Mark Latham Commodity Equity Intelligence Service

Thursday 9th July 2015
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    OECD Indicators Point to Growth Slowdown in Major Economies

    The economies of the U.S., China, U.K., Canada and Brazil are seen slowing

    Growth is set to slow across more of the world’s largest economies, including the U.S. and China, according to leading indicators released Wednesday by the Organization for Economic Cooperation and Development.

    The Paris-based research body said its gauges of future economic activity—which are based on information available for May—also point to slowdowns in the U.K., Canada and Brazil. The indicators had previously pointed to steady growth for the U.K.

    If it materializes, the broadening slowdown suggested by the leading indicators would spell another disappointing year for the global economy, which has struggled to recover from the effects of the 2008 financial crisis.

    It would also pose a challenge for central bankers, who have already provided large amounts of stimulus in an effort to keep the recovery on track, and would prefer to return interest rates to more normal rates sooner rather than later. Most policy makers acknowledge that the longer interest rates remain very low, the higher the risk of another crisis in the financial system.

    The U.S. economy contracted during the first three months of the year, but most economists attribute that weakness to temporary factors, including harsh weather and a labour dispute at West Coast ports, while the stronger dollar appears to have damped exports.

    However, the OECD’s gauge of future activity suggests that following a return to expansion in the second quarter, the U.S. economy is unlikely to grow as rapidly as it did last year. The leading indicator for the U.S. has fallen in each month this year, and now stands at 99.5. A level below 100.0, where it started the year, signals a slowdown, while a level above signals an acceleration.

    The world’s second-largest economy is also on course for a continued slowdown, according to the leading indicator for China, which fell to 97.3 in May from 97.5 in April.

    The OECD’s leading indicators are designed to provide early signals of turning points between the expansion and slowdown of economic activity, and are based on a wide variety of data series that have a history of anticipating swings in future economic activity.

    The leading indicators suggest that while economies that have grown more rapidly than their peers in recent years—such as the U.S. and China—are set to slow, those that have lagged are beginning to pick up, including France and Italy.

    “Composite leading indicators…point to growth convergence across most major economies and within the OECD,” the research body said.

    Indeed, after having been a drag on global growth in the years since the eruption of its debt crisis in 2010, the eurozone is one of the few potential bright spots, as its leading indicator remained steady at 100.7 for the third straight month, signalling that growth is “firming.” However, the indicator doesn't capture the disruption that would result if Greece were to leave the eurozone, a development that seems increasingly possible.

    The leading indicators suggest that Russia’s economy may be close to bottoming out, after a long slowdown deepened by falling oil prices and Western sanctions. The leading indicators pointed to steady growth for Japan, Germany and India.

    The OECD’s composite leading indicator for its 34 members fell to 100.0 in May from 100.1 in April.
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    Many in Brazil contemplate a Rousseff exit

    The predecessor and mentor to Brazil's president says she is running on empty.

    The chief opposition party says it is ready to take over and the leader of the lower house of Congress says Brazil should reconsider the role and power of the presidency. This is not the usual jockeying of Brazil's noisy, multiparty democracy.

    Rather, the economic and political crisis now engulfing Latin America's biggest economy is prompting politicians, economists and ordinary Brazilians to consider what once seemed unthinkable: that President Dilma Rousseff, re-elected less than nine months ago, might not finish her second term, which runs to 2018.

    "It's a real possibility," says Carlos Melo, a political scientist at Insper, a São Paulo business school. "Bad policies and political stagnation have grown into something more urgent." No one expects Rousseff, a 68-year-old former bureaucrat turned energy minister, to step down tomorrow.

    She has repeatedly said she will not resign. Impeachment would require proof, none of which exists so far, that she committed crimes or other wrongdoing, particularly with regards to a bribery scandal involving state-run energy company Petroleo Brasileiro SA, or Petrobras.

    But the mere notion of political instability illustrates how far Brazil has fallen from its zenith just five years ago. Back then, as Rousseff rode the coattails of her predecessor into office, Brazil was aloft a commodities boom and considered a star among developing nations, posting annual economic growth of 7.5 percent even as the developed world staggered.

    Now, Brazil's economy is likely in recession, unemployment is climbing and inflation is galloping at nearly 9 percent, or double the official target rate, eroding purchasing power for the working-class most buoyed by the boom.

