Mark Latham Commodity Equity Intelligence Service

Monday 25th January 2016
Background Stories on

News and Views:

Attached Files


    Moody's puts 175 commodity firms on review over bleak outlook

    Moody's has placed 175 oil, gas and mining companies on review for a downgrade due to a prolonged rout in global commodities prices that it says could remain depressed for some time.

    Warning of possible downgrades for 120 energy companies, the rating agency said there was a "substantial risk" of a slow recovery in oil that would compound the stress on firms already pummelled by a 75 percent drop in prices since June 2014.

    It said it was likely to conclude the review by the end of the first quarter which could include multiple-notch downgrades for some companies, particularly in North America.

    Moody's also cut its oil price forecasts. In 2016, it now expects the global benchmark Brent crude and the West Texas Intermediate (WTI) crude, the North American benchmark, to average $33 a barrel. This marks a $10 a barrel cut for Brent from its previous forecast and a $7 a barrel reduction for WTI.

    Both contracts are expected to rise by $5 a barrel on average in 2017 and in 2018.

    The sweeping global review includes all major regions and ranges from the world's top international oil and gas companies such as Royal Dutch Shell and France's Total to 69 U.S. exploration and production (E&P) and services firms.

    It nevertheless does not include the two top U.S. oil companies ExxonMobil and Chevron.

    "We see a substantial risk that prices may recover much more slowly over the medium term than many companies expect, as well as a risk that prices might fall further," Moody's said.

    "Even under a scenario with a modest recovery from current prices, producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows," it said.

    Oil, gas and mining companies have been forced to cut thousands of jobs, scrap new projects and slash spending.

    Rival credit rating agency Standard & Poor's signalled in an interview on Friday that oil-exporting countries also face fresh downgrades and that it could repeat last year's move when it made a big group of cuts all at once.

    Multi-notch downgrades are particularly likely among issuers whose activities are centred in North America, where natural gas prices have declined dramatically along with oil prices, Moody's said.

    Moody's also placed 55 mining companies on review for downgrade as they battle a slump in commodity prices due to oversupply and slowing growth in China.

    "Moody's believes that this downturn will mark an unprecedented shift for the mining industry. Whereas previous downturns have been cyclical, the effect of slowing growth in China indicates a fundamental change that will heighten credit risk for mining companies."
    Back to Top

    Bernanke: Don't Worry, China's $28 Trillion Debt is a domestic issue

    Bernanke: Don't Worry, China's $28 Trillion Debt is an "Internal Problem"

    The blue ribbon award for ridiculous comment of the day goes to Ben Bernanke who dismissed China's $28 trillion debt pile as an "internal problem" only.

    This revelation came from the Asian Financial Forum held in Hong Kong where Bernanke Downplayed China Impact on World Economy.
    "I don't think China's economic slowdown is that severe to threaten the global economy," said Bernanke at the Asian Financial Forum held in Hong Kong.

    Bernanke argued that the global economy was more troubled by a global savings glut, which had long been a drag on investments.

    Bernanke also said the $28 trillion debt pile facing China was an "internal" problem, given the majority of the borrowings was issued in local currency. According to consultancy McKinsey & Co., government, corporate, and household debt in China had already hit 282% of the country's gross domestic product as of mid-2014.

    Bernanke said the correlation between different markets is higher than that between markets and the economy. He pointed out that worldwide market selloffs in times of distress was natural due to global asset allocations. "The U.S. and China are not as closely tied as the market thinks," Bernanke said.

    Contrary to Bernanke's views on the global impact of a Chinese slowdown, the IMF said in its latest World Economic Outlook Update released on Tuesday that "a sharper-than expected slowdown in China" was a significant risk that would bring "international spillovers through trade, commodity prices, and waning confidence."
    Savings Glut Question

    Actually, I have to ask: Which is more ridiculous: Dismissing $28 trillion debt as an "internal problem" or proposing $28 trillion debt is indicative of a "savings glut"?

