Mark Latham Commodity Equity Intelligence Service

Wednesday 14th September 2016
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    Taiwan's commodities companies brace for another super typhoon

    Taiwan's commodities industry was preparing on Tuesday for heavy wind and flooding as Typhoon Meranti hurtled towards the south of the island, threatening to disrupt grain and oil shipments from its major port and a lead refinery.

    As the storm strengthened in the Pacific, Taiwan's national weather forecasters predicted it would make landfall in the Hengchun Peninsula on Wednesday.

    Preparing for their second super typhoon in as many months, state-owned Taiwanese oil refiner CPC Corp and Formosa Petrochemical Corp closed their ports in Kaohsiung in the south and Mailiao in the west as a precaution, officials at both companies said.

    Their refineries on the island were operating as normal on Tuesday. Formosa has a 540,000 barrels per day (bpd) refinery while CPC has an existing capacity to produce 500,000 bpd. CPC's 220,000 bpd refinery closest to the storm's path in Kaohsiung was mothballed in November last year.

    Kaohsiung at the southern tip of Taiwan is the island's second most populous city and home to its largest port and the world's 13th largest container terminal.

    It handled 110 million tonnes of cargo last year, almost half of Taiwan's total, according to the port operator's annual report.

    The island is a major importer of corn, wheat and soymeal for animal feed, as well as iron ore and crude oil. Rice and pig farming are among Taiwan's main agricultural sectors.

    Metals industry players were not expecting major disruption, despite the port being a major storage site for metals in the region. LME warehouses there hold more than 42,000 tonnes of nickel, 25,000 tonnes of copper and 28,000 tonnes of aluminum. But a warehouser with operations there said he was not expecting any disruption to activities.

    Thye Ming Industrial Co was ready to adjust shifts at its lead refinery in Kaohsiung if the typhoon hit, said a source familiar with the matter. It sells some 120,000 tonnes of lead and lead products per year.

    Heavy rainfall is more devastating for crops and industrial plants than strong winds, the source said.

    Typhoon Meranti comes just over two months after the deadly typhoon Nepartak cut power, grounded flights and forced thousands to flee their homes across central and southern areas.

    In 2009, Typhoon Morakot cut a swathe of destruction through southern Taiwan, killing about 700 people and causing up to $3 billion of damage.

    Meranti is forecast to hit China's east coast later on Wednesday.
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    Vedanta Wins Cairn Nod for BHP-Style Resources Conglomerate

    Vedanta Ltd.’s plan to create an Indian resources heavyweight to compete with the likes of BHP Billiton Ltd. got a boost Monday after shareholders in its oil unit, Cairn India Ltd., agreed to a proposal to combine the two companies.

    Cairn India’s shareholders “will benefit from exposure to Vedanta’s diversified portfolio of assets while retaining the upside from Cairn’s strong oil & gas assets,” Cairn’s acting chief executive officer, Sudhir Mathur, said in a statement, following the shareholders’ vote. The transaction is expected to be effective by the end of the financial year in March.

    Billionaire owner Anil Agarwal set out his idea to combine Vedanta, India’s biggest base metals producer, based in Panaji, Goa, with its largest onshore oil producer in June 2015, but the plan faltered after the approval of key Cairn shareholders couldn’t be secured. Vedanta, which holds 58 percent of its oil unit, sweetened the deal in July 2016. Cairn UK Holdings Ltd. and Life Insurance Corp. of India are among the largest minority shareholders of the Gurgaon-based Cairn.

    Debt Pile

    The deal will allow India’s most-indebted metals company after Tata Steel Ltd. to access Cairn’s cash pile, which stood at 234 billion rupees ($3.1 billion) at the end of June. Vedanta’s debt at the time was 780 billion rupees while Cairn is debt-free.

    “The deal is definitely good for Vedanta, not exactly for Cairn,” Goutam Chakraborty, an analyst at Emkay Global Financial Services Ltd., said by phone from Mumbai, although he added that the combined entity will benefit from the diversification of its assets.

    London-listed Vedanta Plc’s ownership of Vedanta Ltd. is expected to fall to 50.1 percent once Cairn is absorbed, from 62.9 percent now. Cairn’s minority shareholders will own 20.2 percent of the merged entity and and Vedanta minority shareholders 29.7 percent.

    Merger Approved

    Vedanta Ltd.’s Chief Executive Officer Tom Albanese said last year that the creation of an Indian resources conglomerate was intended to mirror Australia’s BHP -- which holds mining and energy assets -- or Brazil’s Vale SA. Albanese is a former CEO of another mining giant, Rio Tinto Group.

    The merger plan was approved by 65 percent of the Cairn India shareholders -- representing 93 percent of its ownership -- who attended a meeting in Mumbai on Monday, according to the statement. In a postal ballot, 72 percent of shares voted for the deal. Vedanta shareholders and creditors had approved the proposal last week.

    Cairn closed 5.1 percent lower in Mumbai on Monday, leaving it with a market value of 354 billion rupees. Vedanta lost 5.8 percent and is worth 478 billion rupees -- or about a tenth of BHP’s market capitalization. India’s financial markets are shut for a holiday on Tuesday.
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    Oil and Gas

    Oil Stabilizes After API Reports Lower Than Expected Build In Crude Stocks

    The American Petroleum Institute (API) is reporting a 1.4-million-build in US crude oil inventory over last week—bursting the bubble created the week before when official data showed the biggest draw on inventory in a century.

    Still, the build is much lower than expectations of a 4-million-barrel build, in part because the release of shut-in oil following a Gulf of Mexico hurricane.

    At Cushing, crude oil inventories were down 1.12 million barrels, more than expectations.

    Gasoline stocks were also down 2.4 million barrels, against expectations of a 1.1-million-barrel draw.

    For distillates, the picture was gloomier, with the biggest build in eight months, up 5.3 million barrels.

    Tomorrow at 10:30am EST, the EIA will release the official figures, and all eyes will be watching to see if the API’s data holds. In the meantime, the market remains highly volatile.

    The EIA’s latest report had US commercial crude oil inventories down by 14.5 million barrels during the week ended 2 September. This was some 2.5 million more than the API had predicted the day prior, so analysts will be watching tomorrow’s figures closely.

    Last week’s EIA data also showed the API reporting gasoline draw numbers lower than the official figures. On 7 September, the API reported a 2.388-million-barrel draw on gasoline stocks, while the EIA came back with a 4.2-million-barrel draw.
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    Oil Industry May Cut Spending for Third Year in Row, IEA Says

    The oil industry may cut spending for a third straight year in 2017 as lower costs kick in and companies continue to grapple with weaker finances because of crude’s slump.

