Mark Latham Commodity Equity Intelligence Service

Tuesday 7th March 2017
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    China targets 3.4 pct cut in energy intensity in 2017

    China aims to cut the energy consumption per unit of GDP by at least 3.4% in 2017, while targeting continued reductions in the emission of major pollutants, according to a government work report available to the media ahead of the annual parliamentary session on March 5.

    China's energy consumption per unit of GDP fell by 5% last year, according to the report to be delivered by Premier Li Keqiang at the opening meeting of the annual session of China's top legislature, the National People's Congress.

    China's total energy consumption will be capped at 5 billion tonnes of coal equivalent by 2020, according to a government plan for the 2016-2020 period. This will translate into a 15% reduction of energy use per unit of GDP by 2020.

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    Multinationals to heed tax man’s further-reaching hand as transfer pricing disputes come to a head

    With several Canadian miners embroiled in acrimonious standoffs with the Canadian Revenue Agency (CRA) regarding transfer pricing rules, mining companies will have to come to terms with increased levels of uncertainty in their tax profiles and will need to consider the impact of all changes, not only on existing structures but also on new investments and transactions.

    Since the CRA first introduced transfer pricing rules in 1998 to counteract base erosion and profit shifting (BEPS), various Canadian resource firms have been singled out for their purported aggressive tax planning and alleged tax evasion schemes.

    Among the high-profile miners that have filed pleadings with the Canadian Tax Court are Cameco, Silver Wheaton, Burlington Resources, Conoco Funding Company and Suncor Energy. Cameco’s case is the only one that has started hearings.


    According to Fasken Martineau partner in the tax practicegroup Jenny Mboutsiadis, the CRA becomes concerned about transfer prices when multinational enterprises (MNEs) use transfer prices to shift profits from high tax jurisdictions to lower tax jurisdiction.

    “The CRA has been sharpening its assessments of transfer pricing in the last six years, resulting in several MNEs [having their earnings] reassessed and [given] penalties," Mboutsiadis said during a briefing in Toronto on Friday.

    Fasken Martineau’s leader in the tax practice group Christopher Steeves flagged any Canadian corporate structure with a subsidiary in another jurisdiction, any foreign corporate structure with a Canadian component and multinational corporate structures with corporate lines going in and out of Canada as being likely to be tapped by the CRA for closer scrutiny under transfer pricing rules.

    The CRA’s transfer pricing rules are found in Section 247 of the Income Tax Act, which deals with the ‘arm’s length’ principle. This deals with the terms and conditions of a transaction agreed to between non-arm’s length parties that must be equal to what arm’s length parties would have agreed to. The purpose of this principle is to ensure that taxpayers dealing with non-arm’s length parties report substantially the same amount of income as they would have if they had been at arm’s length, Mboutsiadis explains.

    Steeves points out that the result of the application by the CRA of Section 247 could entail any one, or a combination of three outcomes, including an adjustment in the terms and conditions of a transaction to what arm’s length companies would have done; an adjustment or recharacterisation of the transaction or series of transactions to those that would have been entered into by arm’s length parties; and the imposition of penalties.

    This extraordinary power of the CRA to recharacterise transactions is controversial among the Organisation for Economic Cooperation and Development (OECD), whose work ultimately led to the introduction of the transfer pricing rules. “The penalties can be extremely nasty. If a reassessment results in a more than C$500-million adjustment, it can attract a 10% penalty, half of which must be paid or guaranteed by letters of credit while the offending organisation appeals the reassessment,” Steeves stated.


    In November 2012, the Group of Twenty (G20) tasked the OECD with devising an action plan to, besides other things, counter tax planning strategies which they perceived MNEs and wealthy indviduals were using to exploit gaps and mismatches between the tax rules of different countries.

    These strategies include artificially shifting profits to low or no-tax jurisdictions where there is little or no real economic activity.

    The BEPS project was initiated, with more than 60 countries participating, including many of the world’s major miningjurisdictions such as Australia, Brazil, Canada, Chile, Colombia, China, India, Mexico, Peru, Russia, South Africaand the US.

    During the next three years, the OECD considered, consulted and concluded upon 15 BEPS actions, with its findings under each falling broadly into one of three categories: minimum standards to be adopted by all participating countries; desirable but optional best practices; and recommendations for countries to consider.

    Transfer pricing was identified as one of four tax principles that create potential for profit shifting. Mboutsiadis notes that, with the rise of intangible assets in global business, it has become easier to shift profits, because risks and ownership of intangibles are easier to shift.

    Importantly, the analysts point out that Canada introduced country-by-country reporting in the 2016 budget, applicable to reporting fiscal years of MNEs that begin in 2015. This entails a report that MNEs with annual consolidated profit of €750-million or more are required to file with the CRA. This applies to all entities with a relation to Canada.


    “Companies generally follow the letter of the law, but not the spirit of the law,” Mboutsiadis says.

    The CRA tax audit programme brought in more than C$11-billion in taxes, penalties and interest in the 2015/16 fiscal year, of which about two-thirds related to aggressive tax planning by large MNEs or high-net-worth investors.

    Enforcement is set to increase with the 2016 budget appropriating C$44.4-million of additional funding to the CRA to hire 100 more auditors and resources, in the government’s quest to collect C$2.6-billion more over five years.

    The CRA is increasingly using sophisticated analytics to identify high-risk companies for auditing. For companies with yearly revenue over C$250-million, the CRA applies a risk-assessment algorithm that assesses 200 variables, which has significantly increased the amount of tax collected from large corporations.

    The CRA also exchanges selected tax information with tax authorities in other jurisdictions under the exchange of information provisions found in tax treaties, bilateral tax information exchange agreements and the Convention on Mutual Administrative Assistance on Tax Matters. Through the OECD, the international tax community is increasing and expediting the exchange of tax information and can track international money transfers of more than C$10 000 in real time on the FinTrack system.


    One of the most important cases currently before the Canadian Tax Court is that of Cameco, for which the CRA reassessed the 2003 to 2015 tax years. The CRA challenged Cameco Canada’s arrangements with a Swiss uranium aggregating subsidiary, and the price of uranium sold by Cameco Canada to Swiss Cameco.