    Mike "Mish" Shedlock

    Attached Files
    Back to Top

    As Japan's oil, gas, power use stalls, coal imports hit new record

    Japan's 2015 oil imports fell to the lowest since 1988, reflecting the country's declining population and low economic growth while at the same time its natural gas imports fell for the first time since the Fukushima nuclear disaster.

    Yet in the same year that the world agreed to combat climate change, Japan's utilities continued to increase the use of the cheapest but dirtiest fossil fuel, ramping up coal imports to a record.

    Continuing a steady decline since the mid-1990s, Japan's crude oil imports last year fell 2.3 percent to 3.37 million barrels per day (195.499 million kilolitres), official figures released on Monday showed.

    Similarly, Japan's power generation fell for a fifth straight year in 2015 to 866.26 billion kilowatt hours, the lowest since at least 1998.

    The declines reflect deep changes in Japanese society since an asset bubble burst in the 1990s and its population declines and people change the way they consume energy.

    Young Japanese drive less than their parents, and many new cars are electric-gasoline hybrids, cutting oil demand.

    "The fall in consumption in Japan is mainly down to slower economic growth," said Jeremy Wilcox, managing director of consultancy Energy Partnership.

    "At the same time, increased focus on energy efficiency is really starting to constrain imports," he added.

    "Japan's energy market is entering a new phase.... Utilities are having to become more cost competitive. Running old steam turbine gas and oil units no longer makes sense," said Michael Jones, senior analyst at energy consultancy Wood Mackenzie.

    Japan's changing energy profile has hit LNG the hardest, of which it is the world's biggest consumer, using it mainly for power generation and heating.

    LNG imports fell 3.9 percent to 85.046 million tonnes in 2015 from a record 88.51 million tonnes the year before, marking the first drop in six years and the lowest since 2011.

    LNG usage should fall further as overall energy demand declines and the country reopens nuclear reactors.

    This will put further pressure on LNG prices that have already tumbled by two-thirds to under $6 per million British thermal units since 2014 LNG-AS as supplies soar from newexports from Australia and the United States.

    "LNG demand is getting hit from all sides," Jones said. "Power demand is weak, solar capacity is increasing at breakneck speeds, nuclear capacity is returning, and coal-fired generation is rising."

    As a result, LNG imports are expected to fall to a five-year low of 79.6 million tonnes in the year starting in April, according to the government-associated Institute of Energy Economics Japan.

    Japan's LNG imports surged following the meltdowns at the Fukushima Daiichi nuclear plant in 2011 and the ensuing shutdown of all reactors, pushing utilities to the brink of financial ruin as gas prices surged.

    To save cash, Japan's utilities are increasingly switching to cheap coal.

    In 2000, Japan's coal demand was only slightly bigger than LNG consumption, around 60 million tonnes a year versus some 55 million tonnes for LNG, but gas use has now stalled while coal imports have nearly doubled since then.

    Thermal coal imports rose 4.8 percent to a record 114.145 million tonnes in 2015, the same year as the world reached a climate deal to combat global warming caused in large part by coal burning.

    "The rise in coal imports comes down to economics," said Energy Partnership's Wilcox.

    "The figures are consistent with the government's 2030 basic energy plan which aims to reduce LNG usage and maintain coal," said Tom O'Sullivan of energy consultancy Mathyos Japan.

    Attached Files
    Back to Top

    Oil and Gas

    Top Oil Trader Mercuria Sees Market Bottom as Producers Bleed

    The oil market is bottoming after Brent crude, the global benchmark, dropped below $30 a barrel earlier this week, according to one of the world’s largest independent energy trading houses.

    "Oil producers are strained to the limit and some of them are pumping at a loss," Mercuria Energy Group Ltd. Chief Executive Officer Marco Dunand said in an interview at the World Economic Forum in Davos, Switzerland. "We are reaching the bottom of the oil market.”

    Dunand cautioned about expecting a quick recovery, however, saying that companies might “produce at a loss for a short time because the other option -- shutting down -- in some cases is even more expensive.”