    Investments in oil and gas fields are set to drop 24 percent to $450 billion this year, the International Energy Agency said in a report, deeper than the 17 percent decline estimated in February. Capital expenditure fell 25 percent last year, taking out more than $300 billion of spending in two years. Investments will have been cut for two consecutive years for the first time in 40 years, according to the Paris-based agency.

    “There are no signs that companies plan to increase their upstream capital spending in 2017,” the IEA wrote in the report. “Many operators have revised downwards their 2016 capital spending guidance throughout the year and, as of September 2016, they plan to maintain 2017 investment at 2016 levels or even” reduce it further.

    With an oil glut seen likely to persist until late 2017, companies including Royal Dutch Shell Plc and BP Plc are preparing for a prolonged downturn. Crude’s slump has hit their earnings and increased debt, while their credit ratings have been cut as the biggest companies continue to maintain their dividend payouts. The curb on investment has meant they are spending less on finding new oil fields, driving discoveries to the lowestsince 1947.

    Exploration spending fell about 30 percent to less than $90 billion last year and is likely to drop further to about $65 billion this year, according to the report. Its share of total spending on oil and gas fields has dropped to 14 percent, the lowest in a decade.

    “Companies are putting more effort into developing proven reserves in order to sustain cash flows that had already been hit severely by lower oil prices,” the IEA said. “The impact of reduced spending on exploration usually materializes only several years later, while delaying or canceling an ongoing development project can have a more immediate impact on an oil company’s finances.”

    In the boom years, when oil prices rose from about $25 a barrel at the turn of this century to over $100 in 13 years, companies allowed costs to swell as they looked to add reserves and production. Between 2000 and 2014, investments in oil and gas fields increased almost fivefold and capital spending grew 12 percent on average per year, according to the IEA.

    The current downturn is now forcing companies to take a long, hard look at their expenditure. Helping them are the lower costs of services and materials, which fell by 15 percent last year and are expected to decline 17 percent this year, according to the agency. Rig-rental rates will probably stay down because of oversupply, while low steel prices are reducing the cost of other equipment, BP Chief Executive Officer Bob Dudley said in July.

    About two-thirds of the industry’s reduced spending is because of lower costs while companies stalling projects and work accounts for the remainder, according to the IEA. As oil prices rise in the future, costs would increase again, taking overall investments higher as well.

    Brent crude has increased 27 percent this year after touching a 12-year low in January as production fell in the U.S. and demand rose, helping erase some of the oversupply. Still, average prices this year are less than half of what they were in 2014.

    The IEA on Tuesday changed its view on the glut, saying the surplus in global oil markets will last for longer than previously thought, persisting into late 2017, as demand growth slows and supply proves resilient. It trimmed projections for global oil demand next year by 200,000 barrels a day to 97.3 million a day and reduced growth estimates for this year by 100,000 barrels a day to 1.3 million a day.
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    China crude oil imports rebound in Aug despite lower runs, pushes excess to tanks

    China's crude oil imports rebounded in August despite lower crude throughput at both state-owned and independent refineries, implying that the excess imported barrels likely made their way to storage tanks.

    China imported a total of 32.85 million mt, or 7.77 million b/d, of crude in August, up 5.7% from July, the first rebound after three consecutive month-on-month declines since April, when 7.96 million b/d of crude was imported, S&P Global Platts' calculation based on customs data showed.

    China's state-owned oil refiners Sinopec, PetroChina and China National Offshore Oil Corporation, planned to operate their plants at an average of 80% of nameplate capacity in August, down two percentage points from the planned run rate of 82% in July, according to a Platts survey.

    The actual average operating rate in August may, however, be lower than 80%, as some of the refineries under maintenance were not included in the survey, Platts previously reported.

    In addition, the 38 independent refineries in Shandong that were surveyed also lowered primary throughput in August to an average of 46.5% of their processing capacities, down from 47.2% in July, data from Beijing information provider JYD showed.

    Lower crude throughput last month was mainly due to maintenance at some of the refineries, market sources said.

    The excess crude imports in August were likely sent into storage, including tanks at refineries for replenishment after turnarounds as well as the country's strategic petroleum reserves, sources said.


    China is believed to have continued boosting SPR stocks as the number of qualified independent storage operators -- who are involved in leasing tanks for strategic reserves -- has increased, likely resulting in more availability of storage space. This is despite a delay in the construction of some of the state-owned storage facilities.

    Beijing last Friday said that by early 2016, the country had stored 234.34 million barrels of crude for SPR in both state-built and independent storage tanks. The volume had risen by 22% from 191.31 million barrels by mid-2015.

    At least 54.45 million barrels of SPR was stored in independent storage facilities by early 2016, up from as low as 11.42 million barrels as of mid-2015, Platts calculations showed.

    China issued a draft ruling mid-2016 requiring private investment in state oil reserves' storage facilities, which was expected to encourage building of oil stocks.


    China's oil product exports retreated in August due to low crude throughput at the refineries and a recovery in domestic demand, market observes said.

    China exported 3.71 million mt of oil products in August, down 18.8% from a record high of 4.57 million mt in July, though the figure was still up 19.3% year on year, according to Platts calculations.

    Domestic sales of gasoline and gasoil in Shandong province, the home of oil product swing suppliers -- the independent refiners, registered a month-on-month jump of 36.89% and 13.98%, respectively, in August, Platts calculations based on JYD data showed.

    Increased gasoil and gasoline sales indicated higher demand for the two products last month, which were supported by a recovery in the industrial and transportation sectors after heavy rains in July, market sources said.

    In addition, the autumn harvest season began in August, which also likely supported higher demand for gasoil and gasoline, sources noted.
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    Vast Kazakh Oil Field Seen Taking Another Decade to Reach Target

    Kazakhstan’s giant Kashagan oil field has taken 16 years and more than $50 billion to bring to the verge of production. It could take another decade to reach its potential, with initial output at half the forecast level.

    Eni SpA, working with partners Royal Dutch Shell Plc, Total SA and the Kazakh state, expects Kashagan to start in October and pump 370,000 barrels a day within a year. Consulting firm Wood Mackenzie Ltd. contends the field will produce only about 154,000 barrels a day in 2017 and won’t get anywhere near targeted volumes until the next decade.

    “It will take time to reach production capacity,” Samuel Lussac, WoodMac’s research manager for Russia, said in an interview. “We don’t expect Kashagan Phase 1 to produce more than 300,000 barrels a day until the early 2020s.”