    Three tax years are currently being tried in court, with Cameco liable for additional revenue, as assessed by the CRA, of C$7.4-billion during this period, which results in C$2.2-billion in additional taxes. This could rise if penalties are also imposed.

    Steeves says the CRA’s primary position is that CamecoCanada was in fact the one carrying the uranium business, not Swiss Cameco. Its first alternative position would be to apply the pricing provisions of paragraphs 247 (2) (b) and (d) of the Income Tax Act, that argues that arm’s length persons would not have carried out the series transactions involving Cameco Canada and Swiss Cameco, and it will recharacterise the transactions to effectively disregard Swiss Cameco, which would be the first tie this provision is used.

    So far, Cameco Canada has paid the CRA C$825-million in cash and letters of credit, which will remain locked until the case is resolved. No decision I expected until 2018.

    The other cases are pending litigation.

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    Diversified miners to continue focus on capital discipline despite market upturn – BMI

    With the mining downturn having bottomed out in 2015 and improved performances already achieved in 2016, BMI Research believes the major diversified miners can expect to perform better over the coming years.

    Based on the performance of large diversified miningcompanies, including Anglo American, Glencore, Vale and Rio Tinto, which have posted positive net incomes for the first time in years, BMI Research adjusted its outlook for major diversified miners to positive.

    “Not only did they make profits, they were also successful at debt reduction,” the firm noted, pointing out that Glencoremade a profit of $1.6-billion in the last financial year, while reducing debt from $25.9-billion at the end the 2015 financialyear to $15.5-billion in 2016.

    Similarly, Rio Tinto, Vale and Anglo American posted profits of $4.6-billion, $3.9-billion and $1.6-billion, respectively, following years of losses.

    Rio and Anglo American also managed to reduce their net debt to below $10-billion each. Vale was, however, less successful and only managed a marginal reduction in debt.

    “Miners will remain committed to debt reduction in the year ahead and beyond, along with which their performance will continue on the uptrend. Reduced cost of debt servicing as interest payments decrease with debts paid off will contribute to better balance sheets. Most major miners have decided to restart dividends from 2017 onwards,” BMI pointed out.

    However, BMI further pointed out that commodity prices would not be the main driver of growth in coming years. “Instead, cost reduction and efficiency improvements will be the sources of strong balance sheets, improved cash flows and overall better performance.”

    Meanwhile, despite improvements in operating cash flows across the board, capital expenditures will remain stringent over the next three years in terms of absolute value, as miners will continue to pursue a strategy of great capital discipline.

    “This will ensure miners have greater free cash flow going forward to weather market volatility than in past years. Miners will continue investing in technology – all the more so that technology will help them improve efficiency further – and expand growth assets, but there will be minimal investment in greenfield projects,” BMI stated.
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    3D Printing a house for $10000

    This Home Was 3D Printed in Only 24 Hours and for Just $10,000

     Apis Cor
    • A 38-square-meter (406-square-foot) house was 3D printed in 24 hours for a total cost of $10,000.
    • Apis Cor., the Russian company that constructed the house, says that a simpler house could cost only $223 per square meter ($68 per square foot).

    3D printing is incorporating itself into our clothes, our medicine, and, now, even our homes. Apis Cor., a company dedicated to building the world with printing has built its first ever 3D-printed home in Stupino town, a region near Moscow, Russia.

    Construction took only 24 freezing hours during December, 2016, through temperatures of -35°C (-31°F). The home, equipped with a living room, kitchen, bathroom, and a hallway, was made on-site, a world’s first for 3D-printed building constructed in that amount of time.

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    Bitcoin capital leakage $100m a day?

    Integrating the new implied market share into 2016 trading volume gives us a more realistic interpretation of the year's volume than recorded data seemed to show.

    At 35% market share, Chinese exchange volume steps down to $103m of bitcoin traded daily, down from the apparent $1.6bn-worth traded daily before the implementation of fees.

    Amid the shifting regulatory landscape it seems that some traders have decided to stick with these Chinese exchanges.

    Coindesk Research will continue to track exchange volume closely to see how the story unfolds throughout 2017.Image title

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    Oil and Gas


    OPEC in February moved closer to full compliance with the landmark
    production cut agreement signed late last year, as output in the month fell
    from January levels to average 32.03 million b/d, according to an S&P Global
    Platts survey released Monday.

    In all, taking an average of January and February production, the 10
    members obligated to reduce output under the deal have achieved 98.5% of their
    total combined cuts, according to the survey, up from 91% in January.

    Saudi Arabia continued to show the strongest output discipline, with its
    February production averaging 9.85 million b/d, the survey found, below its
    allocation under the deal of 10.06 million b/d and its lowest output since
    February 2015, according to the survey archives.

    Its January and February combined average output of 9.92 million b/d was
    140,000 b/d below its deal quota.

    The kingdom's overcompliance, along with Angola's, is helping compensate
    for the overproduction others within OPEC, notably Iraq, Venezuela, and the
    UAE, which have not cut down to their allocations under the deal.

    Iraq remains 91,000 b/d above its quota despite lowering its February
    output, Venezuela is 43,000 b/d above, and the UAE is 42,000 b/d above.

    Saudi Arabia and Angola's output reductions also have mostly offset for
    increases by exempt Libya and Nigeria since the deal began on January 1.

    Libya's January and February average is 140,000 b/d above the agreement's
    reference October levels, while Nigeria is producing 44,000 b/d above the
    reference level.

    Iran, which is allowed to boost production to 3.80 million b/d under the
    deal as it recovers from western sanctions lifted in January 2016, had
    February production of 3.75 million b/d, a 30,000 b/d increase from January.

    Its January and February average is 3.73 million b/d.

    Analysts have said Iranian production is unlikely to increase
    significantly without further investment, much of which has been stymied by
    remaining US sanctions, the threat of reimposing the previous sanctions on
    Iran's oil sector by the US, and Iran's delays in releasing the full terms of
    its revamped petroleum contract.

    Still above ceiling

    Under the agreement, OPEC pledged to cut 1.2 million b/d for six months
    and freeze production at around 32.5 million b/d, including Indonesia, which
    suspended its membership in November and is not included in the Platts survey
    estimates for 2017.