    Meanwhile, the Petrobras scandal edges uncomfortably close to top aides, a federal auditor may soon reject the government's 2014 bookkeeping and her approval ratings have plummeted to single digits, lower than any president in a quarter century.

    On Tuesday, the Eurasia Group, a consultancy, raised the probability of Rousseff leaving office early from 20 percent to 30 percent.

    "There is political risk beyond what anyone expected," said Neil Shearing, senior economist at Capital Economics in London. "It's not good for anyone trying to make investments or plans."

    Still, even members of her ruling Workers' Party are rebelling. The leftist party opposes her ongoing efforts to impose austerity measures, seen by most economists as essential after a prior term of bloated budgets and interventionist policies. Some party legislators have even voted to increase spending.

    Former President Luiz Inácio Lula da Silva, the party's biggest star and a possible candidate in 2018, has increasingly distanced himself from Rousseff, whom he plucked from obscurity and named the party standard bearer when he faced a constitutional term limit. Recently, he compared Rousseff's standing to near-empty reservoirs of drought-plagued São Paulo.

    In February, the lower house elected Eduardo Cunha, an Evangelical Congressman, to head the chamber, with twice as many votes as those cast for Rousseff's candidate. Although Cunha's party in theory is allied with Rousseff, he has slowed her legislative agenda and recently said she was so weak that Brazil should switch to a parliamentary system.

    Few are as emboldened as the centrist Social Democracy party, which last weekend re-elected as its leader Aécio Neves, the senator Rousseff defeated last October. The administration, Neves told reporters, was headed toward an "an interruption."
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    China is spending $40 billion to prop up the weakest parts of its economy

    China's government plans to spend 250 billion yuan ($40.3 billion) to foster growth in areas of the economy most in need of support, the Chinese cabinet said on Wednesday.

    The State Council said after a weekly meeting that authorities will also accelerate construction of big public services projects, such as the building of roads and water conservancy facilities.

    The cabinet did not comment on China's plunging stock market, which has slumped nearly one- third since mid-June, after having more than doubled before the sell-off.

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    Oil and Gas

    Baker Hughes announces June 2015 rig counts

    Baker Hughes Incorporated announced today that the international rig count for June 2015 was 1,146, down 12 from the 1,158 counted in May 2015, and down 198 from the 1,344 counted in June 2014. The international offshore rig count for June 2015 was 277, down 7 from the 284 counted in May 2015, and down 43 from the 320 counted in June 2014.

    The average U.S. rig count for June 2015 was 861, down 28 from the 889 counted in May 2015, and down 1,000 from the 1,861 counted in June 2014. The average Canadian rig count for June 2015 was 129, up 49 from the 80 counted in May 2015, and down 111 from the 240 counted in June 2014.

    The worldwide rig count for June 2015 was 2,136, up 9 from the 2,127 counted in May 2015, and down 1,309 from the 3,445 counted in June 2014.
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    New subsidy formula to boost ONGC and OIL India earnings in Q1

    Financial Express reported that oil and gas producers ONGC and Oil India are set to report strong numbers during April to June 2015, owing to better realisations from crude oil sales. This is because the government-owned companies would have to fork out meagre funds towards compensating PSU oil-marketing companies post the government’s new subsidy sharing formula. The Indian basket of crude oil averaged at USD 61.47 per barrel in the quarter.

    The Narendra Modi government has rolled out a subsidy sharing mechanism according to which upstream players such as ONGC and Oil India would have to bear no subsidy if the average crude oil price during April-June remains below USD 60/barrel. If the price is between USD 60 and USD 100 per barrel, they would have to shell out 85% of the incremental price towards oil subsidy. The sharing would be 90% if crude crosses USD 100 per barrel.

    “The total subsidy bill estimated for Q1 FY16 is INR 10,600 crore. Of this, we expect subsidy burden INR 670 crore on ONGC and around INR 50 crore on OIL if the new subsidy sharing formula is followed. The remaining will be compensated by the government. We estimate ONGC’s gross realisation at USD 63 per barrel and for OIL at USD 61.5 per barrel.”

    Going by the latest expectation figures, ONGC's oil subsidy bill would drop by 95% to just INR 670 crore during April to June 2015 against INR 13,200 crore in the same months the previous year. The largest oil and gas explorer in the country is expected to post a net profit of over INR 5,670 crore in Q1 of the current fiscal, which would be 18.6% higher compared with INR 4,781.8 crore in the year-ago quarter.