    Lussac expects efficiency rates lower than projected by Eni, explaining the difference in forecasts for the vast field in the northern Caspian Sea. The project, initially due to come on stream more than a decade ago, has been plagued by delays and cost overruns caused by multiple setbacks. A 2008 budget estimate of $38 billion jumped to $53 billion by the end of last year following sour-gas leaks that cracked the pipelines.

    Eni said in July that Kashagan would pump 230,000 barrels a day by the end of this year, and plateau at 370,000 barrels by mid-2017. WoodMac sees the plateau -- which it estimates at 380,000 barrels a day -- no sooner than 2026.

    Challenging Project

    In November 2014, Total described Kashagan as “the mother of all projects,” saying “the combination of challenges on this project are without equivalent in our industry.”

    The owners of the oil discovery, the world’s biggest since Russia’s Priobskoye North in 1982, have changed over the years. Kazakhstan’s stake is now 16.88 percent; Eni, Total, Shell and Exxon Mobil Corp. each own 16.81 percent. China National Petroleum Corp. has an 8.33 percent interest and Japan’s Inpex Corp. has 7.56 percent.

    The imminent start of Kashagan has led the Organization of Petroleum Exporting Countries to raise its forecast for non-OPEC supply growth next year by 350,000 barrels a day to an average of 56.52 million barrels. The International Energy Agency also increased its forecast for non-OPEC supply in 2017, predicting growth of 380,000 barrels a day.
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    Libya's NOC to 'begin work immediately to restart exports' from seized ports

    Libya's National Oil Corporation (NOC) said on Tuesday it would immediately start working to resume crude exports from ports seized in recent days by forces loyal to eastern commander Khalifa Haftar.

    "Our technical teams already started assessing what needs to be done to lift force majeure and restart exports as soon as possible," NOC Chairman Mustafa Sanalla said in a statement.

    Starting on Sunday, pro-Haftar forces took control of the ports of Ras Lanuf, Es Sider, Brega and Zueitina from a rival force allied to a U.N.-backed government in Tripoli.
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    Kogas signs MoU with Brazilian state to develop LNG import terminal

    According to Reuters, Korea Gas Corp. (Kogas) has signed a memorandum of understanding (MoU) with the Brazilian state of Ceara to cooperate in the development of an LNG import terminal in Brazil. Specifically, Kogas will transform an existing floating storage regasification unit (FSRU) located at the port of Pecem to an onshore LNG import terminal.

    Reuters claims that this follows an MoU that was signed in August 2016 with the Mexican state of Yucatan to construct a US$1 billion – US$1.5 billion LNG import terminal. With regards to the Brazilian terminal, Kogas is reportedly planning to establish a consortium with a number of private Korean companies to execute the project. The company is also planning to carry out a feasibility study before proceeding with the project.

    In addition to the Brazilian and Mexican terminals, Reuters adds that Kogas is still actively looking to work with a number of countries that wish to import LNG, including South Africa and Bangladesh.
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    Lights on, commissioning imminent at Ichthys LNG FPSO

    INPEX had provided an update on its Ichthys LNG project. The central processing facility (CPF) and FPSO safely started up their main power generators in the South Korean shipyards where they are being constructed.

    Last week at the Samsung Heavy Industries shipyard in Geoje, the CPF’s three generators run by 25 MW dual-fuel gas turbines energized the facility’s distribution network.

    The CPF milestone followed the July start-up of the FPSO’s main turbo-generators at the nearby Daewoo Shipbuilding & Marine Engineering yard in Okpo.

    Ichthys Project Managing Director Louis Bon said this achievement signaled commissioning was well under way for the two facilities.

    “Starting up the main generators of the FPSO and CPF allows the commissioning to further progress by providing the required power for both massive offshore facilities,” he said.

    Following the successful firing of the main power generation units, the focus will now be on load testing, synchronization, and commissioning of the power distribution systems for both offshore facilities. This will allow the permanent utilities on board each facility to be made fully available.

    The CPF and FPSO will be permanently moored for 40 years of operation in the Ichthys field, located in the Timor Sea about 220 km (137 mi) offshore Western Australia.

    Gas will undergo initial processing on the CPF to extract condensate and water and remove impurities in order to make the gas suitable for transmission.

    Most condensate will be transferred from the CPF to the nearby FPSO for offshore processing, with the remainder sent to Darwin with the gas via the project’s 890 km (553 mi) gas export pipeline.

    More condensate will be extracted from the gas at the onshore plant in Darwin. Once in the field, the FPSO and CPF will be linked by an electric cable, allowing power supply to flow from each facility as a contingency measure as required.
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    Qatar Petroleum eyes stake in Eni’s Mozambique LNG project

    Qatar Petroleum is reportedly interested in the Mozambique gas business of Italy’s Eni and could opt to join ExxonMobil in buying a multibillion-dollar stake.

    Reuters reported on Monday, citing sources familiar with the matter, that Qatar Petroleum is in talks with ExxonMobil and Eni on some kind of involvement in Mozambique which could involve a joint investment with the U.S. major, adding the deal was not a classic joint venture structure.

    According to the report, Qatar Petroleum had been looking at Eni’s Area 4 field as well as adjoining acreage of Anadarko Petroleum but the focus was on Eni.

    Italian oil and gas company reportedly sold a multi-billion dollar stake in the planned Mozambique LNG development to ExxonMobil, but the deal will not be announced for several months due to ExxonMobil’s request.

    The gas reserves already discovered by Eni in Area 4 in the offshore Rovuma basin are large enough to feed a giant land-based LNG export plant. Eni, that is the operator of the Area 4 with a 50 percent stake, has discovered about 85 trillion cubic feet of gas in the offshore block.

    To remind, the Mozambique government in February approved the plan of development for Eni’s Coral FLNG project. The approval relates to the first phase of development of 5 trillion cubic feet of gas in the Coral discovery, located in the Area 4 permit.

    The plan of development, the very first one to be approved in the Rovuma Basin, foresees the drilling and completion of 6 subsea wells and the construction and installation of a floating LNG facility, with the capacity of around 3.4 MTPA.
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    Dutch see demand for Groningen gas down sharply from 2020

    Demand for gas from Groningen will "fall sharply from 2020" as production at the northern Dutch field is reduced, Economy Minister Henk Kamp said in a letter to parliament released on Tuesday.

    The Netherlands has been forced to scale back production by roughly half at Groningen, which once met 10 percent of European Union gas requirements, to 24 billion cubic meters per year due to damage from earthquakes.