    OPEC as a whole averaged 32.11 million b/d in January and February,
    according to the survey. Adding in Indonesia's typical 730,000 b/d of
    production would take the producer group about 340,000 b/d above its ceiling.

    Since the deal covers an average of January to June output,
    month-to-month fluctuations are to be expected.

    The Platts estimates were obtained by surveying OPEC and oil industry
    officials, traders and analysts, as well as reviewing proprietary shipping

    In concert with OPEC, 11 non-OPEC countries led by Russia have also
    agreed to cut output by 558,000 b/d in the first half of 2017, with many of
    those countries phasing in their reductions or relying on natural declines.

    A five-country monitoring committee formed to enforce the deal is
    scheduled to hold a ministerial meeting March 25-26 in Kuwait City.

    The committee is chaired by Kuwaiti oil minister Essam al-Marzouq and
    also includes ministers from OPEC members Algeria and Venezuela, along with
    non-OPEC Russia and Oman.

    Libya violence restarts

    Angola saw its production rise slightly to 1.66 million b/d, as exports
    rose and the country inaugurated a new grade Olombendo, with its first cargo
    scheduled for lifting in mid-March.

    But its overall average output for 2017 puts the country 29,000 b/d below
    its allocation, second most among the 10 countries required to cut production.

    Among the countries still above their allocations, Iraq saw its
    production fall in February 80,000 b/d from January, as inclement weather
    delayed some loadings from its southern port and an attack at the Bai Hassan
    field slightly reduced output by the Kurdistan Regional Government.

    Venezuela, beset by economic crisis, held its production steady at 2.01
    million b/d. Survey participants said they expected Venezuela's production to
    fall throughout the year, as the country has failed to keep pace with
    necessary investments in declining fields.

    The UAE saw its February output fall 30,000 b/d from January to 2.90
    million b/d. Survey participants say they expect the country to become
    compliance once its key export grade Murban undergoes maintenance starting
    this month.

    Meanwhile, exempt Libya saw production hold steady at 670,000 b/d, as
    gains in the beginning of February were undone by power outages and
    maintenance in fields.

    Renewed violence in the country, as militia forces overran several key
    eastern oil export terminals over the weekend, will impact March production,
    with output as of Monday down to 600,000 b/d, according to state-owned
    National Oil Corp.

    Also-exempt Nigeria showed an increase of 50,000 b/d to 1.70 million b/d
    in February, as production comes back online after recent attacks on
    infrastructure in the Niger Delta, offsetting maintenance of Bonga grade crude
    in the latter half of the month.
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    Libya's Waha oil output cut by 35,000 bpd due to unrest - NOC board member

    Production by Libya's Waha oil company has been cut by 35,000 barrels per day (bpd) as a precautionary measure due to clashes near the major oil ports of Ras Lanuf and Es Sider, a senior official at the National Oil Corporation (NOC) said on Monday.

    Jadalla Alaokali told Reuters that national production currently stood at 663,000 bpd, down from an average of about 700,000 bpd in recent weeks.

    "The production of Waha before was about 75,000 bpd and it has been reduced by 35,000 bpd as a precaution due the company's limited storage capacity and fears about the evolution of events in Es Sider," Alaokali said.
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    Novak: Russia’s hydrocarbons industry competitive despite sanctions and downturn

    Despite difficulties posed by international sanctions and the downturn in the past two to three years, the Russian hydrocarbons industry has demonstrated positive results, helped by a very liberal investment regime that incentivizes greenfield developments and further production of brownfields.

    The agreement between OPEC and non-OPEC countries to cut productions helped reduce volatility and prompted investments to return.

    These were the key messages that Alexander Novak, Minister of Energy of the Russian Federation, conveyed at CERAWeek in Houston today.

    “Russia had a lot of foreign investment coming in”, said Novak. “Clearly it was difficult to get investments from the US and Europe but we were able to raise a lot of investments from Chinese, Japanese and Indian companies.”

    According to Novak, the liberal legislation which regulates the repatriation of profits by foreign companies working in Russia, made it possible to bring in investments even in a low oil price period.

    At the same time the Russian government put in place a system of incentivizing the development of greenfields and the further production of the brownfields.

    This made it possible for the Russian industry to “do a good job, to survive and to really be competitive.”

    “In two years the amount of oil output grew by almost 400,000 bbl/day.”

    Production growth v production cuts
    Following the agreement between OPEC members and non-OPEC oil producers reached in December, Russia has reportedly cut between 98,000 and 117,000 bbl/day.

    “In the longer term the market would have solved the price issue”, said Novak,“but that would have led to a chaos for some time at least and the market would have allowed for a shortage of supply.”

    “Witnessing this balancing where we see a $50 – $60 for a barrel of Brent, this is the kind of situation that has helped us reduce volatility and see investments return.”

    According to Oil 2017, the IEA’s market analysis and forecast report previously known as the Medium-Term Oil Market Report, production from Russia is forecast to remain stable over the next five years.

    When asked whether Russia will ever join OPEC, Novak responded that Russia is not considering joining OPEC but the level of interaction between Russia and OPEC and the agreement on production cuts demonstrate the need and willingness for a change in cooperation, which in itself dates back to the Soviet Union.

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    Platts JKM declines to $5.95/MMBtu on emerging US and Australian LNG supply

    S&P Global Platts JKM for LNG cargoes to be delivered in April ended the week at $5.95/MMBtu, a $0.225/MMBtu fall from last Friday, on greater supply visibility from two large-scale liquefaction projects in US and Australia.

    Train two of the Gorgon project in Western Australia resumed production last week, following a shutdown for "minor" maintenance.

    In addition, Gorgon train three should start-up very soon, according to market sources.

    One source said he was confident it will start producing in "very, very likely to be early Q2."

    A Chevron spokesman declined to comment.

    Higher train two output, as well as an earlier-than-expected train three startup, would pressure prices in Asia, sources said.

    The Cheniere-operated Sabine Pass in the US project is also currently commissioning its train 3 which is expected to start up this month.