    Kotak Institutional Equities Research said that “The robust YoY increase in profitability despite lower global crude oil prices reflects higher net crude realisations.”
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    LNG companies slugged with huge rates increase

    Gladstone's LNG companies will be slugged massive increases in the amount of rates they pay the Gladstone Regional Council once their production trains start exporting liquefied natural gas.

    Two new rating differential categories have been added to the council's rating list this year especially to cater for the LNG industry.

    One rate, 77.490 cents in the dollar of land valuation, will apply to plants operating one production train and the other, 154.980 cents in the dollar, for those with two operational production trains.

    All three LNG plants will have two trains when completed.

    Currently the QCLNG plant is the only producing facility, while the others are either still in construction or in the commissioning phase.

    During the construction phase of the projects, the gas companies have been paying 66.083 cents in the dollar.

    Council chief financial officer Mark Holmes said the new rate levels wouldn't apply until the plants were producing and exporting LNG.

    The rate increase will be capped so the companies will pay no more than a 50% increase in the previous year's rates, which means it could take some years before the total impact of the rating change will be felt.

    Mr Holmes said the changes were an attempt to create a fair and equitable rating system across all ratepayers.

    "For example, our residential ratepayers are currently paying what we have estimated to be 1.48% of their income. Our major industries at present are paying about 1.13% and the LNG companies are paying well below that level.

    "We want to see fairness across the board. It's a process we started in 2012 and it will take some years before it is finally implemented across all categories.

    "We have done our best so far to attempt to achieve that," he said.

    Mr Holmes said the council had met with the three LNG companies and explained its position.

    "The meeting was a fairly agreeable one, and while the gas companies may not be impressed with what we are trying to achieve, they seemed to understand the reasoning behind it."
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    UK Chancellor Confirms Tax Relief for O&G Investment

    UK Chancellor of the Exchequer George Osborne confirmed Wednesday tax relief measures for the development of oil and gas fields on the UK Continental Shelf that he first announced in March. Osborne also stated in his 'Emergency Budget' – the first Budget from a Conservative government for almost two decades – that the types of investment that will qualify for allowances have been broadened.

    In the previous March Budget Osborne announced a new tax allowance to stimulate investment, while the government would also cut both the Petroleum Revenue Tax and the Supplementary Charge – which is paid on ring-fenced oil and gas profits.

    In his Budget speech to Parliament Wednesday, Osborne said: "The large reductions in tax on North Sea oil and gas that I announced in March are going ahead and today we broaden the types of investment that qualify for allowances."

    This broadening will see the expansion of North Sea investment and cluster area allowances to include additional activities. The definition of investment expenditure will be extended to include what the Treasury called in a Budget document "certain discretionary non-capital spend and long-term leasing of production units". The allowance will exempt a portion of a company's profits from the Supplementary Charge.

    Meanwhile, the government also plans to bring forward proposals for a sovereign wealth fund for communities that host shale gas projects.

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    Alfa Oil Dream Falters as $1.7 Billion Pacific Bid Falls Apart

    Mexico’s Alfa SAB and partner Harbour Energy Ltd. dropped their plans to buy Pacific Rubiales Energy Corp. after the driller’s largest shareholder spurned a takeover offer once valued at as much as $1.7 billion.

    Pacific Rubiales said Wednesday it would have “no further material obligations” to its former suitors after accepting their withdrawal. Alfa said its offer “correctly valued” Bogota-based Pacific Rubiales and had no plans to sweeten the price.

    The pullout derails Alfa’s quest to become an oil company and take advantage of Mexico opening its fields to private producers for the first time since 1938. The maker of lunchmeat and car parts slumped 10 percent since being identified as a bidder in May, a sign of investor dismay even as Pacific Rubiales stakeholder O’Hara Administration Co. lambasted the $C6.50-a-share bid as too low.

    “We see this as positive for Alfa,” Ana Sepulveda, an analyst at Invex Casa de Bolsa SA, said in a telephone interview in Mexico City. “The requirements from funds that held stakes in Pacific Rubiales were overvaluing the company.”

    The original bid for Pacific Rubiales was about C$2.1 billion, or $1.7 billion, when it was made in May. By Wednesday, the value had fallen to $1.6 billion. The company’s shares are listed in Toronto as well as in Bogota.

