Mark Latham Commodity Equity Intelligence Service

Tuesday 5th January 2016
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    Byron Wien: One year on, and boy he is a bear.

    Byron R. Wien, Vice Chairman of Multi-Asset Investing at Blackstone, today issued his list of Ten Surprises for 2016. This is the 31st year Byron has given his views on a number of economic, financial market and political surprises for the coming year. Byron defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening.

     Byron started the tradition in 1986 when he was the Chief U.S. Investment Strategist at Morgan Stanley. Byron joined Blackstone in September 2009 as a senior advisor to both the firm and its clients in analyzing economic, political, market and social trends.

     Byron’s Ten Surprises for 2016 are as follows:

     1. Riding on the coattails of Hillary Clinton, the winner of the presidential race against Ted Cruz, the Democrats gain control of the Senate in November.

    The extreme positions of the Republican presidential candidate on key issues are cited as factors contributing to this outcome. Turnout is below expectations for both political parties.


    2. The United States equity market has a down year. Stocks suffer from weak earnings, margin pressure (higher wages and no pricing power) and a price- earnings ratio contraction. Investors keeping large cash balances because of global instability is another reason for the disappointing performance.


    3. After the December rate increase, the Federal Reserve raises short-term interest rates by 25 basis points only once during 2016 in spite of having indicated on December 16 that they would do more. A weak economy, poor corporate performance and struggling emerging markets are behind the cautious policy. Reversing course and actually reducing rates is actively considered later in the year. Real gross domestic product in the U.S. is below 2% for 2016.


    4. The weak American economy and the soft equity market cause overseas investors to reduce their holdings of American stocks. An uncertain policy agenda as a result of a heated presidential campaign further confuses the outlook. The dollar declines to 1.20 against the euro.


    5. China barely avoids a hard landing and its soft economy fails to produce enough new jobs to satisfy its young people. Chinese banks get in trouble because of non-performing loans. Debt to GDP is now 250%. Growth drops below 5% even though retail and auto sales are good and industrial production is up.

    The yuan is adjusted to seven against the dollar to stimulate exports.


    6. The refugee crisis proves divisive for the European Union and breaking it up is again on the table. The political shift toward the nationalist policies of the extreme right is behind the change in mood. No decision is made, but the long-term outlook for the euro and its supporters darkens.


    7. Oil languishes in the $30s. Slow growth around the world is the major factor, but additional production from Iran and the unwillingness of Saudi Arabia to limit shipments also play a role. Diminished exploration and development may result in higher prices at some point, but supply/demand strains do not appear in 2016.


    8. High-end residential real estate in New York and London has a sharp downturn. Russian and Chinese buyers disappear from the market in both places.

    Low oil prices cause caution among Middle East buyers. Many expensive condominiums remain unsold, putting developers under financial stress.


    9. The soft U.S. economy and the weakness in the equity market keep the yield on the 10-year U.S. Treasury below 2.5%. Investors continue to show a preference for bonds as a safe haven.


    10. Burdened by heavy debt and weak demand, global growth falls to 2%. Softer GNP in the United States as well as China and other emerging markets is behind the weaker than expected performance.


    Added Mr. Wien, “Every year there are always a few Surprises that do not make the Ten either because I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are ‘probable.’”


    Also rans:


    11. As a result of enhanced security efforts, terrorist groups associated with ISIS and al Qaeda do NOT mount a major strike involving 100 or more casualties against targets in the U.S. or Europe in 2016. Even so, the United States accepts only a very limited number of asylum seekers from the Middle East during the year.


    12. Japan pulls out of its 2015 second half recession as Abenomics starts working. The economy grows 1%, but the yen weakens further to 130 to the dollar. The Nikkei rallies to 22,000.


    13. Investors get tough on financial engineering. They realize that share buybacks, mergers and acquisitions, and inversions may give a boost to earnings per share in the short term, but they would rather see investment in capital equipment and research that would improve long-term growth. Multiples suffer.


    14. 2016 turns out to be the year of breakthroughs in pharmaceuticals. Several new drugs are approved to treat cancer, heart disease, diabetes, Parkinson’s and memory loss. The cost of developing the breakthrough drugs and their efficacy encourage the political candidates to soften their criticism of pill pricing. Life expectancy will continue to increase, resulting in financial pressure on entitlement programs.


    15. Commodity prices stabilize as agricultural and industrial material manufacturers cut production. Emerging market economies come out of their recessions and their equity markets astonish everyone by becoming positive performers in 2016.

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    One of the world's most reliable economic indicators has bad news about all major markets

    One of the more reliable indicators of the global economy continues to confirm fears of a worldwide slowdown.

