Mark Latham Commodity Equity Intelligence Service

Tuesday 16th August 2016
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    Clinton Landslide?

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    We’re going to spend a lot of time over the next 87 days contemplating the possibility of a Donald Trump presidency. Trump is a significant underdog — he has a 13 percent chance of winning the election according to our polls-only model and a 23 percent chance according to polls-plus. But those probabilities aren’t that small. For comparison, you have a 17 percent chance of losing a “game” of Russian roulette.

    But there’s another possibility staring us right in the face: A potential Hillary Clinton landslide. Our polls-only model projects Clinton to win the election by 7.7 percentage points, about the same margin by which Barack Obama beat John McCain in 2008. And it assigns a 35 percent chance to Clinton winning by double digits.

    Our other model, polls-plus, is much more conservative about Clinton’s prospects. If this were an ordinary election, the smart money would be on the race tightening down the stretch run, and coming more into line with economic “fundamentals” that suggest the election ought to be close. Since this is how the polls-plus model “thinks,” it projects Clinton to win by around 4 points, about the margin by which Obama beat Mitt Romney in 2012 — a solid victory but a long way from a landslide.

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    He continues: "Believe me, if my purpose was not significant, I would not risk my life pursuing it.

    "The reason I climbed your tower was to get your attention. If i had sought this via conventional means, I would be much less likely to have success because you are a busy man with many responsibilities."

    The man adds that he wants his video to go viral and urges viewers to "get out and vote for Mr Trump in the 2016 election."

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    Mining stocks rally postpones industry revamp

    Investors in mining stocks could face years of weak returns as a rally in share and industrial metals prices eases pressure on companies to restructure and curb oversupply.

    The mining sector is known for over-investment in boom times and crashes when demand weakens as economies slow, but many companies say they have learnt lessons and are making efforts to reduce debt and control spending.

    Mining stocks have more than doubled since multi-year lows touched in January, a rebound analysts link to cheap cash from Chinese financial stimulus rather than a fundamental increase in demand for industrial materials.

    The rally has given companies with fragile balance sheets a reprieve from the bankruptcies and mergers analysts say are needed to adapt to lower demand. This could extend the stagnation as production at weaker firms limps along, adding to inventories.

    "We see significant excess capacity in the (mining) industry which needs to be reduced before the fundamentals will improve, and this could easily take three years. We are therefore taking a cautious view toward the industry," said Lewis Grant, a senior portfolio manager at Hermes Investment Management.

    He said he was particularly wary of smaller firms and drawn toward miners with exposure to gold, such as Randgold Resources, as gold is seen as safe-haven investment.

    Commodity markets boomed shortly after the millennium, driven by demand from China, the world's biggest raw materials market. They started to falter early in 2011, led by copper after it became clear Chinese consumption was not as great as previously thought.

    In January this year, at the height of concerns about Chinese demand and weak balance sheets, the market capitalization of mining firms fell to less than $300 billion, a 75 percent fall from $1.1 trillion in March 2011. It has since risen to $480 billion, according to the MSCI global mining index.

    Mining companies, including Glencore, BHP Billiton, Rio Tinto and Anglo American, have all announced asset sales and said they are focused on lowering costs.

    But the sales are taking time and in some cases, industrial sources say mining assets have been taken off the market.

    Glencore has put on hold a copper mine sale, people familiar with the matter said.

    A company spokesman last week declined to comment, but Glencore has repeatedly said its policy is to only sell if it can achieve the right price.

    "If we had January-like conditions for six months, it would have gone a long way to cleaning up excess supply in commodities like iron ore, but China stimulus means we're back to where we started," Richard Knights, analyst at investment bank Liberum Capital, said.

    A surplus of iron ore, used to make steel for buildings and infrastructure, is expected to persist for the foreseeable future because the market is flooded and yet firms are still producing more, analysts say.

    As the impact of Chinese stimulus has waned, they have also become bearish about copper, used as a conductor for electricity and as a building material.

    "For a new commodity bull rally to happen, you need to see further capitulation and to see further tightening of the belts for some of these companies," David Neuhauser, managing director at U.S. hedge fund Livermore Partners, said.


    Livermore says it owns Glencore shares and has sold short Anglo American.

    Glencore, along with Anglo American, faces the biggest debt burden of the major miners, analysts say, and they have mooted Anglo American as a potential takeover target.

    Firms with less debt, notably Rio Tinto, which could seek to expand, are also wary of paying too much for other companies.

    Rio Tinto spent $38 billion on Alcan in 2007 at the top of the commodities boom in a deal viewed by analysts as the most calamitous the sector has seen.

    As the first mining company to take a major hit from a slowing market, Rio was forced to reform and its new CEO Jean-Sebastien Jacques, who took over at the start of July, said this month that maintaining a strong balance sheet was a priority in such a capital-intensive sector.