    Citing a June study by Gasunie, Kamp said a 480 million euros gas conversion facility in Zuidbroek was no longer needed due to falling exports.

    The Groningen gas field is operated by NAM, a joint venture between Royal Dutch Shell and Exxon Mobil Corp.

    Dutch exports of gas have declined already and European countries, notably Germany, had said they would reduce Dutch imports further and seek other sources. The Netherlands had been studying the option of converting gas to meet export requirements.

    "The market conversion abroad has started sooner than we anticipated," Kamp wrote. "Germany, France and Belgium will start the switch from low to high-caloric gas in 2020 instead of 2024.

    That will lead to a reduction in demand for Groningen gas from 2020, he said.

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    Nord Stream-2 on track with pipes expected soon

    Pipes to build Moscow's Nord Stream-2 are expected to start being supplied in December or January, in a sign the gas project is going ahead, Ivan Shabalov, owner of Pipe InnovationTechnologies (PIT), told the Reuters Russia Investment Summit.

    The plan, designed to double the capacity of the existing pipeline on the bed of the Baltic Sea from Russia to Germany, has irked the European Union, which is trying to cut the bloc's dependency on energy supplies from Moscow.

    Russian natural gas supplies to Europe, where Kremlin-controlled Gazprom owns a 31 percent share of the market, have become increasingly politicized since 2014 when Moscow annexed Ukraine's Crimea region.

    Although Shabalov's firm does not supply pipes for Nord Stream-2, one of his companies plans to provide cement coating for some of the pipes which are being used in the project and Gazprom is its customer.

    Shabalov, who founded his firm in 2006 and also heads the Russian pipemakers association, said he expected construction of Nord Stream-2, which was due to start in 2018, to go ahead as planned as production of the pipes had already begun.

    "Supplies are seen starting in December-January," he told the Reuters Investment Summit at the Reuters office in Moscow.

    Some 2.2 million tonnes of steel pipes will be supplied by Europipe [AGD.UL] GmbH, a consortium which includes Salzgitter, with 40 percent of the contract and Russian companies OMK (33 percent) and Chelpipe (27 percent).

    Last year Gazprom and its European partners, including E.ON, Wintershall, Shell, OMV and Engie, agreed on Nord Stream 2, which will double the 55 billion cubic metres per year of the existing pipeline.

    Demand from Gazprom's domestic projects will fall to 1.2-1.3 million tonnes of large-diameter pipes (LDP) this year - valuing them at $1.8 billion - from a peak of more than 2 million tonnes in 2015, Shabalov said.

    Gazprom is seeking to bypass Ukraine, a key transit route for Russian gas to the EU and is also pushing on with the plans to build a gas pipeline to Turkey and beyond to Southern Europe.

    The company also plans to complete the Power of Siberia pipeline to China in 2019-2020, part of Moscow's push for closer ties with Asia despite many analysts questioning its economics.

    "When we built a pipeline to Germany in (the) 1970s, it was not profitable in some respects, this was pure political," Shabalov said.

    "The return of projects like this is the beyond the 20 year horizon... The infrastructure project stands out as only the state can venture to build it."

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    Another Buyer in World’s No. 1 LNG User Resists Resale Curbs

    Osaka Gas Co. is in talks with some suppliers to remove restrictions in existing liquefied natural gas contacts that prohibit resale of the fuel amid a global oversupply.

    The Osaka-based city-gas distributor won’t sign new contracts with so-called destination restrictions, Sunao Okamoto, general manager of the company’s LNG trading department said. Among Japan’s biggest buyers of the fuel, Osaka Gas plans to boost annual LNG fuel purchases to about 10 million metric tons by around 2020 and resell about 2.5 million, Okamoto said, without providing details. He didn’t elaborate on the suppliers with whom the company is in talks.

    “Everyone is demanding destination-free contracts. When it becomes clear to suppliers they can’t sell LNG with such restrictions, we hope it will become the new paradigm,” Okamoto said Monday in Tokyo. “While we want all of our LNG supplies to be destination free, it has to be negotiated with sellers.”

    Osaka Gas is among Asian gas consumers that are using a supply glut and price slump to gain an upper hand in negotiations with suppliers.

    Japan’s Jera

    Qatar’s RasGas Co. last year agreed to revise the pricing formula in its 25-year contract with New Delhi-based Petronet LNG Ltd., resulting in costs for Indian importer to drop almost by almost half. Jera Co., a Japanese utility joint-venture that’s the country’s biggest importer of LNG, has also said it won’t sign new contracts with destination restrictions.

    About 80 percent of long-term LNG contracts between major Japanese and South Korean buyers and suppliers are estimated to include destination restriction clauses, law firm Nishimura & Asahi said in a Feb. 12 presentationfor a study group commissioned by Japan’s Ministry of Economy, Trade and Industry.

    Japan’s Fair Trade Commission is in the preliminary stage of investigating if destination clauses impede competition laws, Bloomberg News reported in July. The probe may lead to the renegotiation of more than $600 billion worth of deals that run until almost the middle of the century.

    Buyers may seek more concessions as a wave of new projects in the U.S. and Australia are set to flood the market. Annual global LNG demand is forecast to increase by 140 billion cubic meters from 2015 through 2021, which isn’t enough to absorb almost 190 billion cubic meters of new capacity slated to become operational, the International Energy Agency said in its Medium-Term Gas Market Report in June.

    Part of Osaka’s supplies for resale will be sourced from the U.S. Freeport LNG development in Texas, Okamoto said. Osaka Gas has a liquefaction tolling agreement with the project for about 2.32 million metric tons a year of destination-free LNG, he said. The project is scheduled to start operations in September 2018.

    “With a big amount of U.S. LNG scheduled to be supplied, it has a huge impact on how sellers think about the market,” said Okamoto. “Major suppliers that have pushed destination restrictions will be forced to change their way of thinking.”

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    EIA releases new estimates of drilled but uncompleted (DUC) wells

    The U.S. Energy Information Administration's (EIA) monthly Drilling Productivity Report (DPR), released today, now includes a supplement that provides monthly estimates of the number of drilled but uncompleted wells (DUCs) in the seven key oil and natural gas producing regions covered by the DPR.

    Current EIA estimates show DUC counts as of the end of August totaling 4,117 in the 4 oil-dominant regions and 914 in the 3 gas-dominant regions that together account for nearly all U.S. tight oil and shale gas production.In the oil regions, the estimated DUC count increased during 2014-15, but declined by about 400 over the last 5 months.The DUC count in the gas regions has generally been in decline since December 2013.