    Alfa’s exit means Pacific Rubiales executives now will have to restart a turnaround effort, according to Nathan Piper, an analyst at RBC Capital Markets. In a note, he estimated that the company is saddled with about $4.5 billion in net debt and will lose 35 percent of current production when the license for its biggest field ends in 2016.

    Pacific said in a statement that it would continue with its plans to reduce its debt and operating costs, and to divest non-core assets. It also will continue to pursue “Mexico energy opportunities” with Alfa as a partner.
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    Summary of Weekly Petroleum Data for the Week Ending July 3, 2015

    U.S. crude oil refinery inputs averaged 16.6 million barrels per day during the week ending July 3, 2015, 65,000 barrels per day more than the previous week’s average. Refineries operated at 94.7% of their operable capacity last week. Gasoline production decreased last week, averaging about 9.9 million barrels per day. Distillate fuel production increased last week, averaging 5.1 million barrels per day.

    U.S. crude oil imports averaged over 7.3 million barrels per day last week, down by 197,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged about 7.2 million barrels per day, 1.6% below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 852,000 barrels per day. Distillate fuel imports averaged 164,000 barrels per day last week. 

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 0.4 million barrels from the previous week. At 465.8 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. Total motor gasoline inventories increased by 1.2 million barrels last week, and are in the upper half of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories increased by 1.6 million barrels last week and are in the middle of the average range for this time of year. 

    Propane/propylene inventories rose 2.2 million barrels last week and are well above the upper limit of the average range. Total commercial petroleum inventories increased by 10.6 million barrels last week. Total products supplied over the last four-week period averaged 19.9 million barrels per day, up by 4.7% from the same period last year. Over the last four weeks, motor gasoline product supplied averaged over 9.5 million barrels per day, up by 5.3% from the same period last year. Distillate fuel product supplied averaged about 3.9 million barrels per day over the last four weeks, up by 1.5% from the same period last year. Jet fuel product supplied is down 6.5% compared to the same four-week period last year.

    Attached Files
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    EIA reports small rise in domestic oil production

                                                     Latest week  Last week      Year ago

    Domestic Production .................... 9,604          9,595           8,514
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    WTI under USD 60 beyond 2016 suggests market rethinking shale

    The almost 10% nosedive in headline oil prices this week has many hallmarks of a shocking but short-lived slump, triggered by a confluence of external events and exacerbated by safety-seeking investors and momentum-chasing traders.

    By Tuesday afternoon, the crowded race to the exit was winding down, with prices recovering from three-month lows as traders reassessed the factors they blamed for the worst slide in four months: Greece's debt woes; China's stock market meltdown; talks with Iran over its nuclear program; a stronger dollar; a rise in the number of U.S. oil rigs; a breach of key technical triggers.

    Yet a deeper look at the market suggests an important and more lasting rethink may now be afoot: longer-term oil prices, normally less volatile and reactive than immediate delivery, have suffered an almost equally violent collapse, pushing crude prices for 2017 to below USD 60 a barrel for the first time ever.

    If US shale drillers, the world's new 'swing' producers, can still turn a profit at below USD 60 a barrel, then the fall in long-dated oil prices may be rational. If not, as some bullish market analysts worry, then lower prices could be choking off new supplies the world may need as soon as next year.

    Mr Paul Horsnell, global head of commodities research at Standard Chartered, said, referring to West Texas Intermediate crude, that "If you take the curve at face value, it appears to be saying that U.S. shale can grow, if WTI stays below USD 60 for 3 years. That doesn’t seem very likely."

    He said that "One would guess that all those companies that had been holding back from cutting projects and jobs over the past few months are not going to hold on much longer and another shakeout will start. And it probably won’t be long before US rig counts start to dive again."

    US oil futures for December 2017 delivery have dropped by as much as USD 5 a barrel, or 8%, in the past two days, an even deeper retreat than last November when OPEC's surprise decision to maintain oil output despite a global glut sent markets into a deepening tailspin.

    The more liquid frontline prices for delivery in August this year have fallen only slightly further this week and are still several dollars above their trough from March. Longer-dated futures are plumbing contract lows, testing the break-even economics for US shale oil drillers.

    The cause of this unusual tumble is still a topic of debate.

    Some link it to a future shift in fundamentals such as the expected boost in Iran's oil exports next year. Others said it may reflect the realization that oil industry costs are falling faster than expected as activity slumps. A few wonder if it is an unusually large producer hedge, or a big macro-economy fund trade unwinding.