    South Korean exports — also referred to as the world's economic canary in the coal mine — fell 13.8% in December from a year earlier.

    This was a deterioration from the 4.8% decline in November, and it was much worse than the 11.7% decline expected by economists.

    Korea's exports generally reveal more about the country's global trading partners than it does about what's happening internally.

    "By destination, exports to all major markets fell," Barclays' Wai Ho Leong and Angela Hsieh observed. "All in, we think the underlying trend of a challenging external environment will likely extend into 2016."

    Economists look to Korean exports because they are the world's imports. Major traded goods are as varied as automobiles, petrochemicals, and electronics such as PCs and mobile devices.

    Furthermore, this report is the first monthly set of hard economic numbers — as opposed to soft-sentiment-based reports like purchasing managers surveys — from a major economy.

    In December, most major categories of goods saw declines, except for mobile devices which added 0.13 percentage points to the the aggregate exports number.

    From a regional perspective, the declines were broad, with exports to the US, European Union, and Japan.

    But the biggest source of weakness was China, which hacked 4.3 percentage points from exports.

    All of this may explain at least some of the volatility we're seeing in world markets.

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    US Industrial Recession Now Inevitable As Manufacturing ISM Worst In Six Years

    Following China's disappointing drop in Manufacturing PMI overnight, this morning started off poorly with Canada's PMI crashing to its lowest reading since records began at 47.5. Then US Manufacturing PMI tumbled to 51.2 - its lowest print since October 2012 (with US factory orders collapsing to weakest since 2009). But The ISM Manufacturing crashed to 48.2 (deep in contraction) - the weakest level since June 2009, with employment bumping along at its lowest level since September 2009 and imports (reflecting domestic demand perhaps) crashed to levels only seen twice in 20 years.

    The manufacturing recession is now inevitable: the only question is when and how it will spread to the service sector and be recognized by the NBER:

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    Saudi Arabia to Support Egypt With $3 Billion of Loans, Grants

    Saudi Arabia agreed to provide Egypt with more than $3 billion in loans and grants to help its dollar-starved economy.

    The kingdom will loan $1.5 billion to develop the Sinai peninsula and $1.2 billion to finance Egypt’s oil purchases, Egyptian Minister of International Cooperation Sahar Nasr told Bloomberg News from the Saudi capital, Riyadh. Egypt will also receive a $500 million grant for buying Saudi exports and products, she said, without providing further details. The loans are on favorable terms and will be formally signed on Tuesday, she said.

    The fresh aid suggests that Saudi Arabia is still committed to supporting Egypt even as the oil-rich kingdom cuts subsidies to shore up its finances, though it is significantly smaller than the tens of billions which Saudi Arabia along with Kuwait and the U.A.E poured into Egypt after the 2013 military-led ouster of Islamist President Mohamed Mursi. Egypt has offered tourism and housing projects to Saudi funds, an Egyptian government official said last week.

    Last month, Saudi Arabia promised to invest 30 billion riyals ($8 billion) in Egypt through its public and sovereign funds. It also said it will help Egypt meet its oil needs for five years on favorable terms.

    Egypt’s currency crisis caused business activity to contract the most in more than two years in November. The new aid package should free up dollars needed to import capital goods and raw materials, and help authorities avoid an uncontrolled currency devaluation.
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    Brazil's Lula summoned to testify in bribery case

    Former Brazilian President Luiz Inacio Lula da Silva was summoned to testify as a witness for a lobbyist accused of paying bribes to alter legislation in favor of businesses, local media reported on Monday.

    Lula and other former and current officials including Deputy Finance Minister Dyogo de Oliveira will testify on Jan. 25 at the request of the defense for jailed lobbyist Alexandre Paes dos Santos, media reported. Reuters could not immediately confirm the reports.

    A spokesman for Lula did not immediately respond to emails seeking comments.

    In December, Lula was called in for questioning by federal police in the same bribery investigation, which also involves his son Luis Claudio.

    Lula is not under investigation in the case known as "Operacao Zelotes."

    Paes dos Santos is accused of charging businesses to change legislation in their favor during the Lula administration between 2003 and 2011.

    Many lawmakers from Lula's ruling Workers' Party are under investigation for possible links to a separate bribery scandal at state-run oil company Petrobras <. Senator Delcidio do Amaral, the government's leader in the Senate, was arrested in November and charged with obstructing the Petrobras investigation.
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    PBOC Injects Most Cash Since September in Open-Market Operations

    China’s central bank conducted the biggest reverse-repurchase operations since September, adding funds to the financial system after money-market rates surged and equities slumped.