    Also, Angola LNG launched a single-cargo DES sell tender on Monday, for early-March delivery, which closed on Thursday.

    But some end-user demand stopped further price losses late in the week with at least two tenders floated by Asian end-users reported awarded this week.

    Buy tenders were floated by Kansai Electric and Indian Oil Corporation this week. Tohoku Electric was heard to be also searching for an April cargo, although this could not be fully verified.

    Both GAIL and PTT were said to have bought a cargo for first-half April each, at close to $6/MMBtu.

    SK was also heard to have done a spot purchase for two cargoes earlier this week for April delivery, with various sources saying the final deal price for both cargoes was in the low-$6s/MMBtu. Sources from SK were unavailable for comment.

    Summer demand for cargoes could also support prices for deliveries further down the curve, sources said.
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    BHP Billiton, Pemex advance work on deep-water oil discovery in Mexico

    BHP Billiton has advanced its explorationand production interests in the Gulf of Mexico by signing a contract with Pemex Exploration & Production Mexico to complete work on the significant Trion discovery.

    BHP in December successfully bid to acquire 60% of the resource that, once fully appraised, is expected to be in the top ten fields discovered in the Gulf of Mexico in the last decade.

    Through the agreement, BHP will have participating interest in and operatorship of blocks AE-0092 and AE-0093, while Pemex retains a 40% interest in the blocks. Pemex estimates the gross recoverable resource to be 485-million barrels of oil equivalent.

    BHP’s bid for Trion includes an upfront cash payment of $62.4-million and an estimated $320-million initial commitment to deliver a minimum work programme, which comprises drilling one appraisal well, one exploration well and the acquisition of additional seismic data.

    Should BHP Billiton and Pemex agree to progress the projectbeyond the minimum work programme, BHP will be required to fulfil the commitment to pay the remainder of a $570-million minimum contribution.

    BHP Billiton would also carry Pemex for an additional $561.6-million on future project costs.

    Should the project progress to full development and production, both BHP Billiton and Pemex would pay the Mexican government an additional royalty of 4% on revenues.

    The signing ceremony was attended by Mexico President Enrique Peña Nieto, Mexico Energy Minister Pedro Joaquín Coldwell, BHP Billiton CEO Andrew Mackenzie and Pemex CEO José Antonio González Anaya.

    Mackenzie noted at the signing that the partnership was an historic moment for Mexico and the beginning of a new chapter in business relations between BHP and Pemex.

    “It is an honour to be the first foreign company to partner with the people of Mexico in developing their significant petroleum resources for mutual benefit,” he added.

    Nieto thanked BHP for being Mexico’s partner. “I am certain [this journey] will yield greater development for our country,” he highlighted.

    González Anaya further added that the agreement constituted a parting of the waters in the history of Pemex. “For the first time, an area assigned during the Round Zero auction, will be progressed in partnership with a world leading company.”
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    Statoil CEO Says Break-Even Cost Down to $30 Per Barrel

    Statoil CEO Says Break-Even Cost Down to $30 Per Barrel

    Eldar Saetre, president and chief executive officer at Statoil, discusses the market impact of OPEC's output cut, his company’s positions in the U.S., and the decline in their break-even costs. He speaks with Bloomberg's Alix Steel.

    video on:
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    Argentina slashes drilling costs, sees more efficiencies

    Argentina slashes drilling costs, sees more efficiencies

    Argentina's state-run oil company YPF has cut horizontal drilling costs by more than half and slashed the time required to complete new wells, the chairman said on Monday at the CERAWeek energy conference.

    The company cut the cost of horizontal drilling to around $8 million from $17 million a well, while the time required to complete a new well has been shaved to 15 days from 40 days, Miguel Gutierrez told the gathering in Houston.

    Those efficiencies have pushed break-even prices to below $40 per barrel, a significant gain for Argentina, which has struggled to attract capital since crude prices started to decline in 2014.

    Argentina recently has been pushing again to lure energy investment into the country, particularly into its massive Vaca Muerta formation. That reservoir is one of the largest shale deposits in the world.

    In January, Argentina announced changes to its subsidy program to offer producers $7.5 per million BTU of natural gas produced through 2020 - a figure well above U.S. gas prices.

    "It's competitive, especially compared to the United States," Gutierrez said on the sidelines of the conference.

    Despite the vast reserves, lack of production has left the country short on energy, and a bump in production is unlikely to curb imports in the near term. In 2016, Argentina was forced to significantly increase imports of LNG and purchase supplies from Chile, which resells a portion of the gas it receives to its neighbor.

    "For quite a considerable time, Argentina will be importing LNG," Gutierrez added.

    Argentina also is exploring opportunities for deep-water offshore oil production. A process is underway to explore a new area, with work anticipated to begin in April, Gutierrez said.

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    Genscape Cushing 66.782MM

    Genscape Cushing 66.782MM Up +1.171MM from Fri, Feb 24

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    Exxon to invest $20 bln on U.S. Gulf refining projects

    Exxon Mobil Corp, the world's largest publicly traded oil producer, said on Monday it would invest $20 billion through 2022 to expand chemical and refining plants on the U.S. Gulf Coast.

    The investments at 11 sites should create 35,000 temporary construction jobs and 12,000 permanent jobs, Chief Executive Darren Woods said in a speech at CERAWeek, the world's largest gathering of energy executives in Houston.

    Exxon last month pledged to boost this year's spending by 16 percent to expand operations, especially in shale production, after the company posted a better-than-expected quarterly profit, helped by rising oil prices and lower costs.

    The quarterly report was Exxon's first under Woods, after former CEO Rex Tillerson was appointed as U.S. President Donald Trump's secretary of state.
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    U.S. Oil, Gas Breakevens are $50 per barrel, $3.35/Mcf: KLR

    U.S. Oil, Gas Breakevens are $50 per barrel, $3.35/Mcf: KLR

    U.S. shale required prices to break even are higher than many are asserting, according to research by KLR Group released today. But if the IEA’s current demand/supply analysis is correct, it’ll be a moot point in three years.

    KLR’s models show U.S. oil and gas breakeven WTI prices are $50/bbl and $3.35/Mcf, significantly above many estimates. Using a standard 10% ROR forces cost of supply much higher, with oil ranging from $71/bbl to $91/bbl and gas from $4.20/mcf to $5.70/mcf.