    Mercuria is one of the world’s five biggest independent oil traders alongside Vitol Group BV, Glencore Plc, Trafigura Pte Ltd. and Gunvor Group Ltd. The company was founded by former Goldman Sachs Group Inc. bankers Dunand and Daniel Jaeggi in 2004.

    The view of Dunand is more optimistic than others at Davos, including the International Energy Agency, which earlier this week warned that oil markets could “drown in oversupply,” sending prices even lower. BP Plc CEO Bob Dudley said the market was facing a "flood of oil," while Glencore Chairman Tony Hayward said "oversupply" would keep prices around current levels "for some time".

    Dunand said Mercuria was witnessing unusual pain in the market, trading varieties of crude for as little as $10 a barrel while poor-quality fuel-oil sold for virtually nothing.

    Dunand said several factors have driven oil prices down this month, including concern about the return of Iran to the market and economic weakness in China. However, the most important -- and overlooked -- factor was "the drop in forward prices brought about by producer hedging under pressure from banks to extend their loans,” he said.

    Brent futures for delivery in five years have dropped roughly $10 a barrel this year, compared with a drop of $8 a barrel for contracts for immediate delivery.

    Dunand said prices were likely to rise in the next couple of years as the market feels the impact of the belt-tightening the energy industry is undergoing.

    "I think that about $500 billion in production projects had been shelved between 2015 and 2016 -- this would have an impact on future output," he said.
    Back to Top

    Possible Saudi IPO wouldn’t include oil reserves

    The chairman of Saudi oil giant Saudi Aramco was quoted as saying a possible initial public offering would not include the kingdom’s oil reserves.

    Chairman Khalid al-Falih made the comments to Saudi privately owned broadcaster Al-Arabiya in an interview from Davos, Switzerland. The Dubai-based broadcaster reported the comments Sunday.

    Al-Falih also says the potential share flotation could take place on local or international markets.

    Saudi Deputy Crown Prince Mohammed bin Salman told The Economist earlier this month that the kingdom was considering an IPO involving the Saudi Arabian Oil Co., better known as Saudi Aramco. The company is the world’s largest oil producer.
    Back to Top

    Brazil maintains oil price formula for Petrobras royalties

    Brazilian President Dilma Rousseff has approved a resolution to maintain the current system for establishing the minimum price of oil on which royalty payments are paid by state-run company Petroleo Brasileiro SA to local governments.

    The resolution, announced in the official government gazette on Friday, is a victory for Brazil's oil industry, which has been worried by calls to raise its taxes to make up for shrinking royalty revenues in the wake of the collapse in global oil prices.

    The so-called "Brent Dated" index, based on a seven-day rolling average price for crude, will be used up to the price level of $50 a barrel, the National Energy Policy Council said in the government gazette.

    Brent crude has fallen to $31.29 per barrel from a 2015 peak of $67 per barrel. The plunge has dried up government revenues in many oil exporting countries.

    Although not a major oil exporter, Brazil is struggling to curb growth in federal and statespending in the face of falling revenues and a sputtering economy. For states such as Rio de Janeiro, oil revenues are vital to funding public services.

    The bulk of Brazil's oil output is pumped from the Campos Basin off the coast of Rio de Janeiro, which receives the largest share of the royalties.

    The state of Rio de Janeiro recently passed laws to levy new taxes on the oil industry in an effort to shore up the state's accounts. The courts, however, could overturn those laws.
    Back to Top

    China to grant four non-major crude oil refineries import licences

    China is set to grant another four non-major oil refineries licences to import crude, the country's commerce ministry said on Monday.

    The four firms are Shandong Huifeng Petrochemical Group, Tianhong Chemical, and Shandong Chambroad Petrochemicals Co., Shandong Shouguang Luqing Petrochemical Co., the ministry said on its website.