    The People’s Bank of China offered 130 billion yuan ($19.9 billion) of seven-day reverse repos on Tuesday at an interest rate of 2.25 percent. The monetary authority suspended the operations in the last auction window on Dec. 31, ending a six-month run of cash injections that helped drive borrowing costs lower in an economy estimated to grow at the slowest pace in more than two decades.

    Nicholson Says Rate Cut Coming Before Chinese New Year

    The overnight repurchase rate, a gauge of interbank funding availability, fell one basis point to 2.01 percent as of 1:41 p.m. in Shanghai, according to a weighted average from the National Interbank Funding Center. It climbed to 2.12 percent on Dec. 31, the highest since April.

    “Liquidity is tight in the market and the PBOC has to react to that,” said Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale SA. “Capital outflows may keep liquidity tight and there is likely to be more easing from the PBOC.”

    The monetary authority cut the reserve-requirement ratio for major lenders by 250 basis points in 2015 to 17.5 percent, and is forecast to further lower it to 15 percent by the end of this year, according to a survey last month. A central bank research bureau economist last week damped speculation reserve requirements will be eased, saying that any adjustments should avoid causing too much volatility to short-term rates.

    Stock trading in China was halted on the first trading day of the year after a 7 percent selloff in the CSI 300 Index triggered circuit breakers. The gauge fell 0.4 percent Tuesday.

    “By offering such a big amount of reverse repos, the PBOC is also trying to comfort the market following the equities slump yesterday,” said Liu Dongliang, a senior analyst at China Merchants Bank Co.

    The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was unchanged at 2.34 percent, data compiled by Bloomberg show. Sovereign bonds declined, with the 10-year yield rising two basis points to 2.91 percent, according to National Interbank Funding Center prices.

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    US EPA sues VW, Audi and Porsche for alleged Clean Air Act violations

    The US Department of Justice on Monday filed a federal court civil complaint in Detroit, Michigan on behalf of the US Environmental Protection Agency (EPA) against German automotive manufacturers Volkswagen, Audi and Porsche, collectively referred to as Volkswagen. 

    The complaint alleged that nearly 600 000 diesel engine vehicles had illegal defeat devices installed that impaired their emission control systems and caused emissions to exceed the EPA’s standards, resulting in harmful air pollution. 

    The complaint further claimed that Volkswagen had violated the Clean Air Act by selling, introducing into commerce, or importing into the US, motor vehicles that were designed differently to what Volkswagen had stated in applications for certification to the EPA and the California Air Resources Board. “With today’s filing, we take an important step to protect public health by seeking to hold Volkswagen accountable for any unlawful air pollution, setting us on a path to resolution. 

    So far, recall discussions with the company have not produced an acceptable way forward. These discussions will continue in parallel with the federal court action,” stated EPA assistant administrator for enforcement and compliance assurance Cynthia Giles. 

    The civil complaint sought injunctive relief and for civil penalties to be assessed. In line with the EPA’s notices of violation, issued on September 18, for two-litre engines, and on November 2, for certain three-litre engines, the complaint alleged that the defeat devices caused emissions to exceed the EPA’s standards during normal driving conditions. 

    The Clean Air Act required vehicle manufacturers to certify that their products would meet applicable federal emissions standards to control air pollution. The EPA advised that motor vehicles equipped with illegal defeat devices could not be certified. The complaint further alleged that Volkswagen equipped certain two-litre vehicles with software that detected when the car was being tested for compliance with EPA emissions standards and turned on full emissions controls only during that testing process. 

    During normal driving situations the effectiveness of the emissions control devices was greatly reduced. This resulted in those cars meeting emissions standards in the laboratory and at the test site, but not during normal on-road driving, when oxides of nitrogen (NOx) were emitted at levels of up to 40 times the EPA compliance level. 

    In total, the civil complaint covered about 499 000 two-litre diesel vehicles sold in the US since the 2009 model year. The complaint further alleged that Volkswagen also equipped certain three-litre vehicles with software that sensed when the vehicle was undergoing federal emissions testing. When the vehicle sensed the test procedure, it operated in a “temperature conditioning mode, meeting emissions standards. 

    At all other times, including during normal vehicle operation, the vehicles operated in a “normal mode” that permitted NOx emissions of up to nine times the federal standard. In total, the civil complaint covered about 85 000 three-litre diesel vehicles sold in the US since the 2009 model year.
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    Oil and Gas

    Islamic State attack on Libyan oil port kills two, storage tank ablaze

    An attack by Islamic State militants on Libya's Es Sider oil export terminal on Monday killed two guards and set an oil storage tank on fire, a Petrol Facilities Guard source said.

