandRidge Energy's operations, but it had planned to put its entire saltwater disposal system into an MLP and use that business to raise capital via an IPO. That would enable it to recoup some of the more than $600 million it invested into the system. Its capital that the company needs given its hefty debt load, but money it might never see if regulators put restrictions on these wells.

    SandRidge Energy's main focus right now is to get its well costs below $2.4 million, which would enable it to earn a 50% internal rate of return on new wells at current commodity prices. That return just happens to be the same one the company was earnings when oil was in the $80-per-barrel range when its well costs were north of $3 million per well. If it's successful, the company will be able to cut its capital spending from its current rate of $700 million down to an annual average of $400 million to maintain flat production.

    All that being said, even if that plan works, it really just has the company stuck in neutral. It doesn't grow its cash flow so that it can support its debt load. Furthermore, it's questionable whether the company will even be able to generate $400 million in cash flow to support that type of capital program given its debt load. Instead, its only hope of surviving is for oil prices to rally meaningfully higher and it's anyone's guess when, or even if, that will happen.
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    Alternative Energy

    Tesla Executive: Solar Power the big winner as storage costs drop

    A top executive at Tesla has been outlining a vision for electricity storage, which is set to have a momentous impact on power generation.

    JB Straubel, chief technical officer at the company, says solar power will be the main beneficiary once the cost of lithium-ion batteries continues to decrease.

    Speaking in San Francisco on Monday, Straubel described a future in which all vehicles (other than planes and rockets) are powered by batteries, and new electricity systems are built with solar panels combined with batteries.

    While the cost of lithium-ion batteries has dropped in recent years, Straubel said that the price will continue to decline dramatically — and he thinks it will happen much more quickly than most people think. These batteries are just at the beginning, or at “the cliff,” of even lower prices, said Straubel.

    According to the company co-founder, when the combination of batteries and solar panels become cheap enough to provide electricity for less than the cost of fossil fuel power, solar energy will become the low cost choice.

    “Once we get to that there is no going back. That’s the tipping point that’s going to happen, I am quite certain, over the next 10 years,” said Straubel.

    In April, after close to five years of research and testing, Tesla launched a new division focused on building batteries for the power grid and buildings, which the company calls “Tesla Energy.”

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    Base Metals

    Global copper mine production to grow 6% annually until 2018: ICSG

    Global copper mine production capacity until 2018 is expected to grow at an average annual rate of around 6% to reach 27.5 million mt/year in 2018, data released Tuesday by the International Copper Study Group showed.

    Concentrate production capacity will represent 84% of the growth (4.8 million mt,) with solvent-extraction/electrowinning production capacity representing 16% (900,000 mt), the Lisbon-based research group said in a biannual report.

    Compared with a previous estimate published in January, anticipated annual mine production capacity for 2017 and 2018 was revised down around 330,000 mt and 140,000 mt, respectively, owing mainly to continued delays for many projects, ICSG analysts said.

    During the 2015-2018 period, copper in-concentrate capacity is expected to increase by 6.5%/year to reach 21.8 million mt/year in 2018, while solvent-extraction/electrowinning capacity is expected to increase at a slower rate of 4.4%/year to reach 5.7 million mt/year in 2018.

    "Peru is projected to account for 26% of the additional capacity from new mine projects and expansions through 2018, followed by Zambia, Mexico, Mongolia, China and the Democratic Republic of the Congo," the ICSG said. "Together these six countries will represent 66% of the world growth."

    Projects are also being planned in countries that currently do not mine copper, including Afghanistan, Ecuador, Ethiopia, Fiji, Greece, Israel, Panama, Sudan and Thailand, the research group noted.

    "By 2018, total expected copper production capacity from projects starting in these new copper mining countries could reach 150,000 mt/year, and capacity could continue to increase well above 1 million mt/year if projects planned beyond 2018 in these countries are developed," ICSG analysts said. Concurrently, production from countries that started mining copper in the last decade is expected to increase to 550,000 mt/year by 2018 from 4,000 mt/year in 2003.

    Annual copper smelter capacity growth is projected to lag behind the growth in concentrate capacity, growing an average 3%/year to reach 22.5 million mt/year in 2018, an increase of 2.6 million mt (13%) from that in 2014.
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    Sandfire Resources to build $40m solar power station

    Sandfire will start the construction of its solar power station in July. Photo: Dominic Lorrimer

    Construction of a state-of-the-art solar power station at a copper mine in Western Australia will begin later in July.

    Sandfire Resources says the $40 million project at the DeGrussa copper mine 900km northeast of Perth will be the largest integrated off-grid solar and battery storage facility in Australia.