    Longer-term oil futures are normally insulated from the speculative, short-term fluctuations and factors that afflict immediate prices. Too illiquid to attract fast money, they tend to trade on more strategic themes, whether a long-term bet on prices or a corporation seeking to hedge its price risks.

    Front-month oil futures have posted a daily change of more than USD 1 a barrel on 62 occasions this year, trading in a range of over USD 20; December 2017 has moved by that magnitude only 18 times, trading between USD 61 and USD 67 a barrel.

    Mr Jan Stuart, Credit Suisse analyst, said that “The fact that this week's activity has affected both ends of the futures curve in nearly equal measure is unusual. This isn’t a simple front-month correlation trade or a dip in demand. This is investors who invest all along the curve picking up the ball and going home. That's what this looks like."

    Attached Files
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    Pioneer says increasing drilling activity

     U.S. shale exploration and production company Pioneer Natural Resources Co on Wednesday said it is increasing drilling activity in Texas following the sale of its Eagle Ford shale pipeline and processing business.

    Pioneer, based in Dallas, said it has already added two drilling rigs in the Permian Basin this month and plans to add an average of two per month during the balance of the year as long as the crude oil price "remains constructive," the company said in a news release.

    The increase in drilling activity is not expected to have a big impact on 2015 production previously forecast to grow more than 10 percent, but will push capital spending up $350 million to $2.2 billion, the company said.
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    Alternative Energy

    No new plan for solar PV manufacturing expansion for China in 1H

    PV Tech reported that a detailed preliminary analysis of global PV manufacturing expansion plans for the first half of 2015 indicates that little if any meaningful or ‘effective’ new plans were announced by Chinese producers for China.

    Instead, Chinese crystalline silicon-based PV manufacturers announced more than 6.7 GW of planned capacity expansions in a number of overseas countries, including India, Malaysia, Thailand, South Korea, Brazil and the US.

    According to PV Tech’s next updated quarterly report on global PV manufacturing capacity announcements, published in sister technical journal, Photovoltaics International, Chinese producers announced at least 19 GW of new capacity plans in 2014 for production in China.

    However, the H1 of 2015 has seen several of the same tier-one companies that announced new production plans in China last year, such as Trina Solar, JinkoSolar and JA Solar, lead an exodus overseas.

    This has been driven by US anti-dumping duties as well as plans to become major players in emerging markets such as India and Latin America.

    The lack of new capacity expansions in China contrasts with over 12 GW of new announcements in 2015 for other regions across Asia, with Chinese producers accounting for just over half of the capacity announcement figures.
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    Renewable Energy Solutions Australia: Whisper-quiet wind power

    Le Messurier and his team were determined to address concerns about noise and the environmental impact of wind turbines in order to ensure scalability – they created the Eco Whisper Turbine to do just that.

    Les Messurier explains, “It’s a turbine that follows the wind so it’s always trying to face forward into the wind. Basically the wind turns the blades and it’s all directly connected to a generator. The power from the generator goes through a conversion process and we can either put that energy back into the site, into batteries or it goes back into the grid.” A revolutionary aspect of the Eco Whisper is that it’s virtually silent due to an outer ring placed around the tip of the blades. Le Messurier explains the concept by drawing a parallel to a common desk fan or room fan, “As the speed increases, the noise increases as there’s more air coming off the tip of the blades but that outer ring prevents that from happening.” The Eco Whisper Turbine also has 30 blades rather than the conventional two or three, which gives it the ability to start rotating and generating power with just a slight breeze. All of these factors combine to enable the Eco Whisper Turbine to generate up to 30 percent more power than conventional three-bladed designs.

    There were concerns that wind turbines can cause negative health effects and have adverse environmental impacts but Le Messurier says, “The Eco Whisper Turbine really knocks a lot of that on the head. It’s virtually silent, and it’s had no impact on bird life to date and its design is especially unique. It has become something that people like and want to be associated with.”

    Echo Whisper Turbine: silent wind power
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    Green energy sector attacks chancellor's changes to climate change levy

    George Osborne has infuriated green energy producers and campaigners with a £910m-a-year raid on the renewable energy sector by changing a climate change levy (CCL) at the same time as providing more fiscal help for North Sea oilfields.

    RenewableUK, the lobby group, said the changes would cost green energy producers around £450m in the current financial year, and up to £1bn by 2020-2021.