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    When producers are under stress, as has been the case following the large decline in oil prices since mid-2014 that triggered a significant slowdown in drilling and completion activity since late 2014, changes in the number of DUCs can provide useful insight into upstream industry conditions. A high inventory of DUCs also has potential implications for the size and timing of the domestic supply response to a persistent or significant rise in oil prices, since completions of existing DUCs can provide an increase in production with or without any significant changes in the rig count.

    While both drilling and completion activity have declined since late 2014, completions have experienced a deeper decline than drilling in the four DPR regions (Bakken, Niobrara, Permian, and Eagle Ford) that account for nearly all tight oil production, resulting in a growing inventory of DUCs. The differential reduction in drilling and completion rates in these regions may be attributed to several factors, including long-term contracts for drilling rigs and lease contracts that mandate drilling and/or production in order to fulfill commitments made to the landowners and mineral-rights owners. The situation appears to be somewhat different in the other three DPR regions (Marcellus, Utica, and Haynesville) where the production mix skews heavily towards natural gas, in which significant price declines began as early as 2012.

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    Rex Energy to Ship Marcellus Gas to Midwest & Gulf Coast in Nov

    Higher prices for Rex Energy’s Marcellus/Utica gas are on the way. Why? Because the company will, beginning in November, begin to ship some of its gas out of the northeast–to the Midwest and Gulf Coast, where it can get higher prices.

    So says Rex in an update issued yesterday. Rex issued an operational update yesterday to discuss recent results and the next round of drilling they plan to do–4 more wells on the Vaughn pad in Butler County, PA–

    and the news that a new high pressure gathering system is on the way in Butler County. Included in the update is the good news that Rex will begin to ship 100 million cubic feet per day (MMcf/d) of natgas to the Gulf Coast and 30 MMcf/d to the Midwest, starting in November, via two different pipelines.
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    Calfrac Weighs Entry Into Big Oil Regions Such as Saudi, Permian

    Calfrac Well Services Ltd., the Canadian oilfield services provider, is considering expansion opportunities into two of the world’s largest producing regions.

    Saudi Arabia and the U.S. Permian Basin are two oil producing areas attracting Calfrac for potential investment, Chief Executive Officer Fernando Aguilar said on Tuesday. The Calgary-based company wants to be in important markets where output is around 10 million barrels a day, he said by phone after a Bloomberg TV Canada interview with Pamela Ritchie.

    “Saudi is an idea, a project,” Aguilar said. “We continue exploring those markets with potential for us to be present where we are not operating today, like the Permian, like Saudi Arabia.”

    Calfrac provides services including hydraulic fracturing, also known as fracking, in parts of Canada, the U.S., Russia, Mexico and Argentina, and is looking for opportunities to grow as a two-year crude market slump shows signs of stabilizing. In the U.S., Calfrac is active in the Bakken, Marcellus, Rockies, Utica and Eagle Ford, according to an investor presentation last week.

    Balance sheet concerns have been raised by analysts including Kurt Hallead at RBC Capital Markets in Austin, who in a research note last week flagged Calfrac’s higher debt levels than peers and negative projected free cash flow through this year and next. Oilfield services activity isn’t poised to increase materially until U.S. crude prices consistently trade higher than $50 a barrel, Hallead said.

    West Texas Intermediate crude has risen about 70 percent since a February low and closed at $44.90 a barrel on Tuesday. Aguilar expects global oil market supply and demand balancing later this year, he said in the TV interview.

    “We are interested and exploring those possibilities as we continue moving forward with the options for the company,” Aguilar said. “But, of course, that’s going to take some time.”

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    Bayer agrees to acquire Monsanto for $128 per share - source

    Bayer won over Monsanto's management with a $128 per share offer to take over the global seed market leader, a person familiar with the matter told Reuters on Wednesday.

    The companies have agreed on a break-up fee of $2 billion, the person said. The deal is expected to be closed by the end of 2017, the source said.
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    Precious Metals

    Amplats output to be 100,000 oz lower as furnace leaks at Waterval

    ANGLO American Platinum (Amplats) said metal production for its 2016 financial year would be up to 100,000 platinum ounces lower than 2.3 to 2.4 million oz forecast following a furnace leak at its Waterval facilities which would require a R125m, three to four month rebuild.

    It was not possible to recover the production as the group’s other smelters were operating at full tilt, the company said in an announcement today. The affected facility, Waterval furnance number one, accounts for about 20% of Amplats’ smelting capacity, it said.

    “A preliminary assessment of the damage to the furnace has shown that a rebuild of the furnace should be brought forward as the most prudent means of mitigating future potential operational risks,” Amplats said.

    “While the extent of the damage to the furnace has yet to be fully quantified, early indications are that the rebuild, and associated production ramp-up, is likely to take approximately three to four months to complete,” it said.

    “As a result, platinum production for the 2016 financial year is expected to be impacted by between 70,000 and 100,000 platinum ounces,” it added.

    A leak of molten furnace matte was discovered at Waterval furnace number one’s hearth on September 10 which required staff to stop the unit. No-one was injured in the event.

    Amplats said there would be a build-up of concentrate stocks during the rebuild period which would be released as refined metal in the future.

    The cost of the furnace rebuild would take total capital expenditure for the year to reach the upper end of Amplats’ guided range of R4bn. It guided for between R3.5bn and R4bn.

    “The company’s mining and concentrating activities are unaffected, therefore not impacting the previously guided range of produced (metal in concentrate) of 2.3-2.4 million platinum ounces,” it said.

    “Shareholders and key stakeholders will be kept updated on the progress of the rebuilding of the furnace and associated impacts,” said Amplats.
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    Base Metals

    Nonferrous industry body refutes claim that Chinese company is evading US tariffs

    The China Nonferrous Metals Industry Association (CNMIA) said on Monday that foreign media accusations that a Chinese company is using transshipping, a method of evading US tariffs, by routing aluminum through Mexico to disguise its origins "seriously deviated from reality."

    The CNMIA rebutted the transshipping claims raised on Friday by the Wall Street Journal. The US-based newspaper said China Zhongwang Holdings, the world's second-largest producer of aluminum extrusions, had stored nearly 1 million metric tons of aluminum worth some $2 billion in a Mexican town, with intentions of shipping it to the US to avoid tariffs on Chinese exports.

    China Zhongwang said in a statement sent to the Global Times on Monday that the company has no manufacturing base in any foreign countries, and that the company always abides by all international trade regulations and relevant government laws on exports.