    The four have already obtained quotas to use imported crude oil from the country's economic planning commission.
    Back to Top

    Cairn India Net Plunges 99% as Oil Prices Trade Near 12-Year Low

    Cairn India Ltd., a crude oil producer owned by billionaire Anil Agarwal, posted a 99 percent decline in third-quarter profit as oil prices collapsed to near 12-year lows.

    Group net income fell to 86.9 million rupees ($1.3 million) in the three months ended Dec. 31, from 13.5 billion rupees a year earlier, the company said Friday in a stock exchange filing. That fell short of the 2.08 billion-rupee mean of 15 analyst estimates compiled by Bloomberg. Sales decreased 42 percent to 20.4 billion rupees.

    Cairn India, which produced about 27 percent of the country’s domestic crude output during the financial year to March 2015, slashed spending this year and relinquished exploration rights in Sri Lanka as Brent crude dropped. Drillers globally have reduced spending on exploration and deferred new projects amid declining profit and revenue, leading to over a quarter of a million job cuts.

    “These are challenging times for Cairn India as oil prices are low and output from its fields remains flat,” Dhaval Joshi, an analyst at Emkay Global Financial Services Ltd. said before of the earnings. “In the current environment, there is no trigger for the stock unless there’s a revival in prices.”

    The company sold oil at an average price of $35 a barrel in the third quarter, compared with $68.7 a year earlier. The crude decline prompted the oil producer to cut its capital expenditureplans for the year ending March 31 to $300 million from an initialprojection of $1.2 billion.

    The company based in Gurgaon, near New Delhi, had 184.70 billion rupees of cash and cash equivalents as of Dec. 31. Total expenses at Cairn India fell about 4 percent to 22.7 billion rupees. The company produced 202,668 barrels of oil equivalent a day during the quarter. Production from its flagship Rajasthan block was 170,444 barrels a day, according to the statement.
    Back to Top

    Ophir brings Schlumberger on board Fortuna FLNG

    London-based Ophir Energy revealed on Monday it has partnered up with Schlumberger on the Fortuna FLNG project in Equatorial Guinea.

    According to Ophir’s statement, a non-binding heads of terms agreement has been signed under which Schlumberger will receive a 40% economic interest in the Fortuna FLNG project.

    Last week, Schlumberger joined forces with Golar LNG to develop gas reserves utilizing floating LNG technology.

    A definitive deal is expected to be signed in the second quarter of 2016, prior to the final investment decision, which would see Schlumberger reimburse 50 percent receive a 40% economic interest in the Fortuna FLNG project. This would cover Ophir’s share of capital expenditures up until first sales of LNG, the statement reveals.

    Ophir noted that it also expects to complete a shortlist of the gas off-take offers in the coming weeks.

    Ophir’s CEO Nick Cooper said, “These are tough times for the upstream sector, but this transaction will free up our balance sheet and further increase our financial flexibility.”

    The company predicts its 2016 capital expenditure to be between US$175 million and US$225 million compared to approximately US$250 million in 2015.

    Additionally, the company informed that Tanzania Petroleum Development Corporation has announced the location of the LNG site at Machenga Bay.

    Ophir also expects Shell to assume operatorship of the project upon completion of the Shell-BG Group deal. BG Group formed a partnership with Ophir in 2010 in blocks 1, 3 and 4, offshore Tanzania.
    Back to Top

    SGX Seeks to Break LNG's Price Link to Oil With Singapore SLInG

    Singapore Exchange Ltd. wants to break the liquefied natural gas market’s reliance on oil as a pricing peg as the city-state seeks to solidify its role as Asia’s energy trading hub.

    The exchange, known as SGX, plans to launch on Monday futures and swaps linked to its index of spot prices for LNG traded in Asia. Final settlement for the contracts will be determined by average weekly assessments gathered from producers, consumers and traders in the physical LNG market.

    Natural gas can be supercooled and liquefied to transport it on tankers between areas difficult to link by pipeline. LNG traded in Asia -- where sellers such as Qatar and Indonesia ship fuel to buyers including Japan or China -- has traditionally been pegged to crude prices. That’s because the region lacks a benchmark similar to Henry Hub in the U.S., which the country’s burgeoning LNG exporters use in sales contracts.