    Several factors contribute to costs being higher than expected. According to KLR, all-in well costs across a company’s entire drilling program are about 120% above single well estimations.

    Trouble costs double

    Trouble wells can easily cost double expectations. Actual well recoveries are generally 15%-30% below type curves. Almost all anomalous events in a well’s lifetime are negative, and these occurrences are typically not included in forecasts. The higher full-cycle well cost and lower well recoveries make actual industry capital intensity about twice the values given in single well representations, according to KLR.

    Midland and Eagle Ford show lowest oil breakevens

    The Midland basin and eastern Eagle Ford have the lowest required oil costs due to lower capital intensity and higher oil cuts. These basins require a WTI price of $71/bbl-$80/bbl to create a 10% ROR. The Bakken has higher capital intensity than the Midland basin and lower realized oil price, but does have the highest oil cut of major U.S. oil plays. An oil price of about $90/bbl is required for a 10% ROR in the Bakken, according to KLR. The Midland basin is considered the lower bound of the cost of U.S. supply, while the Bakken is considered the upper bound of supply cost.

    Gas: Marcellus is lowest breakeven

    According to John Gerdes and the KLR team, the Marcellus has the lowest breakeven costs of any major U.S. gas play.

    Low capital intensity drives this advantage, but is partially offset by lower realized prices due to transportation bottlenecks. KLR estimates that $4.20/mcf-$4.50/mcf gas prices are required to generate a 10% ROR in the Midland. The Utica sees similar price realizations but higher capital intensity than the Marcellus, driving its 10% ROR cost up to $5.00/mcf.

    Marginal cost:

    “Assuming a 4% unleveraged mid-cycle return, and 5%-10% incremental cost inflation relative to the ’17 industry cost structure, the marginal cost of U.S. gas supply is NYMEX $3.75-$4, while the marginal cost of global oil supply is NYMEX $75-$80,” according to KLR Group.
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    U.S. asks for more information on Baker Hughes-GE merger

    General Electric Company (GE) and Baker Hughes have each received a request for additional information from the United States Department of Justice (DOJ) in connection with the pending combination of GE’s oil and gas business with Baker Hughes.

    The two companies announced their agreement to combine GE Oil & Gas and Baker Hughes to create the second largest oilfield technology provider back in October last year. The “New” Baker Hughes will be an equipment, technology and services provider in the oil and gas industry with $32 billion of combined revenue and operations in more than 120 countries.

    The second requests were issued under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act).

    According to their joint press release on Monday, GE and Baker Hughes have been working cooperatively with the DOJ as it conducts its review of the transaction.

    The second requests were expected and are a normal part of the DOJ review process, the statement further said. The effect of the second requests is to extend the waiting period imposed by the HSR Act until 30 days after GE and Baker Hughes have substantially complied with the requests, unless that period is extended voluntarily by the parties or terminated sooner by the DOJ, the companies said.

    The transaction remains subject to approval by Baker Hughes’ shareholders and other approvals, as well as customary closing conditions. GE and Baker Hughes expect the transaction to close in mid-2017.
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    Hess: Deepwater at rock bottom, but there are exceptions

    Much has been said about the shale revolution and the low oil prices effects during the first day of the CERAWeek conference in Houston. On the other hand, not so much attention was given to the offshore part of the industry.

    This was also acknowledged by John Hess, the CEO of Hess Corporation, a U.S. based independent with assets both in offshore and onshore areas of both in the U.S. and internationally.

    Speaking at the Ceraweek panel in U.S. Hess said while the spotlight has been on shale, most people don’t realize that offshore deepwater makes up about seven percent of world oil supply, while shale is five percent.

    “While shale was the first to go down (during the oil price crash), offshore deepwater has been the last to go down, and is really at rock bottom.”

    Commenting further on the current conditions in the offshore market, Hess said the offshore rig utilization is now at about 50 percent, meaning there’s a lot of equipment lying around that cannot be used.

    “Offshore drilling rates, whether it’s for a drillship or semi-submersible have gone from $600.000 a day in the heyday to $200.000 per day today barely covering operating expenses.

    Also he said that oil and gas exploration investments globally have shrunk from $100 billion to $40 billion this year.

    Hess also highlighted the $40 billion number has been like that for two years.

    “So, in sum, we’re not spending enough money, we’re not investing enough, to keep offshore development pipeline full.”

    Hess said the consequences of this under-investment will start to show in a few years, echoing a statement by IEA made earlier during the day when it said that oil prices might jump after 2020 if no new projects are sanctioned soon.

    John Hess then went on to quote the IEA who said that the industry needs to spend in excess of $600 billion a year to hold global oil and gas production flat. According to Hess, in 2016 the investments were at around $300 billion, while 2017 should be around $410 billion.

    So, he said, as an industry we’re not investing enough to ensure that we have enough supply growth to keep up with the demand growth and offset the annual decline in production.

    Asked about the company’s offshore investments, Hess said that while most people might think the offshore makes no economic sense in the current oil price environment there are exceptions, and “we are very fortunate to have one of those exceptions in offshore Guyana.”

    Hess was referring to the giant Liza discovery recently made by ExxonMobil.

    “We’re very fortunate we have Exxon as partner over there, they’re doing a great job. Two years ago, we had a play opener. The largest oil discovery in the last ten years, great reservoir, massive resource.”

    The Liza development is expected to be sanctioned in mid-2017. According the the Hess CEO, the project offers very attractive returns even at $40 a barrel.

    Hess then again highlighted that the industry needs to invest both in the short cycle and long cycle to avoid the supply crunch that may be looming over the next several years.
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    China has no plan to build inland nuclear plants by 2020, NEA

    China has no plan to build inland nuclear reactors in the 13th Five-Year period ended in 2020, Nur Bekri, director of the National Energy Administration, said in an interview during the parliamentary sessions on March 5.

    The development of nuclear power is an inevitable choice as China aims to move the world's largest energy market towards cleaner, renewable sources. But no decision was made to kick off the construction on inland nuclear power projects in the next three years, said Nur Bekri.