    The project, expected to be up and running in 2017, is getting up to $15 million in funding from the federal government's Clean Energy Finance Corporation and $20.9 million from the Australian Renewable Energy Agency.

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    Steel, Iron Ore and Coal

    Gas eats coal?

    The Wall Street Journal reported that State regulators are descending on Washington Tuesday to make last-minute pleas for changes in the Obama administration’s sweeping new rules for power-plant emissions, which will determine the direction of utility investments for decades to come and could affect the price of electricity.

    California and several East Coast states want the Environmental Protection Agency to respect the steps they have already taken to cut carbon pollution in their regions and hold other states to higher standards by not easing proposed emission targets.

    Mr Mary Nichols, chairman of the California Air Resources Board, said that “We want a strong rule. There are not quite as many viewpoints as states but it’s pretty close.”

    Other states, including Tennessee, Ohio and Nevada, say the pollution targets put forth by the EPA are so onerous they threaten to close power plants and cost consumers substantially more to keep the lights on.

    At least 5 governors have threatened not to comply with the new pollution rules, including those of Texas, Louisiana, Oklahoma, Indiana and Wisconsin.

    According to spokesman Mr Tom Reynolds, the EPA has received more than four million comments so far on what the Obama administration is calling its Clean Power Plan, the most in the agency’s history. Once finalized in August, it is expected to face a barrage of legal challenges. In the meantime, some Republicans and coal-state Democrats have been pushing legislation to delay the rule’s compliance deadlines until all the litigation is complete.

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    China June coal output falls nearly 5 percent -stats bureau

    China churned out 327 million tonnes of coal in June, down 4.9 percent from the same period last year, despite rising seasonal power demand, with major producers slashing output to minimise losses, data from the country's statistics bureau showed.

    Production in the first six months reached 1.789 billion tonnes, down 5.8 percent compared with the same period in 2014, the National Bureau of Statistics said.

    Coking coal production in June also fell 6.9 percent on the year to 38.38 million tonnes.

    Beijing has been trying to ease its dependence on coal and encourage new sources of energy as part of its war on pollution, but it is the economic downturn that has had the biggest impact on the sector, with supply outstripping demand and prices down more than 20 percent so far this year.

    China has been urging producers to curb coal output in a bid to support prices, but new capacity continues to go into operation, with local governments remaining reluctant to take on a sector that employs 5.9 million people and provides huge amounts of revenue.

    So far, the arrival of the summer - usually accompanied by a surge in power consumption as air conditioners are switched on - appears to have had some impact on coal demand, but demand remains weak compared to last year.

    Coal imports rose 16.5 percent on the month in June, but they were still down 34 percent on the year.

    According to Helen Lau, analyst with Argonaut Securities in Hong Kong, many domestic miners in the provinces of Inner Mongolia and Shanxi have cut back production because prices at Chinese ports are now even lower than those on the spot market. The drop in supplies caused the month-on-month increase in import volumes.

    "But the Chinese coal price has not gone up at all, meaning that even though imports of coal increased a little, overall demand remains very, very weak," she said.

    Power generation volumes reached 474.5 billion kilowatt-hours (kWh) in June, up 0.6 percent compared to the same period of last year, but thermal power output was actually down 5.8 percent, with grid companies taking advantage of the 16.4 percent increase in hydropower over the period, which eased their reliance on coal-fired plants.

    Industrial demand for coal has also remained low, with cement production down 5.8 percent in June and crude steel output also falling 0.8 percent compared to last year.

    Spot coal prices in the port of Qinhuangdao SH-QHA-TRMCOAL have remained unchanged at 415 yuan ($66.84) per tonne since early June. The Shenhua Group, China's top coal producer, also said that it would keep prices unchanged over July in the face of weak demand.
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    Iron ore’s plunge has Mount Gibson warning of mine closures

    The collapse in iron ore prices to near the lowest level since at least 2009 risks forcing Mount Gibson Iron to shutter both its operating Australian mines.

    Mount Gibson’s realized price for iron ore fines more than halved in the past year and it’s now contemplating the early closure of its Extension Hill mine, the Perth-based producer said Wednesday in a statement.

    The Koolan Island mine, located off the coast of Western Australia and engulfed by the Indian Ocean after the collapse of part of a 75-meter wide seawall in November, is already scheduled to be placed on care and maintenance by the end of the year, it said.

    The volatility prompted an “ongoing assessment of possible early closure of the Extension Hill mine in the event that price conditions deteriorate,” Mount Gibson said in the statement. Shuttering the site ahead of schedule would cost about A$45 million ($33 million) as at June 30, it said.

    Insurers have offered conditional confirmation that Mount Gibson will be covered for the failure of the Koolan Island mine subject to further inquiries, the company said. Mount Gibson rose 5.3% to 20 Australian cents at 10:06 a.m. in Sydney trading.