    For Singapore to become Asia’s LNG pricing hub, it will need greater physical supplies and expanded storage facilities in addition to swaps and futures, according to Wood Mackenzie Ltd.

    “When Singapore talks about being a pricing hub, it is talking more about being a physical hub for gas where as a buyer and seller you can put gas in and take gas out,” Gavin Thompson, Wood Mackenzie’s vice president for China and Northeast Asia gas and power, said in an interview. “That price for the physical commodity is then priced into the short-term spot and long-term contracts, potentially the same way Henry Hub is priced into long-term LNG contracts.”

    Divergent Supply

    While both oil and LNG prices have tumbled since 2014, a forecast decrease in global crude output in the medium-term contrasts with LNG’s “tsunami” of new production, according to Adrian Lunt, an associate director of commodities at SGX. These divergent supply situations, and the growing share of LNG in global energy markets, “will likely reveal the increasingly blatant flaws” of pricing the fuel off oil, he said.

    Japan’s Jera Co., a joint venture between Tokyo Electric Power Co. and Chubu Electric Power Co. that’s poised to become one of the world’s biggest LNG buyers, may use the Singapore index in its term contracts, according to the company. Korea Gas Corp. isn’t actively using the index because its not purchasing LNG on a spot basis, according to spokesman Song Kyu Cheol.

    Indian Oil Corp. isn’t planning to use the swaps and futures and prefers indexing its contracts to Brent, said Debasis Sen, director of planning and business development.

    Attached Files
    Back to Top

    Beach flags impairment charge, cuts capex and output guidance

    Australian oil and gas producer Beach Energy on Monday warned of an impairment charge of between A$450-million and A$650-million for the 2016 half year, on the back of lower oil prices. 

    The company also announced a A$60-million reduction in its planned capital expenditure for 2016, to between A$180-million and A$210-million. The company told shareholders that the reduced range reflected savings of about A$20-million achieved in the first half of 2016, and a further A$40-million in reductions and deferrals identified for the remainder of the year. 

    Subject to joint venture (JV) approval, the savings would be achieved through a curtailed operated drilling programme, well inventory management, deferral of the Bauer facility upgrade and noncritical projects, and a reduced capital programme within its South Australian Cooper Basin JV and the South West Queensland JV, which were operated by fellow-listed Santos. 

    “During these challenging times it is extremely pleasing to demonstrate Beach’s ability to live within its means and maintain financial strength,” said acting CEO Neil Gibbins. “Despite lower oil prices over the past six months, we have held our net cash position relatively constant, secured increased debt financing facilities and improved terms, and identified up to A$40-million of second half savings and deferrals in our capital programme.

    ” Operationally, Beach continued to perform well, Gibbins said, adding that production levels were maintained during the second quarter of 2016, giving the company grater confidence in its full-year guidance, while the recent infrastructure projects have delivered results better than expected. 

    Beach on Monday narrowed its full-year production expectations from the previous guidance of between 7.8-million and 8.6-million barrels of oil equivalent, to between 8-million and 8.6-million barrels of oil equivalent.
    Back to Top

    SandRidge Energy explores debt restructuring options-sources

    SandRidge Energy Inc is exploring debt restructuring options, according to people familiar with the matter, as the heavily indebted U.S. oil and gas exploration and production company struggles with the fallout from plunging energy prices.

    SandRidge has been in talks with investment banks and law firms about hiring restructuring advisors, and could make an announcement on their appointment as early as this week, the people said.

    Oklahoma City-based SandRidge, which has a debt burden of around $4 billion, has already been reaching out to some of its creditors to inform them that they should work together to prepare for likely negotiations, one of the sources said.

    The vast majority of the company's debt is in the form of bonds owned by a plethora of mutual funds, hedge funds, and other institutional investors. They do not yet have a single representative who could be reached for comment.