    China will only continue the preliminary study on nuclear projects and protect nuclear plant sites, according to the energy plan under the 13th Five-Year Plan.

    China halted all its nuclear power construction projects after the 2011 Fukushima nuclear disaster, but began construction work on several projects in eastern coastal areas in 2015.

    According to the 13th Five-Year Plan, China's nuclear power capacity should reach 58 GW by 2020. The total capacity of the plants currently under construction will be 30 GW.
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    ChemChina says Syngenta deal filing accepted by Beijing

    ChemChina said on Monday that Beijing had accepted its application for regulatory approval of its $43 billion takeover of Syngenta last month.

    Earlier Gao Hucheng, who retired as commerce minister less than two weeks ago, said the government had not received a formal filing for China's largest overseas acquisition.

    Speaking to Reuters on the sidelines of parliament's annual meeting, Gao also said the Ministry of Commerce (MOFCOM) would not start considering any submission until regulators in other countries had given the deal the green light.

    Responding to the comments, ChemChina spokesman Ren Kan denied this, saying by phone the company had submitted the application and the ministry had accepted it.

    A second company official who was not authorized to speak to press, said the ministry's anti-trust bureau had accepted the application on Feb 9.  

    It is not clear if Gao, who left his post and was replaced by his deputy on Feb 23, had not been briefed with the most up-to-date information.

    Gao is now a senior member of a largely ceremonial but high-profile advisory body to parliament.

    Press officials at the Ministry of Commerce were not immediately available for comment, while Syngenta did not immediately respond to a request for comment.

    Gao's comments come a month after Syngenta delayed the expected closure of the deal to the second quarter amid scrutiny from U.S. and European regulators.

    His remarks will likely stir fresh speculation among Syngenta investors about the China regulatory process.

    Mergermarket publication PaRR reported in January that ChemChina had previously filed and then withdrawn the filing, a strategy that is sometimes used to give merging parties more time for the deal to clear, or to address potential objections.

    Last month, Syngenta Chief Executive Erik Fyrwald did not confirm if China's Commerce Ministry had formally accepted a filing, but said he was confident the deal would win approval in the world's top agricultural market, without any long delays.

    The process has drawn intense interest from investors as Bayer's  acquisition of Monsanto and the merger of Dow Chemical and DuPont are being examined by regulators across the globe.

    Mario Russo, an analyst at boutique investment bank NSBO said the deal created few overlaps outside Europe and he expected Chinese regulators to approve the deal, which is strategically important to China, once the U.S. and EU had officially cleared it.

    However, investors had concerns over potential domestic political interference that could potentially slow the deal and wanted more transparency on the timetable, he added.
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    Base Metals

    Workers at Peru's Cerro Verde mine to strike for five days

    Workers at Cerro Verde mine, one of the largest copper producers in Peru, plan to start a five-day strike on Friday to demand better labor conditions, a union representative said on Monday.

    The representative and the mine's controlling owners said the strike could be indefinite.

    Cerro Verde is controlled by Freeport-McMoRan Inc , which owns a 53.56 percent stake. Sumitomo Metal Mining Company Ltd controls a 21 percent stake and Buenaventura 19.58 percent.

    News of the Cerro Verde strike comes as output at the world's two biggest copper mines has been interrupted. Some 2,500 unionized workers at BHP Billiton's Escondida copper mine in Chile began a strike on Feb. 9 while Freeport's Grasberg mine in Indonesia has stopped due to a dispute over export rights.

    Supply disruptions pushed copper prices to 20-month highs of $6,204 a tonne on the London Metal Exchange last month. Prices have come off these peaks since and were last trading at $5,851.50 a tonne.

    The Cerro Verde union's deputy secretary, Cesar Fernandez, said workers wanted family health benefits and other measures and had not ruled out an indefinite strike. He said the mine's standards for sharing conventional profits with workers were too high.

    A representative of Cerro Verde said the mine would continue abiding by the collective agreement it had forged with workers.

    Cerro Verde produced 1.1 billion pounds (498,951 tonnes) of copper in all of 2016, more than double output in 2015 thanks to a recent expansion.

    Freeport McMoRan said in a statement to Reuters it had been notified on March 2 the miners intended to go on strike for an indefinite period starting on March 10.

    The company said Cerro Verde strictly complies with its obligations by law and under its agreements with the union, paying out amounts owed for conventional profits as required, and providing competitive vacation and healthcare benefits.
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    Environmental review panel nixes proposed Ajax mine

    A prospective copper-gold mine in south-central  British Columbia has been handed a setback by local First Nations who oppose the project.

    An environmental review panel led by the Stk'emlúpsemc te Secwépemc and the Tk’emlups had been deliberating the pros and cons of the controversial $1.3-billion mine, located on the outskirts of Kamloops, for the past few months. On Saturday, in a 200-person ceremony announcing their rejection, one of the indigenous groups said a lake and the land around it where the mine is to be located, holds spiritual significance.

    "The current environmental approval process in British Columbia and Canada uses science but doesn't take into consideration our traditions and our culture," said Stk'emlúpsemc te Secwépemc councillor Janet Jules, quoted by CBC News. "That's what we emphasized with our consultations."

    However the decision isn't the end of the Ajax mine; final word goes to the federal and provincial environmental assessment offices. On January 18 the mine developer, KGHM Ajax Mining, submitted an application to them for an environmental certificate.

    The open-pit mine about 400 kilometres from Vancouver has been under consideration since 2006, but has run into opposition mostly due to its close proximity to Kamloops, a medium-sized Interior B.C. city. A survey done in 2013 showed nearly 75 per cent of respondents opposed the mine. Recently Mining Watch calculated the risk to the proponents, KGHM International (TSX:QUX) and Abacus Mining & Exploration (TSXV:AME), of pushing ahead with the project, saying it could cost them over $100 million in litigation or compensation costs.

    But KGHM says on its website that it has taken local concerns into account by moving the facilities farther from the city, while also increasing the processor throughput by 5,000 tonnes per day (60,000 tpd to 65,000 tpd) in an updated feasibility study released on January 13.