    The guards were killed when two suicide bombers targeted the terminal, the source said, adding that the Islamic State fighters had retreated to neighboring areas.
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    Statoil renegotiates terms with suppliers in NOK11 billion deal

    Statoil has renegotiated the terms of two of its long-term contracts with its suppliers.

    The Norwegian operator today confirmed two new contracts worth a combined NOK11billin with Beerenberg Corp AS and Prezioso Linjebygg AS.

    The deals include scaffolding and surface treatment services to 20 of the company’s 29 installations on the Norwegian continental shelf (NCS) over the next 15 years.

    The two new contracts will replace the company’s existing contracts with these two suppliers regarding NCS services, according to the firm.

    Jon Arnt Jacobsen, senior vice president for procurements in Statoil, said: “The suppliers understand the industry challenges and want to help solve them. Beerenberg Corp AS and Prezioso Linjebygg AS have during the renegotiations expressed that they focus on permanent improvements as well as quality and cost.”

    Kjetil Hove, senior vice president for operations technology of development and production in Norway, added: “These contract awards mark an important milestone in the long-term improvement effort within insulation, scaffolding and surface treatment services.

    “Beerenberg Corp AS and Prezioso Linjebygg AS have competitive deliveries, and with these long-term contracts we ensure a predictable and clear contribution to the cost reductions we want to achieve together.”
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    Active bidding expected for Origin gas assets

    Prospective bidders for Origin Energy's $300 million gas interests in Western Australia have been told the undeveloped Waitsia field is the largest onshore conventional gas find in the country for 30 years and could easily undercut competing supplies from the North West Shelf venture in the Perth market.

    In a confidential flyer distributed to interested parties, Origin's adviser, UBS, says the package of assets up for sale in the Perth Basin offers a "rare opportunity to participate in one of the most prospective discoveries in Australia".

    The Perth Basin package, part of a targeted $800 million divestment program by indebted Origin, includes a 67 per cent stake in the producing Beharra Springs gasfield and Dongara processing plants, in addition to the stakes in undeveloped fields including Waitsia and Senecio.

    The assets are understood to have attracted the attention of Quadrant Energy, controlled by Brookfield Infrastructure and Macquarie, although any move by the private player is expected to attract the attention of the national competition regulator, given Quadrant's strong existing position as a gas supplier into the Perth market.

    Woodside Petroleum is also thought to be interested, with one source suggesting the WA player could use the gas to help supply an expansion of its Pluto liquefied natural gas venture.

    AWE owns a minority stake in the Beharra Springs/Dongara venture, as well as 50 per cent of the L1/L2 venture holding Waitsia and Senecio. Citigroup analyst Dale Koenders has estimated Origin could fetch $300 million for its Perth Basin assets.

    Two Cooper Basin asset sets

    Separate flyers have been distributed for two sets of Cooper Basin assets that Origin has also put on the block as part of a $4.7 billion rescue plan announced in September, which included a $2.5 billion capital raising. Those assets could fetch $212 million, UBS equity analyst Nik Burns said in a research note in late September.

    One set involves Origin's stakes in the Santos-operated Cooper Basin ventures in South Australia and Queensland, of 13.19 per cent and 16.74 per cent, respectively, as well as minority stakes in seven more joint ventures all also operated by Santos.

    However, some sources have low expectations of a reasonable sale price for this interest, given Santos' market testing for its larger stake in September-October is understood to have only elicited a low-ball offer from private equity firm KKR & Co.

    The second set of Cooper Basin interests involves Origin's interests in an unconventional exploration venture with junior Senex Energy which it signed in February 2014. The flyer describes the venture as "one of the most prospective gas plays in Australia" with "multi-tcf" (trillion cubic feet) potential that has the potential to provide significant volumes of gas to the east coast market.

    Expressions of interest for all three sets of assets have been requested by January 29. UBS says in the flyers that offers for both sets of Cooper Basin assets "will be viewed favourably".

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    Four China teapot refineries apply for 14.47 mil mt/year of crude quotas

    Four more Chinese independent teapot refineries, with a total capacity of 15.6 million mt/year, have joined others in applying to the National Development and Reform Commission to process around 14.47 million mt/year of imported crudes, the government said on its website late Tuesday.

    The four new applicants, together with three other refineries still waiting for the NDRC's final nod for a total of 9 million mt/year of crude import quotas, and 11 that have been granted quotas, will bring the total applicants to 18.