    One of the options that the company will consider is a pre-packaged bankruptcy with the agreement of its creditors, the people said. They said that a decision on a way forward is not imminent and that the company has access to enough cash to continue doing business for at least several more months under its current structure.

    Other avenues SandRidge could pursue would include a debt exchange or filing for bankruptcy protection without any agreement with its creditors. It is not clear whether the company currently has a preference for a particular route.

    For months, SandRidge has been caught in a bind, having just enough money to pay interest on its debt, but not enough to drill new wells or replace older ones.

    Mississippi Lime wells typically do not produce as much oil as some other shale formations, and the rock also contains a lot of water, which is costly to haul away.

    After an initially encouraging exploration phase, the shale play has not delivered the low cost production gains that SandRidge and Wall Street analysts expected.

    About 40 energy companies entered bankruptcy in 2015 and more are expected in the next few months as oil prices have dropped by 75 percent since mid-2014.

    As of earlier this month, SandRidge's shares are no longer listed on the New York Stock Exchange, and trade on the OTC Pink marketplace instead with a market capitalization of around $30 million.

    Its bonds are trading at extremely distressed levels, with its Jan. 15 2020 notes at below 5 cents on the dollar.
    Back to Top

    Chesapeake Suspends Preferred Stock Dividends

    With Chesapeake Energy hitting its lowest stock price since 2000 earlier this week, it was only a matter of time before US gas giant Chesapeake halted all "discretionary" cash payments, which it did moments ago when it announced it would halt dividend payments on its preferred stock.

    From the release:

    Chesapeake Energy Corporation (CHK) announced today that it has suspended payment of dividends on each series of its outstanding convertible preferred stock effective immediately.

    Doug Lawler, Chesapeake's Chief Executive Officer, commented, "The board and management believe this decision is in the best long-term interest of all Company stakeholders. Today's decision to suspend our preferred stock dividends will allow the company to retain approximately $170 million of additional cash per year and use these funds to purchase debt at significant discounts in the near term. Given the current commodity price environment for oil, natural gas and natural gas liquids, we believe that redirecting this cash toward debt retirement provides better returns for the Company. We currently have senior debt securities trading at significant discounts, and we will continue to take advantage of that within the coming year."

    Suspension of the dividend does not constitute an event of default under the Company's revolving credit facility or outstanding bond indentures.

    We expect many more energy companies to follow in CHK's shoes.
    Back to Top

    Alternative Energy

    Orocobre completes major capital raise

    ASX- and TSX-listed Orocobre has completed an A$85-million capital raise through a share placement to institutional and sophisticated investors. The company on Friday announced that it had placed more than 40.4-million shares, at a price of A$2.10 each

    The issue price represented a 10.7% discount to the company’s five-day volume-weighted average price, prior to a trading halt on January 20. More than 25.3-million shares would be issued under the company’s current capacity, while the balance of the shares would be issued subject to shareholder approval at a general meeting scheduled for February 29.

    Orocobre would use the proceeds of the placement to service financing costs related to the Olaroz project, including principal and interest payments due in March and September this year, and payments to the debt service reserve accounts.

    Meanwhile, Orocobre noted that production ramp up at the Olaroz lithium facility, in Argentina, continued during the three months to December, with the operation producing 1 108 t of lithium carbonate during the quarter. This was an increase of 616 t over the previous quarter.

    A production rate of 20 t/d was achieved towards the end of December, and Orocobre was confident that it could produce between 600 t and 650 t during the month of January.

    Debottlenecking work would also be completed during January, allowing the plant to achieve the operating cost breakeven run rate, and enter the final stages of the production ramp up. The Olaroz project had a nameplate capacity of 17 500 t/y.
    Back to Top

    Precious Metals

    Petra Diamonds H1 revenue falls 28 percent

    Diamond miner Petra Diamonds Ltd said its first-half revenue fell 28 percent as the price of diamonds continued to fall.

    Revenue for the six months to Dec. 31 fell to $154 million from $214.8 million a year earlier, the company said in a statement.