    Bai Ming, a research fellow at the Chinese Academy of International Trade and Economic Cooperation, said judging from what has been disclosed by overseas media on the matter, the evidence is not strong enough to prove that the transshipping practice really exists.

    "First, overseas reports about the aluminum in Mexico and its origin are not clear enough. Second, overseas media organizations haven't got sufficient proof that the stockpile is used for transshipping instead of for other purposes, such as for sale in Mexico," Bai told the Global Times on Monday.??

    Xu Ruoxu, an analyst from Shenwan Hongyuan Securities, said Chinese companies might export virgin aluminum to Mexico, process it into aluminum ingots, and then ship the latter to the US, because the US charges a high tax on direct exports of aluminum ingots from China.

    But according to the CNMIA, the Chinese government levies a 15 percent tax on all virgin aluminum exports, and therefore Chinese companies can hardly make any profits from virgin aluminum exports.

    It also noted that if China transships virgin aluminum to the US via Mexico, the products can't obtain a legal certificate of origin from Mexico, and the importer will still need to pay duties levied by the US.

    The CNMIA also noted that if the "discovered" aluminum stockpile is composed of processed aluminum products imported from China, it doesn't violate export laws in China or import laws in Mexico.
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    Norilsk's 1942 nickel plant gone but far from forgotten

    Norilsk Nickel, or Nornik as it has just rebranded itself, has just completed the decommissioning of the nickel refining plant in its far-flung Polar operations in the Arctic north of Siberia.

    It was known as the 1942 Plant because that's when it was first commissioned and it has been operating ever since.

    The closure is part of a radical overhaul of the company's nickel operations, with refining operations being refocused on the metallurgical complex on the Kola Peninsula in the west of Russia and the Harjavalta refining complex in Finland.

    It is decidedly good news for the inhabitants of the city of Norilsk itself.

    Located with Soviet practicality within the residential confines of the city, the plant emitted 380,000 tonnes of sulphur dioxide every year, representing around 25 percent of total sulphur emissions in the city.

    Its removal marks a major leap forward in Nornik's programme of improving its environmental record, back in the news with reports of rivers turning the colour of blood due to metallic contamination.

    But the removal of this legacy plant leaves an interesting legacy for the global trade in nickel, much of which is predicated on stocks of "Norilsk Combine H-1" and "Norilsk Combine H1-Y", the two brands produced by the 1942 Plant.


    The 1942 Plant was a monster, producing around 120,000 tonnes per year of refined nickel.

    That's twice as much as either BHP Billiton's Nickel West complex in Australia or Vale's Sudbury operations in Canada.

    Based on International Nickel Study Group figures, it accounted for just over six percent of global refined nickel production in 2014, the last year of full operations before the winding-down process started.

    But its significance in terms of global nickel trading was more than just about its huge output.

    It was a major source of full-plate nickel cathode. This form of the alloying metal is not particularly favoured by industrial users because most have to cut it into more manageable size before transforming it into an intermediate product.

    In the years following the demise of the Soviet Union and the subsequent flow of Norilsk material into the Western market-place, Russian full-plate cathode therefore became one of the most traded and stored forms of nickel.

    It represents much of the nickel market's global inventory as well as acting as the stocks bedrock of the London Metal Exchange's (LME) nickel contract and, more recently, of the Shanghai Future Exchange's (ShFE) contract.

    Its closure won't affect Nornik's own production profile. The company will simply redirect raw material flows through its other refining operations.

    But it does pose a headache for the two exchanges and nickel traders.


    That's because it's normal practice for the LME to delist specific brands of metal if the source plant ceases production.

    That's a problem when those brands constitute a significant part of the exchange's own registered stocks.

    Norilsk metal, and specifically Norilsk full-plate cathode, has historically accounted for much of the LME's stocks base.

    For example, at the end of March 2015, the close of the exchange's warehousing year, over half of LME stocks were classified as originating from Eastern Europe or the former Soviet Union.

    The LME doesn't specify tonnages by specific brand, so it's possible that some of that total came from Nornik's Kola operations but it's certain that there was a lot of metal from the 1942 Plant there as well.

    But the ramifications of an LME listing, or possible de-listing, extend much wider than simply what is already in the exchange's warehousing system.

    An LME listing confers a special status on otherwise generic metal. The ability to deliver a registered brand into exchange warehouses provides a comfort zone for traders, stockists and the banks that finance the physical trade in metal.

    Which is why the exchange has held fire on its normal 90-day delisting rule for legacy brands "due to the significant off-warrant stocks of these brands, and in particular the size of such stocks in comparison to total warranted nickel stocks."

    The LME, it added in a notice to members dated Aug. 26, 2016, "will continue to keep this situation under review, and intends eventually to proceed to delisting when it considers this may be achieved in an orderly manner."

    Don't necessarily hold your breath.
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    Ahead of more suspensions, Philippine miners question review process

    Philippine miners facing more mine suspensions under anenvironmental review backed by President Rodrigo Duterte have stepped up their criticism of the process, questioning the inclusion of anti-mining activists in the review teams.

    The world's top nickel ore supplier has halted operations of 10 mines, eight of them nickel, for environmental infractions, and the government has said more suspensions will be announced this week.

    The crackdown is aimed at enforcing stricter environmental protection measures, with Duterte warning the nation could survive without a mining industry. But miners have labelled the review a "demolition campaign".

    The Chamber of Mines of the Philippines, which groups 21 of the country's 40 metallic miners, said it had "trouble appreciating" the inclusion in mine audit teams of groups such as Alyansa Tigil Mina (ATM), which translates to Alliance To Stop Mining.

    "Why are they part of the audit team when they can hardly be expected to be impartial?" said chamber spokesman Ronald Recidoro.

    "Our members are fairly confident that they have complied with the technical and legal requirements."

    ATM groups non-governmental organisations, church groups and academic institutions working to protect Filipino communities and natural resources threatened by large-scale mining operations, according to its website.

    The mining industry has powerful opponents in the Phillipines, led by the influential Catholic Church, following past environment disasters and the displacement of local communities.


    Environment and Natural Resources Secretary Regina Lopez, who has said openpit mining is madness, said she had committed to involving civic groups in the audit teams along with government experts."Miners need to upgrade their operations so that people don't suffer," Lopez told Reuters, adding that issues such as silt build-up on rivers, fishponds and rice fields around mining sites were "unacceptable."

    "The problem is that mining here has not followed rules."

    ATM's partners in local communities took part in the audit across the country, said Jonal Javier, advocacy officer for the organisation. They told the audit team what to look into and submitted the public's complaints against mines, he said.