    Once those seven teapots get approved, it will bring the total volume of crude quotas granted to teapot refineries to 72.66 million mt/year, with 49.19 million mt/year awarded to 11 teapot refineries.

    This will be around 22% of the country's total imports in a year, since China has imported around 6.63 million b/d of crudes over January-November this year, according to the latest customs data.

    The four new teapot refinery applicants, three from eastern Shandong province and one from central Henan province, have a combined installed capacity of 15.6 million mt/year.

    All four have committed to get rid of small crude distillation units smaller than 2 million mt/year (40,000 b/d) and to update fuels to National Phase 5 standard, setting up gas infrastructure such as storage tanks in order to qualify for a crude import quota.
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    El Nino and sluggish freight upend U.S. heating oil market

    Heating oil prices in the United States are trading as if it was mid-summer rather than winter, as warm weather and sluggish demand from freight companies combine to make heating oil cheaper than gasoline.

    Heating oil normally trades at a substantial premium to gasoline in winter and then moves to a discount during the second and third quarters as heating demand fades and the summer driving season ramps up.

    But this winter, heating oil is trading at the sort of discount normally only seen between March and July as heating demand fades away and refiners prepare for the summer gasoline campaign.

    On Dec. 31, the front-month futures price of heating oil closed at $1.10 per gallon, a discount of almost 17 cents to the futures price of gasoline.

    It was the largest seasonal discount for more than a decade and compares with a normal premium of around 26 cents per gallon at this time of year.

    Consumption of distillate fuel oil, used in trucks, trains and ships, and to heat homes and office buildings, is down by more than 450,000 barrels per day, 11 percent, compared with the end of 2014. 

    Warmer-than-normal weather since October due to El Nino has cut heating demand by around 25 percent according to the U.S. National Oceanic and Atmospheric Administration. (

    And freight movements by road, rail, barge and pipeline have been essentially flat for the last 12 months after five years of strong growth, according to the U.S. Bureau of Transportation Statistics. (

    Freight is being hit by the shift from coal to gas in power production, the end of the U.S. oil drilling boom, and over-ordering by retailers and wholesalers earlier in the year, which has left them trying to cut excess stocks.

    Despite weak demand, the supply of distillate fuel oil is increasing because U.S. refineries are processing crude oil at a seasonal record high to meet strong demand from motorists for gasoline.

    Strong gasoline margins are incentivising refiners to produce as much as possible, making excess distillate as an unwanted co-product.

    U.S. refiners produced 5.5 million barrels per day of distillate in the four weeks leading up to Christmas, up from 5.25 million in the prior-year period, according to the U.S. Energy Information Administration.

    Since the beginning of the oil boom, U.S. refineries have increasingly turned to exports to dispose of excess production of distillate fuel oil.

    But with warmer-than-normal weather across most of Europe and northeast Asia, it is proving difficult to export any more of the surplus.

    Distillate stocks are 27 million barrels, 22 percent higher than at the same point last year. 

    Distillate fuel oil is the most oversupplied part of the fuels market. With the effects of El Nino likely to linger well into the first half of 2016, that overhang looks set to remain for some time.

    In contrast, gasoline stocks are more than 7 million barrels, or 3 percent, lower than at the end of 2014, and the market looks balanced.

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    North Dakota rigs slip below 60 for first time since 2009

    The number of drill rigs in North Dakota slid below 60 on Monday for the first time since 2009 as crude prices tumble and companies focus on richer portions of the state’s oil patch.

    State Department of Mineral Resources data show 59 rigs were operating Monday in western North Dakota’s oil-producing region, down from 171 rigs on the same day last year and 192 in 2012.

    North Dakota, the nation’s No. 2 oil producer behind Texas, produced about 1.1 million barrels of oil daily in October, which was about 60,000 barrels per day less than the record set in December 2014. October production is the latest available; data typically lags about two months.

    State and industry officials said North Dakota should be able to maintain oil production at the current level if the number of drill rigs stays above 50.

    “As long as we can keep those rigs and completions at today’s level, we’ll be able to maintain that production,” said Ron Ness, president of the North Dakota Petroleum Council.

    There are more than 13,100 active oil wells in North Dakota, a number that has nearly tripled since 2010. Almost all of the new wells are targeting rich Bakken and Three Forks formations in the western part of the state.

    North Dakota sweet crude was fetching $37 a barrel on Monday, about $25 less than the price a year ago.

    The state has about 1,000 wells that have been drilled but have yet to undergo hydraulic fracturing, a process that uses pressurized water, chemicals and grit to break open oil-bearing rock. Completing the wells through hydraulic fracturing will be spurred if oil reaches about $60 a barrel, state and industry officials said.