    Iron ore with 62% content delivered to Qingdao fell 0.5% to $50.06 a dry ton on Tuesday, the first drop in four days, according to data from Metal Bulletin Ltd. Prices reached $44.59 on Wednesday, the lowest in data going back to May 2009.

    Mount Gibson’s realized price in the three months to June 30 declined 54% to $38 a dry metric ton from $83 a ton a year earlier.

    Benchmark prices will probably tumble below $40 a ton this half on a “looming wave of supply,” as the largest producers continue expansions, according to Jeremy Sussman an analyst at Clarksons Platou Securities Inc.
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    China June crude steel output dips on year as demand falters

    China's crude steel output dropped 0.8 percent in June from a year earlier, government data showed on Wednesday, with demand hit by sputtering economic growth and a property slowdown in the world's top producer.

    But average daily output reached 2.298 million tonnes last month, the highest since June last year, according to data from the National Bureau of Statistics.

    "The daily output was a bit surprising. Steel mills are desperate to protect their market share and maintain cash flow despite deepening losses," said Qiu Yuecheng, analyst with steel trading platform Xiben New Line E-Commerce in Shanghai.

    "However, the biggest concern for steel mills is steel demand is declining this year because of the slowing economy, and some will have to accelerate cuts in steel output in July."

    Total steel output declined 1.3 percent to 409.97 million tonnes for the first half of 2015 compared with the same period a year ago, according to the data from the statistics bureau.

    Chinese steel prices are at their lowest in more than 20 years as the slowing economy cuts into demand for a range of commodities including iron ore and steel, threatening the survival of small steel mills in the country.

    More steel mills have planned to schedule maintenance to curb production and reduce losses, and output is expected to fall in July and August as demand dips further as construction activity slows over the summer.

    Large steelmakers' losses in their core business more than doubled for January-May from a year earlier, as the apparent consumption of crude steel dropped 5.1 percent for the first five months from a year before, more than a 3.3-percent decline over the same period in 2014.

    Steel consumption in China is expected to slide futher this year, industry sources say.

    The most traded rebar futures on the Shanghai Futures Exchange have lost about 25 percent so far this year, after losing more than 28 percent across all of 2014.
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    Shares of Gerdau sink as investors shun reorganization plan

    Shares of Brazil's Gerdau SA plunged the most in almost four months on Tuesday after the Americas' largest steelmaking group announced plans to spend 1.986 billion reais ($633 million) buying out four units as part of a broad reorganization program.

    Under the plan, Gerdau will buy the remaining stakes it does not yet own in Gerdau Aços Longos SA, Gerdau Açominas SA, Gerdau Aços Especiais SA and Gerdau América Latina Participações SA. South American operations will be merged into a single unit, with the Brazilian unit absorbing Gerdau's iron ore business.

    While the move underpins efforts by Chief Executive Officer André Gerdau-Johannpeter to mitigate the impact of Brazil's worst economic downturn in 25 years on earnings and output, investors lashed out at the price being paid for the remaining stakes, which range between 4 percent and 5 percent, amid plunging sales and rising unwanted inventory.

    This is "an expensive transaction from basically every angle, and the timing was unfortunate," said Leonardo Correa, a senior mining and steel analyst with Banco BTG Pactual SA. He cut his price target on Gerdau to 9 reais from 12.50 reais on the news.

    Preferred shares of Gerdau, the company's most widely traded class of stock, sank as much as 7.4 percent to 6.51 reais, nearing their lowest level in 10 years. Metalúrgica Gerdau SA, the investment holding company that controls Gerdau, shed as much as 11 percent.

    Gerdau will disburse 339 million reais in cash for the stakes, with the remainder being paid with 206 million reais worth of stock, 802 million reais worth of shares in an asset-backed security fund and 639 million reais in additional, annual installments between 2016 and 2022.

    The reorganization is "part of necessary actions to adapt Gerdau to a current scenario demanding more competitiveness," the filing quoted Chief Financial Officer Andre Pires as saying. The company will formally present the new structure in its third-quarter earnings report.

    A sales trading desk note by Bradesco BBI suggested that the buyout of the four units might have been planned as a way to reverse prior steps in which Gerdau sought to create tax-deductible goodwill. Some of those actions are currently being contested by tax authorities.

    Efforts to contact Gerdau to explain the move were unsuccessful, the Bradesco BBI note added.

    Under the reorganization plan, mills in Mexico and the Caribbean will also be gobbled up by Gerdau's increasingly relevant North America unit, which is starting to reap the benefits of a recovering economy in the United States, the filing added.
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