    The price of rough diamonds fell about 9 percent, hurt by slowing demand for the precious stone.

    Attached Files
    Back to Top

    Base Metals

    Lundin Mining Announces 2015 Production Results and Guidance

     2015 Highlights:

    Exceeded the high-end of annual production guidance for copper and nickel while meeting overall targets for zinc.
    Candelaria outperformed the most recent copper production guidance due primarily to higher than expected mill throughput in Q4.
    At Candelaria as previously announced, the successful exploration and mine plan optimization efforts resulted in total Mineral Reserves increasing by approximately 20% and resulted in the extension of the mine lives of all of the higher grade underground mines as well as the open pit.
    Zinkgruvan achieved new annual records relating to tonnes of ore mined and milled. Annual zinc production also constituted a new record for the operation.
    As at year end 2015, the Company had a net debt balance of $441 million, and did not have any amounts drawn on its $350 million revolving credit facility.

    2016 Capital Expenditure and Exploration Guidance

    Capital expenditures for 2016 for mines operated by the Company are expected to be $220M, which includes:

    $35M in capitalized stripping at Candelaria. This has significantly decreased from prior estimates due to a deferral of 30Mt of waste being mined from Phase 10, resulting in expected cost savings of approximately $65M in 2016.
    At Candelaria spending on the Los Diques tailings facility is expected to amount to $70M in 2016. The total capex budget for the project is expected to total $325M between 2016 and 2018, in-line with prior estimates.
    At Eagle sustaining capital costs are expected to total $10M in 2016, which represents a decrease of 50% compared to 2015 guidance levels.
    At Neves-Corvo capital costs in 2016 are expected to total approximately $55M, in-line with guidance levels provided for 2015.
    At Zinkgruvan the guidance amount of $35M for 2016 includes the spending of $8M on an expansion project which is aimed at increasing the overall mill capacity by approximately 10% by the end of 2017.
    Exploration expenditures in 2016 are expected to total $40M, which represents a decrease of approximately $20M from 2015 guidance levels due to the deferral or cancelation of most greenfields exploration work.
    Back to Top

    Chinese tin producers jump on the cutback bandwagon

    Chinese tin producers jump on the cutback bandwagon

    China's main tin producers have joined the cutback bandwagon with an announcement they will curtail 17,000 tonnes of output this year.

    As with similar announcements by Chinese producers across the base metals spectrum, there may be more to this apparent self-discipline than meets the eye.

    But the cuts, if implemented, will help tighten further a market already facing structural supply issues even before the latest cross-commodities pricing rout.

    Proof of that tightness comes in the form of chronically low stocks in London Metal Exchange (LME) warehouses and the resulting persistent stress in nearby time spreads.

    China is the world's largest tin producer and the nine entities that have pledged to cut output account for around 80 percent of the country's output and 40 percent of global output, according to industry body ITRI.

    The 17,000 tonne cutbacks would represent a 12 percent drop from 2015 production levels and are equivalent to 4-5 percent of global output.

    But, as with similar coordinated cutbacks announced in other parts of the Chinese metals sector, these ones are in essence a cry for central government help.

    The tin market, according to the nine producers, "is detached from fundamentals", for which read, "the current low tin price is not our fault, it's the fault of speculators".
    Back to Top

    Steel, Iron Ore and Coal

    Shandong to slash 25% coal capacity over 2016-2020

    Eastern China’s Shandong province aims to pare back coal production capacity by 42.82 million tonnes per annum over 2016-2020, accounting for nearly 25% of the province’s total capacity, said one government official on January 21.

    By the end of 2015, the province had a combined coal capacity of 172 million tonnes per annum. Its coal output in 2015 amounted to 145 million tonnes, a year-on-year decline of 2.14%, according to the Shandong Administration of coal mine Safety.

    All capacity cut will target provincially-owned coal miners, which managed to cut cost by 68 yuan/t ($10.37/t) on year in 2015 and saved 12.5 billion yuan in total, said Fanjun, Deputy Director of the Shandong State-owned Assets Supervision and Administration Commission, at a provincial meeting on deepening state-owned enterprises reforms.