    Meantime, companies are “concentrating rigs in higher performing areas,” said Justin Kringstad, director of the North Dakota Pipeline Authority.

    In October, the last month data is available, 76 wells were both drilled and completed, down from 118 in September.

    Kringstad said rigs have become more efficient in recent years and are now able to drill a well in two weeks, instead of the month it took in 2012.

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    Alternative Energy

    One of the largest solar projects in history

    Miraah will be one of the largest solar plants in history, producing 1,021 MW of peak thermal energy. GlassPoint is building the project in partnership with Petroleum Development Oman, the largest oil producer in Oman and a joint venture between the government, Shell, Total and Partex.

    Miraah will use concentrating sunlight to generate 6,000 tons of solar steam each day. The steam will feed directly to PDO’s existing thermal EOR operations, providing a substantial portion of the steam required at the Amal oilfield in Southern Oman.

    Miraah will save 5.6tn British Thermal Units (Btus) of natural gas each year, which can be used for higher value uses in Oman boosting economic growth. The mega project dwarfs all previous solar EOR installations and is more than 100 times larger than the pilot project built by GlassPoint for PDO in 2012.

    The full-scale project will comprise 36 glasshouses, built in succession and commissioned in modules of four. The project is currently under construction with steam generation from the first glasshouse module projected to begin in 2017.

    Project completion will come in the following years and will span a total area of three-square kilometers, including supporting infrastructure.

    By using solar instead of burning gas to make steam, Miraah will reduce CO2 emissions by more than 300,000 tons each year. These carbon savings are equivalent of taking 63,000 cars off the road.
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    CNNC, CGN to promote globalization of “Hualong One” technology

    China National Nuclear Corporation (CNNC) and China General Nuclear Power Co., Ltd (CGN) signed an agreement to jointly build Hualong International Nuclear Power Technology Co., Ltd. to promote the globalization of “Hualong One” technology, sources learned from National Energy Administration (NEA) on January 4, 2016.

    The “Hualong One”, based on the two companies’ rich experience of scientific study, design, manufacture and operation in nuclear power sector, is the advanced EPR nuclear technology which adopts the safety standards of the third generation nuclear technology in the globe.

    Hualong International Nuclear Power Technology Co., Ltd had a registered capital of 500 million yuan ($76.81 million), which shared averagely by CNNC and CGN. The company would push the operation of Hualong technology, brand and intellectual property at home and abroad, for its further globalization.

    In 2015, Fuqing nuclear power plant #5 and #6 units, Fangchenggang #3 unit and “Hualong One” Karachi project in Pakistan—trial projects of “Hualong One”—all started construction.

    Besides, China signed relevant frame agreement with Argentina, and investment agreement with UK, demonstrating the great breakthrough of “Hualong One” development in the globe.
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    Precious Metals

    Foreign banks in China could face curbs if they snub gold benchmark

    China has warned foreign banks it could curb their operations in the world's biggest bullion market if they refuse to participate in the planned launch of a yuan-denominated benchmark price for the metal, sources said.

    The world's top producer and consumer of gold has been pushing to be a price-setter for bullion as part of a broader drive to boost its influence on global markets.

    Derived from a contract to be traded on the state-run Shanghai Gold Exchange, the Chinese benchmark is set to launch in April, potentially denting the relevance of the current global standard, the U.S. dollar-denominated London price.

    China needs the support of foreign banks, especially those who import gold into the mainland, but they could be wary given the global scrutiny on benchmarks following the manipulation of Libor rates in the foreign exchange market.

    Banks with import licences will face "some action" if they do not participate in the benchmark, said a source who did not want to be named as he was not authorised to speak to media.

    "Maybe China won't cancel the licence but we won't give them the import quota or will reduce the amount under the quota," the source said. Banks with licences must apply to regulators for annual import quotas.

    Australia and New Zealand Banking Group, HSBC and Standard Chartered are the foreign banks with import licences. Another 12 Chinese banks can also import.

    HSBC declined to comment, while ANZ and StanChart did not respond to calls and emails.

    Banks had been told China would take "some measures" if they did not participate in the fix, a banking source said.

    "They passed on the impression that 'maybe your quota will be limited or you cannot be a market maker for swaps or forwards'," he said.

    In a trial run for the fix in April 2015, some foreign banks participated along with many major Chinese banks.

    Traders at those banks said earlier that while they were interested in the benchmarking process, their legal and compliance teams may be reluctant.