    The move hammered the share price of power generator Drax which is in the process of converting stations from burning coal to burning wood pellets. The company lost more than a quarter of its stock market value as it said the move would cost it £30m this year and £60m in 2016.

    Caroline Lucas, the Green party MP, described the budget as a “serious blow for the fight against climate change”, while Greenpeace said it showed the chancellor is out of step with the times.

    Osborne insisted the Conservative government would still continue to promote low carbon investment and would be pushing for a deal at United Nations talks in Paris later this year to limit global warming to 2C.

    But his budget measures included removing the CCL exemption from renewable electricity schemes and promised streamlining other taxes.

    “The government will review the business energy efficiency tax landscape and consider approaches to simplify and improve the effectiveness of the regime. A consultation will be launched in autumn 2015,” he said.

    Phil Grant, of management consultants Baringa Partners, said the budget was bad news for investors in green power. “Britain is a world leader in green energy but the abolishment of climate change levies for renewables is another blow for an already fragile sector. Investors were perturbed by recent decisions … to reduce subsidies for new renewable plants and we’ve seen the share prices of companies exposed to renewables take a further hit this afternoon.”

    Gordon Edge, RenewableUK’s director of policy, said that until now, Levy Exemption Certificates generated as a result of the CCL had provided vital financial support for renewable energy producers.
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    Potash Corp open to raising K+S bid - Globe & Mail

    Potash Corp of Saskatchewan Inc is confident that K+S AG shareholders would accept its $8.7 billion bid, but is open to raising it if its German rival could reveal more value not currently seen by the Canadian company, the Globe and Mail reported, citing a source close to the deal.

    K+S last week rejected Potash Corp's bid, saying it was too low and that the Canadian suitor could be planning to dismantle the company, putting jobs at risk.

    Potash Corp said on July 3 it was confident of addressing concerns raised by K+S and that it would seek to meet with K+S's management as soon as possible.

    If K+S gave Potash Corp access to its books and the Canadian company found more value, it could raise the bid, the newspaper reported. (

    "If we sit down and do due diligence and they can demonstrate some incremental value to us, we might have an extra euro for them. I wouldn't rule that out," the daily quoted the source as saying.

    A K+S spokesman said that if Potash Corp would send them a new proposal they would be obligated to check it.

    Potash Corp's Germany-based spokesman declined to comment.
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    Uralkali may upgrade 2015 output forecast

    Russia’s Uralkali, the world’s largest potash producer, may upgrade its 2015 production forecast in August, the Vedomosti newspaper reported on Wednesday, citing two sources close to the company and its shareholders.

    An accident at Uralkali’s Solikamsk-2 mine in November put part of the company’s capacity at risk.

    Vedomosti’s sources did not say to what level the production forecast may be upgraded.

    An unnamed source told Interfax news agency that Uralkali could sell between 11.4 million and 11.6 million tonnes of potash in 2015 as it aims to retain its market share after the Solikamsk-2 accident.

    The company produced 12.1 million tonnes of potash in 2014 and 5.7 million tonnes in the first half of 2015, down 5 percent year on year.

    In June, it increased its 2015 production forecast to between 10.4 million and 10.8 million tonnes from a previously expected 10.2 million.
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    Base Metals

    Alcoa earnings hurt by low aluminium prices, higher global surplus seen

    Metals company Alcoa Inc reported a quarterly profit that missed expectations due to plunging primary aluminium prices on Wednesday, but revenues topped estimates on an ongoing drive to reduce reliance on the company's legacy commodity business.

    The New York-based company has been investing in more advanced aerospace and automotive products while selling off some of its more traditional yet costly smelting facilities.

    Three-month aluminium prices have slumped almost a quarter since September, weighed down by the global surplus, and have hovered close to or below the cost of production for a big portion of global capacity. Prices hit six-year lows of $1,630 per tonne on Wednesday, as concerns about China's stock market crash spread to commodities markets.

    During a conference call with analysts, Alcoa raised its global forecast for the global aluminium surplus.

    Supply is expected to outpace global demand by 760,000 tonnes this year, some 400,000 tonnes higher than Alcoa's previous forecast, William Oplinger, chief financial officer and executive vice president, said on a conference call to discuss the second-quarter results.