    The Ajax mine has proven and probable mineral reserves calculated at 2.7 billion pounds of copper, 2.6 million ounces of gold and 5.3 million ounces of silver. The 18-year mine would produce an annual 58,000 tonnes of copper and 125,000 ounces of gold.

    CBC quotes KGHM saying the mine would generate 1,800 jobs during construction and 500 when it's in operation.
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    Steel, Iron Ore and Coal

    China's 12 provinces unveils goals to reduce surplus coal capacity

    A total of China's 12 provinces have unveiled goals to cut excess coal capacity in 2017, with Shanxi, Henan and Guizhou pleading the biggest reductions, China Securities Journal reported.

    Both Shanxi and Henan provinces plan to reduce coal capacity by 20 million tonnes per annum (Mtpa) this year, while Guizhou vows to cut production capacity by 15 Mtpa. The remaining regions' goals all stand below 8 Mtpa.

    China will reduce steel production capacity this year by around 50 Mtpa and shut down at least 150 Mtpa of coal production facilities, Premier Li Keqiang said in the Government Work Report at the fifth session of the 12th National People's Congress on March 5.

    At the same time, the government will suspend or eliminate no less than 50 GW of coal-fired power generation capacity.

    The government pledges to make more use of market- and law-based methods to address the problems of "zombie enterprises," encourage enterprise mergers, restructuring, and bankruptcy liquidations, and shut down all outdated production facilities that fail to meet standards.

    In 2016, the country reduced coal capacity by 290 Mtpa and steel capacity by 65 Mtpa, said the premier.

    China will face a tough year to cut coal capacity in 2017, said Jiang Zhimin, vice head of China National Coal Association. Last year, some of the coal mines involved in capacity cut were already idle or operating at half capacity, so it's easy to achieve the goal. However, the coal mines involved this year are all running at normal capacity, said Jiang.

    The country will shut 800 Mtpa of coal capacity over 2016-2020, in order to optimize the bloated industry.
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    China will not force big coal output cuts if prices reasonable: NDRC

    China will not force coal mines to cut output on a large scale if prices remain within a reasonable range, the country's state planner said on Tuesday, the latest comments from the government on its efforts to tackle excess supplies and smog.

    In a statement, the National Development and Reform Commission said provincial governments and relevant agencies will decide whether to implement cutbacks at mines that are not considered "advanced".

    It did not say what price range it would consider reasonable.
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    Russia Jan-Feb coal output and exports rise YoY

    Coal-rich Russia produced 65.59 million tonnes of coal in the first two months of this year, a year-on-year rise of 2.86%, showed data from the Energy Ministry of Russian Federation.

    For more details, please visit

    Its coal output in February slid 5.3% from January to 31.9 million tonnes, which, however, was 1.23% higher than the year-ago level, data showed.

    Over January-February, the country's coal exports stood at 27.86 million tonnes, gaining 14.9% from the year prior.

    In February, coal exports of Russia were 13.38 million, increasing 11.26% year on year but falling 7.54% month on month.
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    South Africa Jan thermal coal exports hit six-mth low

    South Africa's thermal coal exports reached 5.62 million tonnes in January, hitting the lowest since July 2016, falling 8.8% from a year ago and down 19.1% month on month, showed customs data.

    India remained the largest taker of South African thermal coal in January, importing 1.27 million tonnes, falling 58.1% on the year and down 25.3% from December.

    Exports to South Korea climbed 20.2% from the month prior to 1.16 million tonnes in January, the highest since 2014.

    Shipments to European countries rose 21.3% on the year but slumped 56.4% on the month to 693,500 tonnes, with shipments to Spain up 4.3% from the month before to 346,100 tonnes.

    Thermal coal exports to Israel doubled the year-ago and month-ago levels to 505,600 tonnes in the month, while that to Pakistan surged 55.8% on the year but down 9.8% on the month to 439,200 tonnes.
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    Suifenhe border crossing starts to import Russia lignite

    Suifenhe border crossing at northeastern China's Heilongjiang province, one major channel for imports of Russian coal, for the first time ever imported over 10,000 tonnes of lignite from Russia in the first two months this year, showed data from the local government.

    The value of the imports stood at $402,400, data showed.

    Suifenhe started to import Russian coal in 2011 and was the first border crossing in Heilongjiang to import coal from Russia.

    In January 2017, imports of Russian coal through Suifeihe reached 493,000 tonnes. Total value of the imports stood at $2.77 million, 3.95 times higher than the year-prior level, official data showed.

    Major imported coal products via Suifenhe are premium anthracite coal and coking coal which accounted for 72% of the total.
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    Coal exports of North Queensland in Feb rise 13% on year

    Coal exports from North Queensland in Australia increased year on year in February after particularly low exports during the same month in 2016, data from North Queensland Bulk Ports Corporation showed on March 3.

    The coal terminals, including terminals of Hay Point, Dalrymple Bay and Abbot Point shipped 11.40 million tonnes of coal in February, rose 13.4% from February 2016 — which reached the lowest monthly volume in almost two years.

    According to the data, February's volume was almost stable from the 11.39 million tonnes shipped in January.

    In February, the 50 million tonnes per year capacity Abbot Point Coal Terminal shipped its lowest monthly volume in 35 months with 1.79 million tonnes — down 1.9% year on year and 13.7% month on month, the data showed.

    The 85 million tonnes per year capacity Dalrymple Bay Coal Terminal exported 5.76 million tonnes in February, up 22.5% year on year and rising 8.9% from the previous month, it said.

    With a nameplate shipment capacity of 55 million tonnes per year, Hay Point Coal Terminal saw 3.85 million tonnes shipped in February, which was up 9.2% from February last year, but down 4.3% from January, it said.
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    300 Kt coal-to-EG supporting projects kick off in Shaanxi

    Supporting projects for a 300,000-tonne-per-annum coal-to-ethylene glycol (EG) project have been started in Binxian country, northwestern China's Shaanxi province.

    Construction on the four supporting projects, including gas pressure regulating station and water supply network, marks further advance for the main project, which started construction in November last year.

    The coal-to-EG project, owned by Shaanxi Weihe Binzhou Chemical Co., Ltd. under Shaanxi Coal and Chemical Group, a major coal producer in the province.