    "For foreign banks to take part in that fixing procedure, it is very hard. There are compliance issues for every foreign bank," said the second source, adding that the issue was not with China, but the regulatory attention benchmarks have attracted in the last few years.

    Details of the fix are yet to be revealed, but sources say it would be derived from a contract traded on the bourse for a few minutes, with the SGE acting as the central counterparty.

    A yuan fix would not be seen as an immediate threat to the gold pricing dominance of London and New York, but it could gain momentum if China's currency becomes fully convertible.
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    Lonmin says third-largest shareholder divests stake

    Jan 4 Platinum producer Lonmin Plc said in a regulatory filing that Kagiso Asset Management sold nearly 33 million shares in the company in December, fully divesting its stake.

    Cape Town-based Kagiso, Lonmin's third-largest shareholder, sold the shares on Dec. 17, a week after a crucial rights issue by the company failed to find favour with investors.

    Lonmin, hurt by plunging platinum prices and high labour costs, raised $400 million through the rights issue, which priced shares at just a penny each.

    The issue made Public Investment Corp, which manages South African government employee retirement funds, the largest shareholder in Lonmin with a stake of nearly 30 percent.

    Kagiso was not immediately available to comment.
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    Base Metals

    China is expected to construct 7 million mt/year of new aluminium smelting capacity in 2016

    China is expected to construct 7 million mt/year of new aluminium smelting capacity in 2016, but how much of the new capacity would be brought online will depend on cheap availability of power, refined aluminium prices, demand and stock levels, brokerage Galaxy Futures said in its aluminium industry report issued Monday.

    The new smelters will be mainly based in Shandong Province and the autonomous regions of Guangxi, Xinjiang and Inner Mongolia.

    China added over 5 million mt/year new aluminium smelting capacity in 2015, chiefly in Shandong province, North China, and Northwest China, where power costs are relatively lower in comparison to the rest of the country, according to China Nonferrous Metals Industry Association.

    However, China also shut a total 4.91 million mt/year aluminium smelting capacity last year on poor refined aluminium prices, supply glut and high stocks, CNIA said last month.

    The shut capacity was located in Liaoning, Hubei, Hunan, Gansu, Yunnan, Qinghai provinces, Chongqing City, and the autonomous regions in Xinjiang and Inner Mongolia.

    As of end-2015, China's total smelting capacity stood at 40 million mt/year, according to CNIA.

    If the new smelting capacity this year cannot be put into operation, then the total capacity kept shut would be 12 million mt/year in 2016, including the 4.91 million mt/year shut last year, the brokerage firm said.

    Availability of cheap power is a major factor for Chinese aluminium smelters, with those having low power costs surviving and those incurring high costs being driven out of the industry, the brokerage firm said.

    It forecast China's aluminium sector to be increasingly populated with smelters having low power costs as they would enjoy competitive edge over the others in the coming years.

    Looking ahead, Galaxy Futures said as there was surplus aluminium supply in the global market now from a previous deficit, high stocks at London Metal Exchange warehouses and domestic supply glut in China amid poor demand from the real estate and manufacturing sectors, consumption will be under great pressure this year.

    Galaxy forecast Shanghai Futures Exchange's most active aluminium futures contract prices to hover around the low Yuan 9,000-11,500s ($1,440-1,840s)/mt in 2016, noting that prices had already fallen below most smelters' production costs so there was little room for a big fall ahead.
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    Indonesia export ban to be reconsidered?

    - Indonesia may relax rules on the export of metal concentrates following the collapse in metals prices, while keeping a ban on raw ore shipments, according to Energy and Mineral Resources Minister Sudirman Said.

    The policy on concentrate shipments, due to be halted from 2017 to push mining companies to build smelters, should be examined to provide maximum value for the domestic economy, Said said in an interview. The government will soon discuss changes to the mining law with parliament, he said on Monday.
    “2017 is the deadline for processed-metal exports, but can we meet the targets for smelter construction by 2017? It must be reviewed,” Said said in his office in Jakarta. “We must be realistic to ensure a conducive investment climate,” he said.

    Southeast Asia’s largest economy banned overseas sales of raw ores including nickel and bauxite in 2014, while permitting the continued export of semi-processed concentrates for a further three years. Since the ban on ore shipments went into effect in January 2014, base metals have plunged on the slowdown in China, while rival shippers emerged, including producers in the Philippines and Australia.

                          ‘Come to Grips’

    “Indonesia has had to come to grips with the present reality of the resource sector environment,” Gavin Wendt, founding director at MineLife Pty Ltd. in Sydney, said by e-
    mail. “The key here is Indonesia’s authorities are realistic about current challenges and are keen to appease foreign investors, whilst maintaining their longer-term economic goals.”