    The suspension of nickel mines in the Philippines and the risk of more closures lifted global nickel prices last month to a one-year high above $11 000 a tonne, although the metal has since eased to just above $10 000 a tonne.

    Nickel is used to make stainless steel.

    The chamber's Recidoro said four of its members had been affected and the operations of all four remained suspended despite having addressed environmental violations.

    "How long is this suspension? Because an indefinite suspension is tantamount to a cancellation," he said.

    The Philippines' top gold mine, run by Australia's OceanaGold's, expects a positive outcome from the audit, CEO Mick Wilkes told Reuters in an email.
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    Steel, Iron Ore and Coal

    Coking coal prices go gang-busters — up almost 150%

    Prices of coking coal, the steel-making kind, keep soaring mainly due to slowing supply growth from China.

    Far seems to be the multi-year lows struck in February, as the commodity has surged almost 150% since then, adding Tuesday a whooping $14.80 per tonne, according to The Steel Index.

    Metallurgical coal, which is now trading at a record $195.70 a tonne, has become the best performing commodity of 2016.

    The rally has been triggered in part by Beijing’s decision to limit coal mines operating days to 276 or fewer a year. In addition, recent heavy rains in the key mining province of Shanxi, have significantly reduced the number of available roads and damaged other transportation infrastructure, curbing local supplies.

    Weather conditions in China’s coal producing regions have given Australian suppliers of coking coal, particularly those in Queensland's Bowen Basin, a much-needed boost.

    However, the incredible price rally may also carry some bad news, especially for Anglo American (LON:AAL), which has now been forced to revaluate the asking price for the two coking mines it has for sale in Australia,the Australian Financial Review reports.

    Such sale is expected to yield more than US$1 billion, even with Anglo taking a $1.2 billion charge against Grosvenor and Moranbah at its July results, and bidders —including the BHP Billiton Mitsubishi Alliance — are said to be now waiting to see where coking coal prices go next.
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    A 100-year-old coal mine in Australia restarts as prices double

    Jindal Steel & Power has ramped up production at a 100-year-old coking coal mine in Australia and is set to resume operations at another in Mozambique as prices for the commodity more than doubled this year.

    The New Delhi-based company is producing about 100 000 metric t/m at Wongawilli mine in Australia’s New South Wales and has sought regulatory approval for resuming output at the Russell Vale mine in the same area, CEO Ravi Uppal said. The company, which is one of India’s largest steel producers, plans to resume operations this month at its Chirodzi coal mine in Mozambique and produce 300 000 t/m, he said.

    Metallurgical coal prices have surged and thermal coal has rebounded after five years of declines as China seeks to cut its overcapacity and curb pollution. Output from the world’s biggest producer and consumer of the fuel has fallen more than 10% in the first eight months of the year.

    Jindal joins commodity producers including Chinese steel mills and US oil explorers in boosting activity as prices rally, a response that can aid company balance sheets but also sustain the gluts that have plagued the raw materials industry.

    Jindal Steel, controlled by former lawmaker Naveen Jindal, has reported seven consecutive quarterly losses and is counting on its steel and mining operations to help generate profits. The company took an impairment charge of 6.26-billion rupees ($93.5-million) on the Australian mining assets in the quarter ended June 30, according to a stock exchange filing on September 8.

    Jindal Steel needs coking coal for its 1.7-million-ton-a-year blast furnace in the central Indian state of Chhattisgarh. The company’s demand is set to rise after December, when its four-million-ton-a-year blast furnace in eastern Indian state of Odisha starts operation, according to Uppal. The company uses about half a ton of coking coal to produce a ton of steel.

    The Wongawilli mine started operation in 1916, according to the website of Jindal Steel subsidiary Wollongong Coal. Production restarted in July after the mine was placed on care and maintenance status in 2014, the Australian company said.
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    China Shenhua Aug coal sales up 9.2pct on mth

    China Shenhua Energy Co., Ltd, the listed arm of coal giant Shenhua Group, sold 34.3 million tonnes of coal in August, down 2.8% year on year but up 9.2% month on month, as sales of outsourced coal rose 23.3% on year and 47.5% from July, the company announced in a statement on September 12.

    The company sold 252 million tonnes of coal over January-August, rising 1.8% from the year prior, it said.

    Coal sales via northern ports in August gained 3.2% from the year prior and up 4.8% from July to 19.6 million tonnes, with those shipped from Shenhua's exclusive-use Huanghua port at 14.1 million tonnes or 71.9% of its total in the month, climbing 42.4% on year and up 8.5% on month.

    Total coal sales stood at 150.6 million tonnes in the first eight months, up 10.3% on year.

    Meanwhile, the company produced 24.6 million tonnes of coal in August, falling 0.4% on year but up 4.2% on month. The output over January-August decreased 0.3% on year to 187.9 million tonnes.

    As the nation's top coal producer, Shenhua's parallel pricing for key customers and spot buyers in August has helped the company to maintain steady price increase, while giving more say to the market by getting prices of its spot coal much closer to the spot levels.  

    It announced that prices of spot coal will be set every 10 days based on the FOB Qinhuangdao of 5,500 Kcal/kg low-sulphur coal (0.6% sulphur) published by industry portal China Coal Resource (, under the principle of market-based pricing.

    After a 16 yuan/t hike in July, Shenhua further increased contract price by 18 yuan/t in August for its 5,500 Kcal/kg NAR coal sold to key customers at 435 yuan/t FOB, including 17%.

    In September, Shenhua lifted contract price of the same-CV material by 25 yuan/t to 460 yuan/t, which, though above the expected 15 yuan/t rise, was still lower than 495-505 yuan/t at northern ports in early September.
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    Vale targets profits over volume at flagship Brazil iron ore project

    Peter Poppinga, head of Vale’s iron ore business, said the market had not understood its plans for the ramp-up of S11D, the industry’s biggest new venture, in the Amazonian state of Pará.

    “One thing the market is not getting right is how Vale wants to go about ramping up S11D,” he said. “We decided for a phased approach where we will ramp up S11D not in two years but in four years.”

    While S11D was seen as a 90m tonnes per year project, the capacity of Vale’s infrastructure in northern Brazil meant it would only add another 75mt of the steelmaking ingredient to a market that has suffered a glut of supply.

    “We are not [in] the pure volume game. We think the right approach … is to maximise our margins,” said Mr Poppinga in an interview in London.

    During the so-called commodity supercycle, mining companies ploughed billions of dollars into new iron ore projects as China’s rapid urbanisation saw it suck in ever increasing amounts of the raw material.