    Total investment in the project is estimated at 5.495 billion yuan, of which 444 million yuan would be invested in environmental protection, the company said.

    Upon completion, the project is expected to produce 300,000 tonnes of EG and a variety of by-projects.
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    Iron ore price drops to 1-month low, coking coal rebounds

    The Northern China import price of 62% Fe content ore fell 2.8% on Monday, to a near-one-month low of $89.00 per dry metric tonne according to data supplied by The Steel Index.

    After a 85% rise in 2016, the price of iron ore has improved by 12% so far this year and has more than doubled in value since hitting near-decade lows at the end of 2015.

    The rise in the price of the steelmaking raw material has flummoxed market observers given supply growth expected in 2017, record-setting inventory levels at ports and an uncertain outlook for demand from China.

    The bears received more ammunition over the weekend after inventories at major Chinese ports jumped to 130 million tonnes the highest since at least 2004 according to Steelhome data.

    However, Reuters reports the bulk of inventories are low to medium-grade material and the availability of high-grade iron ore remains limited as "most Chinese mills are opting for higher grade iron ore to boost productivity in order to push out more steel as prices remain high."

    The bulk of inventories are low to medium-grade material and the availability of high-grade iron ore remains limited

    Iron ore prices should also be supported by news over the weekend that Chinese authorities will enforce crude steel production capacity cuts of 50 million tonnes. The announcement form part of Beijing's efforts to tackle chronic air pollution and restructure the steel industry which for decades have suffered from overcapacity, inefficiency and low-quality steel output.

    The Chines push should favour high-grade ore from Australia, Brazil and other exporting nations over domestic production which is low grade and remains unprofitable even at today's iron ore price.

    On Monday, the market for coking coal continued to rebound with the steelmaking raw material advancing to $163.10 after three weeks of unbroken gains. Met coal prices are being supported by the decision to further cut coal production in China with a goal of eliminating 150 million tonnes this year. While the cuts target coal used in power generation, steelmaking quality coal will also be impacted.

    A reduction in allowable work days at the country's coal mines last year sparked a massive rally in coal prices, lifting  met coal prices to multi-year high of $308.80 per tonne (Australia free-on-board premium hard coking coal tracked by the Steel Index) by November from $75 a tonne earlier in 2016. The price had fallen back to $150 a tonne three weeks ago.

    Outlook murky

    FocusEconomics in its February survey of analysts and institutions shows the price of iron ore averaging $56.70 a tonne during the final quarter of next year. For Q4 2018, analysts expect prices to moderate further to average $55.60 over the three month period.

    None of the analysts foresee iron ore holding at today's prices – Dutch bank ABN Amro is the most optimistic calling for a $76 average towards the end of 2017 while London-based Investec sees an average of $71.50 over the cours of this year.

    BMO Capital Markets see prices correcting sharply from today's levels to average $45 during the first quarter of 2018 while Oxford Economics expects iron ore to average $53 this year and below $50 in 2018. Iron ore averaged $56 last year, a slight improvement over 2015.

    FocusEconomics study of coking coal price predictions do not point to further rallies, but prices should stabilize near current levels. The research firm's panelists expect prices to average $149 per tonne in Q4 2017. Prices are set to remain stable throughout 2018 and average $141 during the final quarter of next year. Coking coal averaged $121 last year and $90 the year before.

    Attached Files
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    German union calls for strikes in steel sector over pay dispute

    German union calls for strikes in steel sector over pay dispute

    A pay dispute in Germany's steel sector intensified on Monday as the IG Metall union rejected an offer for a wage increase of 1.3 percent and called for labor strikes in northwest Germany on Tuesday.

    An estimated 3,000 steelworkers will take part in the strikes on Tuesday, and among the companies affected by the walkouts will be Thyssenkrupp Steel Europe in the western city of Duisburg, an IG Metall spokesman said.

    Vibrant domestic demand has replaced exports as the main driver of growth in Europe's largest economy and strong pay rises would help keep growth in private consumption on track as higher inflation eats into Germans' spending power.

    IG Metall has demanded a 4.5 percent pay rise over 12 months for the 72,000 steelworkers in northwest Germany, where the vast majority of the country's industry is concentrated.

    During the second round of negotiations, employers offered an increase of 1.3 percent over 15 months, the union said.

    German annual inflation jumped to 2.2 percent in February, reaching its highest in 4-1/2 years and surpassing the European Central Bank's target for price stability.

    "An offer that is below the inflation rate and leads to a drop in real wages is out of the question and not negotiable," IG Metall chief negotiator Knut Giesler said, describing the employers' offer as measly.

    "Therefore it's the employers who bear responsibility for the escalation of the labor dispute," Giesler added.

    Under the last deal, which ran out at the end of February, steelworkers got 2.3 percent more pay from January 2016.

    Both sides are expected to resume negotiations on March 16.

    Needing to cut costs and reduce overcapacity, ThyssenKrupp and India's Tata Steel have been in talks since last July about a potential merger of their European steel assets.

    Workers in other industries have been pushing for pay rises.

    In February, Germany's 16 federal states agreed with trade unions a two-stage wage increase of 4.35 percent over two years for more than two million civil servants and other public sector employees.

    Last week, IG Metall and employers agreed a 4.4 percent pay rise for 100,000 workers in the west German textile and clothing industry, the latest sector in Europe's largest economy to grant employees a solid increase.

    Attached Files
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    Hebei to close last 'zombie' steel mills in next two years: governor

    China's biggest steelmaking province, Hebei, will close its eight remaining "zombie" steel mills in the next two years, Governor Zhang Qingwei said on Tuesday at a briefing on the sidelines of the country's annual parliament meeting.

    The province in the north of the country near the capital Beijing is home to 104 mills that account for nearly a quarter of China's total steel output and is home to some of its smoggiest cities. It has pledged to cut steel capacity by 31.17 million tonnes by 2017 and by 49.13 million tonnes by 2020.

    Zhang repeated that the province plans to close all steel mills in the cities of Langfang, Baoding and Zhangjiakou, which will co-host the 2022 Winter Olympics with Beijing, by the end of 2020.
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