    The curbs were intended to spur investment in processing across the archipelago, enabling Indonesia to produce higher- value commodities. Freeport-McMoRan Inc. and Newmont Mining Corp. are companies that produce copper concentrates in the country. Unless the law is revised, exports of concentrates from Indonesia will also be prohibited from January 2017.

                        ‘Almost Inevitable’

    “It was almost inevitable that the 2017 deadline for the export of metal concentrates, would have to be pushed out,” Bill Sullivan, a lawyer specializing in mining at Christian Teo &
    Partners in Jakarta, said by e-mail. “The more interesting issue is whether, having pushed out the deadline for the export of metal concentrates, the government will also reconsider the existing export ban on unprocessed metal minerals, notably bauxite and nickel.”

    Attached Files
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    Steel, Iron Ore and Coal

    QHD coal stocks plunge on rebounded outbound shipment

    Coal stocks at Qinhuangdao port, the benchmark for China’s domestic market, had been plunging since December, the latest data showed.

    Coal stocks at the port stood at 3.3 million tonnes on January 4, 2016, falling 0.6% on day and down 14.7% from December 28, showed data from Qinhuangdao Port Group.

    It was mainly due to the increasing outbound coal shipment and meanwhile subduing inbound shipment.

    Daily inbound coal railings to Qinhuangdao port averaged 0.5 million tonnes during the past week, down 24.3% on week, as coal producers reduced deliveries amid falling coal prices.

    Daily outbound shipment was 0.58 million tonnes on average each day during the week, up 9.38% on week, given the resumption of blocked ships amid previous bad weather.

    Meanwhile, coal stocks at Caofeidian and SDIC Jingtang ports – stood at 1.24 million and 880,000 tonnes on January 4, falling 13.9% and 18.5% from December 28, data showed.

    Coal demand from utilities remained weak. Daily coal consumption at power plants under the six coastal utilities stood at 576,000 tonnes on January 4, down 4.48% from December 28, which was enough to cover 21 days.

    Attached Files
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    China Dec steel sector PMI rebounds to 40.6

    The Purchasing Managers Index (PMI) for China’s steel industry rebounded to 40.6 in December, a rise of 3.6 from November, showed the latest data from the China Federation of Logistics and Purchasing (CFLP).

    The rebound signaled a better condition in steel industry last month. However, it was still the 20th straight month below the 50-point threshold, indicating a persistently slack market.

    The output sub-index rose 3.1 from November to 38.5 in December, the 16th consecutive month below the 50 mark.

    China’s steel products output may see a slight increase in January, as steel mills may become active in production after seeing the recent price rebound.

    The new order sub-index increased 11.2 from November to 40.9 in December – the highest since May in 2015, and yet the 18th consecutive month below the 50 mark; the new export order index slightly rebounded 6.6 from November to 47.8 in the same month—the highest in recent four months, reflecting a potentially climbing trend of steel exports in later period.

    The sub-index for steel products stocks decreased 9.7 to 39.5 in December, after the rebound in November ending a four-month drop, and the lowest level since September in 2013, indicating the effect of destocking activities in steel mills.

    As of December 20, total stocks in key steel mills stood at 14.67 million tonnes, rising 2.32% from ten days ago but down 3.42% from November, said the CFLP.

    Domestic steel price is expected to rise in January, as low stocks and the subduing supply would offer some support. Yet, the growth room may be limited, given further shrink in demand amid slack season.
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    Ferrochrome market nearing bottom of the cycle?

    The ferrochrome market is nearing the bottom of the cycle. This is evidenced by the fact that the latest price contractions have resulted in closures across the supply chain.

    This is one of the key takeaways from the latest research put together by Core Consultants.

    According to the report, stainless steel production in 4Q15 declined to 9.564m tonnes compared to 11m tonnes in 3Q15 and 9.9m tonnes in 4Q14.

    China produced 4.96m tonnes in 4Q15, slowing from 5.46m tonnes in 3Q15. Going forward, 2016 is expected to realise lower output (40.56m tonnes), compared to 2015 (40.9m tonnes) as mills draw down from existing stocks.

    A number of countries have instituted anti-dumping measures against Asian stainless steel exports including the EU and India, forcing Chinese producers to scale back production.

    The firm estimates that ferrochrome capacity utilisation has slowed to 54% in 2015, compared to 60% in 2014. Production has declined to 10.18m tonnes compared to 10.8m tonnes in 2014. At these levels the market is in deficit.
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