    But much of the new supply only came online as China’s growth started to slow, hitting prices that — at roughly $55 a tonne — are down some 70 per cent from their 2011 highs.

    While most of the large suppliers including BHP Billiton and Rio Tinto still have plans to increase production, they are prioritising returns and profitability over volume.

    Once its expansion plans are complete, Vale would have capacity to produce 450mt of iron ore annually. “But it doesn’t mean that we are going to use it,” said Mr Poppinga, who forecast that iron ore will trade at $50-$60 a tonne next year.

    “It will be with a mature eye on the market and we will always have a focus on the maximisation of our margins,” he said.

    Vale, based in Rio de Janeiro, is seeking to cut its net debt by at least $10bn by the end of next year by disposing of non-core businesses and other initiatives.

    As well as the downturn in commodity prices, it has been dealing with the fallout from one of its worst mine accidents. The company and BHP Billiton were partners in the Samarco iron ore venture in Brazil where 19 people died when a dam collapsed last November.

    While initially the companies hoped they might be able to resume production at Samarco this year, those hopes have been dashed by the complexity of obtaining permission for a restart. “Optimistically we are looking at mid-2017; realistically we are looking at something in the second half of 2017,” Mr Poppinga said.

    The companies still face potential legal action in Brazil relating to the dam collapse, which a technical report last month said was due to design and drainage problems.

    Mr Poppinga said Vale was still interested in a venture with another iron ore miner, Australia’sFortescue Metals Group, to combine some of their output for sale.

    A project to blend Vale and FMG ore could produce a mix more suitable for some customers, allowing them to share gains from a premium price for the blend. “We have tested everything … [but] on the commercial side it is taking longer than we expected,” Mr Poppinga said.

    Attached Files
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    Fortescue repays more debt

    Iron-oremajor Fortescue Metals has undertaken another round of debt reduction, with the miner issuing a $700-million repayment notice for its 2019 senior secured credit facility.

    The company said on Tuesday that the term loan repayment would be made on September 16, and would generate interest savings of around $26-million a year.

    “This $700-million repayment adds to the $2.9-billion which we repaid in the 2016 financial year and further reduces our all-in cost base. We will continue to apply our free cash flow to repay debt, lowering our gearing and strengthening our balance sheet,” said Fortescue CFO Stephen Pearce.
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    China's steel failure, coal success show prices trump bureaucracy: Russell

    China's steel and coal sectors provide contrasting stories so far this year, with one failing miserably to curb output and the other cutting so successfully it's led to the unintended consequence of higher prices and imports.

    China's steel sector, which accounts for about half of global production, continued its recent strength in August, with output rising for a sixth month to 68.57 million tonnes, the National Bureau of Statistics said on Tuesday.

    This brought the year-to-date total to 536.3 million tonnes, a mere 0.1 percent lower than for the first eight months of 2015, and putting the country on track to produce more than 800 million tonnes of steel for a third year running.

    The resilience of steel output also makes a mockery of official attempts to reduce capacity in the massively oversupplied sector, and questions whether Beijing has the political muscle and determination to actually restructure the sector.

    In contrast, China's coal output dropped 11 percent in August to 278 million tonnes, with production in the first eight months slumping 10.2 percent to 2.17 billion tonnes, according to official data.

    China has met about 60 percent of its target for 2016 of cutting 150 million tonnes of coal capacity, according to state media, as measures to restrict the number of days mines can operate take effect.

    There is little doubt that China's coal sector has met the challenge of removing excess capacity, and the steel sector hasn't.

    This begs the question as to what is different between the two, as they should both be subject to meeting the requirements laid down by the authorities in Beijing.

    The main difference appears to be the dynamics of price and profitability.

    Coal prices started the year at multi-year lows, with the Chinese thermal coal benchmark SH-QHA-TRMCOAL at 370 yuan ($55.39) a tonne.

    It has subsequently rallied almost 540 percent to 515 yuan a tonne on Tuesday, reflecting the tightening domestic market.

    But it's worth noting that most of the gains have come in the past two months, meaning that for the first half of the year, China's domestic coal miners were still labouring under low prices and many were unprofitable.

    The production cutbacks also stoked demand for imported coal, with inbound shipments up 12.4 percent to 155.74 million tonnes in the first eight months of the year compared to the same period in 2015.

    This additional Chinese demand has also fuelled seaborne coal prices, with the Australian thermal benchmark Newcastle weekly index surging 39.5 percent so far this year to $70.61 a tonne for the week ended Sept. 9.


    Unlike coal, steel's gains were made in the first quarter, with benchmark Shanghai rebar jumping 58 percent from the end of last year to its peak so far in 2016 of 2,670 yuan a tonne on April 21.

    Since then steel prices have trended lower, with the contract ending at 2,260 yuan a tonne on Tuesday. However, this is still 33.8 percent above what it was at the end of 2015.

    The rising steel price led Chinese mills to ramp up output, especially from March onwards, culminating in record daily production in June.

    As can be seen from August's robust output, mills have yet to dial back production even as prices start to moderate, and the likely reason is that they are still profitable.

    Steel mills are making profits of about 300 yuan to 400 yuan a tonne at current prices, the highest since November 2014, according to Li Wenjing, an analyst at Industrial Futures in Shanghai.

    The improved profitability for steelmakers illustrates just how challenging it is for the authorities to cut capacity if money is being made.

    China aims to eliminate 100-150 million tonnes of capacity in coming years, with 45 million tonnes planned for this year.

    Even if its does cut this amount, it would still leave about 200 million tonnes of excess capacity in the system, assuming mills operated at 100 percent.

    If mills operated at a more realistic 80-85 percent of capacity, then China's planned cuts would tighten the steel market, assuming domestic demand and exports remain around current levels.

    The market expectation is that Beijing will cajole capacity cuts in the steel sector over the remainder of 2016, but as events so far this year show, this is far from a given.

    If steel prices remain at levels consistent with solid profits, it's likely that the mills will resist attempts to curb their output, and history suggests they are quite good at this.

    If prices do retreat further, then it will be easier to cut steel capacity, but any sustained success is likely to make it harder to cut more capacity, and may in fact encourage mills to ramp up utilisation rates and output.

    So far this year, the Chinese authorities have accomplished what they wanted in coal, but at the cost of higher prices, and failed in steel, because of higher prices.

    This shows that interference in markets seldom comes without side effects, and it will be interesting to see if Beijing allows higher coal output to soften prices and continues to tolerate strong steel production in coming months.
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