    Alcoa said organic growth in its aerospace, automotive and alumina businesses, plus acquisitions offset declines caused by the divestment of lower-margin businesses as well as the decline in aluminium prices.

    The company's recent acquisitions in high-value product lines included titanium supplier RTI International Metals Inc , which has around 80 percent its business focused in the aerospace and defence sectors. Alcoa said on Wednesday it hopes to complete the acquisition by the end of July.

    Chief Executive Officer Klaus Kleinfeld told Reuters that the lower aluminum prices represented a "tough headwind," but the lower costs and less dependence on smelting facilities had mitigated the impact.

    "On the commodity side it is what it is, we can't influence what prices are going to do," he said. "What we can influence is where we are on the cost curve and we will continue to work on it."

    Alcoa reported a quarterly net profit of $140 million, up more than 1 percent from $138 million a year earlier. Profit per share slipped to 10 cents from 12 cents, reflecting an increase in the shares outstanding.

    Excluding special items, the company reported earnings per share of 19 cents. Analysts had expected of 23 cents per share.

    The special items included $143 million in charges related to restructuring Alcoa's business portfolio.

    Revenue for the quarter was $5.9 billion, compared with $5.84 billion a year earlier. Analysts had expected revenue of $5.79 billion.
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    Alcoa expects China aluminium exports to slow but sees higher surplus this year

    Alcoa Inc said Wednesday it expects Chinese exports of semi-finished aluminium to slow as prices drop and Beijing increases oversight, even as the U.S. company blamed the world's top producer and consumer for a ballooning global surplus.

    Chief Executive Officer Klaus Kleinfeld said shipments of semis, including profiles and plates used to make window frames and beer cans, will likely drop as prices in the international market fall. He also said he believes Beijing is prepared to deal with the export surge, which is not in line with government policy.

    Producers, including Alcoa and Rusal, have recently blasted China's swelling exports as a factor behind plunging primary aluminium prices.

    Alcoa on Wednesday doubled its forecast for the aluminium surplus this year, as China has not cut output as much as expected.

    Asked if he was considering launching a trade case against China, Kleinfeld said the company was considering all options.

    "But at this point in time, I'm relatively optimistic that the Chinese will take care of it," he said in a conference call to discuss lower-than-expected second-quarter earnings.

    Kleinfeld said Chinese officials made clear to him when he travelled to Beijing four weeks ago that the rise in exports was not part of their policy and that they were looking into the issue, he said.

    Kleinfeld calls China's semis shipments "fake" because they are produced and shipped to avoid an export tax on primary aluminium, only to be re-melted into primary aluminium by the end user.

    Supply will outpace global demand by 760,000 tonnes this year, some 400,000 tonnes higher than its previous forecast, Alcoa Chief Financial Officer William Oplinger said on the call.

    "This is largely driven by the lack of follow through on curtailments on unprofitable operating capacity even with the recent pressure on metal prices," he said.

    Oversupply in China will be 2.2 million tonnes this year, up from 1.8 million tonnes previously, he said.
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    Rio's Kitimat smelter off to a good start

    Mining major Rio Tinto said on Wednesday it was readying to ship the first aluminium from its Kitimat smelter, in Canada, following a $4.8-billion upgrade.

    The modernisation of the aluminium smelter increased production capacity by 48%, to 420 000 t/y, and would result in the Kitimat smelter becoming one of the lowest cost smelters in the world. 

    The project was currently ramping up towards its full capacity. “The modernisation of Kitimat will fundamentally transform its performance, moving it from the fourth quartile to the first decile of the industry cost curve. 

    At full production, Kitimat will be one of the most efficient, greenest and lowest-cost smelters in the world,” said Rio Tinto aluminium CEO Alf Barrios. “Positioned in British Columbia on the west coast of Canada, Kitimat is well placed to serve rapidly growing demand for aluminium in the Asia-Pacific region and to serve the North American market.” 

    The modernised smelter is powered exclusively by Rio’s wholly owned hydro power facility and uses the company’s proprietary AP40 smelting technology, which would effectively halve the smelter’s overall emissions.
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    Steel, Iron Ore and Coal

    Germany's long goodbye to coal dashes power price rise prospect

    Germany's deferral of the death sentence for its coal sector still condemns power producers to the suffering of engrained falling prices for electricity, analysts say.

    Seeking reductions in carbon dioxide emissions and battling overcapacity in Europe's biggest power market could have prompted Berlin to usher in an aggressive phase-out of old coal-to-power plants, supporting languishing prices.