    Of those miners, Yankuang Group, Shandong Energy Group, Shandong Iron and Steel Group and Shandong Gold Group last year cut staff salary by 3.9 billion yuan or 8% from a year ago.

    In response to the central government’s call for overcapacity elimination, Yankuang and Shandong Energy shut 6.85-million-tonne capacity in the past year comprising 21 mines.
    Back to Top

    Sinosteel wins mining rights of the largest iron-ore resource in the world

    Sinosteel Corporation of China won the bid for the mining rights of the Empresa Siderurgica del Mutun (ESM) in Santa Cruz, Bolivia.

    The ESM is the world's largest iron-ore resource situated 2,000 kilometers (1,243 miles) southeast of La Paz, capital of Bolivia, with gross reserves at 40 billion tons.

    Winning six out of seven votes in the last round of bidding, Sinosteel beat its rival, another Chinese enterprise Henan Complant Mechanical & Electrical Equipment Group Co. Ltd (HCME), with overwhelming odds.

    According to the steel project carried out by ESM, ore-dressing plants, granulation workshops and plants for direct reduction will be set up in Bolivia, stated Saisaer Nawaluo, Mining Minister of Bolivia.

    He added that a steel mill with continuous casting technology will also be established to satisfy 60 percent of domestic steel demand.

    Sinosteel will invest $450 million in the project and initiate the construction in 100 days as prescribed under the supervision of another international corporation.

    In 2007, the government of Bolivia collaborated with Jindal South West Group of India to develop ESM but failed five years later. Many corporations from Russia, Australia, Venezuela and China thereafter expressed their interest in the project.

    "We have to choose a corporation rich in experience and funds as our powerful support. Sinosteel is our best choice", said Nawaluo in a news conference.
    Back to Top

    China to cut crude steel capacity by 150 mln T: premier

    China will cut crude steel production capacity by 100 to 150 million tonnes, and reduce coal capacity by "a relatively large margin", according to a statement issued on January 24 after an executive meeting of the State Council chaired by Premier Li Keqiang on January 22.
    Back to Top

    Higher defaults in coal, steel firms seen as China cuts capacity

    More companies in China’s coal and steel sectors will likely fail as the nation takes further steps in supply-side reforms aimed at curbing overcapacity and excess labour in state-owned industries, according to analysts at Hua Chuang Securities Co and Nanjing Securities Co.

    Investors should avoid putting money in weaker firms in the coal and steel sectors whose securities aren’t frequently traded, according to Yang Hao, a credit analyst at Nanjing Securities. Baotou Iron & Steel Group Co sold 3 billion yuan ($456 million) of notes last week with a coupon of 5.15%, higher than the 4% level paid by similar bonds, he said.

    Defaults are already spreading in the coal and steel sectors. Winsway Enterprises Holdings, the Chinese coking-coal importer, missed interest payment for the second time in October on a debenture due 2016. Coal miner Hidili Industry International Development didn’t repay dollar-denominated bonds due November 4. Sinosteel Co, a state-owned steel trader, on December 30 postponed a note payment a fourth time. Most of the seven onshore bond defaults last year were in sectors deemed to have too much capacity.

    “Credit risks are getting higher for the coal and steel sectors because cutting excess capacity means bankruptcies for some companies,” said Yang at Nanjing Securities. “So investors should only invest in the leaders in those overcapacity industries.”

    The cut in excess capacity will result in higher credit risks for those industries in the short term, according to a January 24 report from Hua Chuang Securities written by analysts led by Qu Qing. In the medium term, if the speed of reduction is well controlled, credit risks will likely drop as the government will come out with other measures to support the economy, they said.

    Attached Files
    Back to Top
    Commodity Intelligence LLP is Authorised and Regulated by the Financial Conduct Authority

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

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

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

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

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

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

    © 2018 - Commodity Intelligence LLP