    Instead it decided to set up a coal-fired electricity reserve from 2017 rather than collecting levies from such plants to enforce a speedy closure. That is not seen as radical enough to boost power prices.

    Costing 230 million euros ($253.69 million) each year, the reserve is not really intended to be activated, and implies the permanent shut-down of the plants after 2021.

    "It makes less than 2 euros difference to the power price by 2020," said Stephen Woodhouse of consultancy Poyry. "We are not talking about anything that fundamentally alters the position of plants in the market."

    The compromise decision of July 1 was aimed at deferring the loss of mining and generation jobs by a few years, and opted for a lignite (brown coal) reserve.

    This involves 2.7 gigawatts (GW), less than 1.5 percent of nominal power capacity to be removed from supply between 2017 and 2020 in a scheme that will be worked out later this year between utilities and the government.

    Since the decision, wholesale forward prices have not shown much change from pricing delivery in 2016 at around 31.80 euros a megawatt hour (MWh) and in 2021 at around 33.75 euros, data from the EEX bourse shows.

    The mild contango, which is hedgers' term for a premium on a commodity at a future point, shows little expectation that overcapacity will disappear in a meaningful size while Germany continues on its course to consistently add renewable capacity.

    The year ahead position is half its level seen in 2011, held down by oversupply, slack demand at home and in the euro zone's key economies that border on Germany, and the politically desired expansion of green energy.

    The alternative option - which had been under discussion for over six months - would have involved a levy on coal-fired plants over a certain age, which could have driven many plants operated by RWE and Vattenfall out of the market.

    Apart from costing jobs, this choice might also have removed too much of a safety net for times that renewable production is insufficient, as Germany simultaneously switches off unpopular nuclear plants by 2021.

    The latest plan allows savings of between 11 and 12.5 million tonnes of CO2, with some hard coal and gas-fired plants due to replace the "missing lignite" on a 50/50 basis, Deutsche Bank and Bernstein analysts said in research notes.

    But traders said the replacements would be more modern, running on less fuel and needing fewer CO2 emissions permits. "All things considered, it will not be bullish for coal," said one.
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    Iron ore prices in largest daily drop on record

    According to Metal Bulletin’s iron ore index the spot price for 62% fines has dropped 10.1%, the biggest daily drop on record, to $44.59 a tonne. Here’s the chart:

    iron ore prices July 8

    The price collapse is being driven by two main factors:

    Evidence that supply is continuing to increase out of the world’s biggest producer countries, Australia and Brazil, and
    Concern that Chinese demand is tanking as the economy slows.

    Economists estimate that each $1 fall in the iron ore price results in around $300 million in lost tax revenue for Australia. So today’s fall alone of $5 in the price equates to roughly $1.5 billion being knocked off the budget bottom line.

    The sharp and sudden decline will raise fresh questions about the viability of some iron ore miners.

    Read more:
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    Big Chinese steelmakers lose $2.7 bln in core business for Jan-May

    Large Chinese steelmakers' losses in core business more than doubled during the first five months from a year earlier as tumbling steel prices plunged producers into red, a top official of the China Iron & Steel Association (CISA) said on Thursday.

    CISA members, comprising of 101 big mills, posted a loss of 16.48 billion yuan ($2.65 billion) in steelmaking business for January-May, which was 10.36 billion yuan more from the same period of last year, according Zhang Guangning, CISA's chairman.

    "It's obvious that China's apparent crude steel consumption has reached the peak, and the large growth of demand has became a history," Zhang said in a speech that was published on the CISA website.

    Chinese steel prices are at their lowest in more than 20 years as the stuttering economy is hitting demand for a range of commodities including iron ore, steel and copper, threatening the survival of small steel mills.

    The apparent consumption of crude steel in the world's top producer dropped 5.1 percent for the first five months from a year before, higher than 3.3 percent in 2014, while total output fell only 1.6 percent on year, the first decline in nearly 20 years.

    "Some enterprises are short of capital and having difficulty in maintaining operations. A few would find it hard to survive and are facing the exit," Zhang added.

    The bloated steel sector is also struggling with environmental compliance costs while the recent plunge in their share prices have also further tightened their cash flow.

    The most traded rebar futures on the Shanghai Futures Exchange lost 28 percent so far this year, the same as the decline for the whole of 2014.

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