    The firm has outlined a moderate capital expenditure plan of less than $4 billion this year, $5 billion for next year and $5.5 for 2018, compared with $17.4 billion in 2012 when adding to production was all the rage.

    Fund managers say the new restraint is in tune with shareholder demands for value for money.

    "With the fresh memory of the prolonged bust in mind, most investors will put pressure on the miners not to repeat the same mistakes and overbuild," said David Finger, an analyst at Allianz Global Investors.

    Glencore, which stands out from the pack because of a big commodity trading portfolio that can generate profits even in falling markets, has gone further.

    Its CEO Ivan Glasenberg, who has criticized his rivals for adding volumes to oversupplied markets, says growth needed to be redefined as cash flow per share, rather than production.

    While acknowledging a shift in attitude from mining companies, the investment community is skeptical about the extent to which that can be achieved.

    "They are builders and engineers. They like digging massive holes in the ground. That psychology is difficult to overcome," one industry insider said on condition of anonymity.
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    Connecting the dots of the transforming Chinese economy

    For a massive economy like China's, which is in the midst of transition, it is easy to dwell on fragmentary data while failing to see the forest for the trees.

    While the latest official indicators of traditional growth engines have underperformed, those measuring the new drivers of the Chinese economy suggest a silver lining.


    Growth in retail sales, industrial output and investment all decelerated from June levels, official data showed Friday, adding to concerns that the Chinese economy might be faltering.

    Customs data published earlier showed July exports contracted by 4.4 percent from a year ago while imports plunged 12.5 percent.

    Economists said the slowdown is expected if not desirable, given the side effects of the government's efforts to cut overcapacity, destock, deleverage, reduce corporate costs and shore up weak spots, five major tasks high on the agenda.

    Li Daokui, an economics professor at Tsinghua University and a former adviser to China's central bank, expects a painful adjustment period in the near term as the country shoulders the costs of restructuring.

    The dragging effect of the restructuring program can be seen in the efforts to slash overcapacity.

    In the first six months of 2016, China reduced steel production capacity by 13 million tonnes and coal capacity by over 72 million tonnes, official data showed.

    Short-term strains have resulted as China speeds up reform, said Zhao Xijun, vice head of the school of finance at Beijing-based Renmin University.


    Monthly dips in growth should not justify panic over the world's second largest economy, Zhao said.

    The economy is actually emerging stronger with solid improvement in structural reform and new growth industries, official data showed.

    Against the backdrop of lackluster industrial production, output of the high-tech industry climbed 12.2 percent in July, accelerating from June's 10.6-percent increase and more than double that of the entire industrial sector.

    New-energy car production surged 88.7 percent and revenues of strategic emerging service sectors gained 15.6 percent year-on-year in the first half of the year, according to data from the National Bureau of Statistics (NBS).

    Meanwhile, with an annual expansion of 40 percent, China's sharing economy market, including Internet-based ride-hailing businesses, will account for more than 10 percent of the country's GDP by 2020, according to an Internet Society of China report.

    The service sector expanded 7.5 percent in the first half, accounting for 54.1 percent of the overall economy, up 1.8 percentage points from a year earlier, according to NBS data.

    Investment in energy-intensive industries also continued to cool down, resulting in a year-on-year decline of 5.2 percent in energy consumption per unit of GDP in the first half.

    Thanks to new growth engines, the Chinese economy generated 7.17 million new urban jobs in the first half of 2016, according to the Ministry of Human Resources and Social Security.

    Li of Tsinghua University pointed to stable administration and policies, increasing human capital and further opening of the economy as three major advantages for China to achieve sustained growth.

    The country's growth in the next two decades will mainly be driven by urbanization, consumption and industry rearrangement, Li said.


    If China continues its current supply-side structural reform, and carries out pro-reform and stabilizing measures, its economy will continue to improve, said Zhao.

    However, the challenges should not be underestimated, as it is not easy for a huge ship to change course overnight, experts said.

    Take the overcapacity cuts in the steel sector as an example.

    In the first six months, China completed only about 30 percent of the planned cuts for the whole year. Warming steel prices had watchdogs on alert for a rebound in production capacity as crude steel output surged.

    A price rebound means local officials have balked, with some deciding to defer capacity cuts. Creating new jobs for hundreds of thousands of laid-off employees and the massive debts of steel enterprises pose tough challenges ahead for cutting overcapacity.

    However, the economy has embarked on an irreversible path of restructuring, and the transition, which is crucial to the country's supply-side structural reform, is bound to forge ahead, experts said.

    The International Monetary Fund (IMF) on Friday issued an affirmative forecast, expecting a positive outlook for the Chinese economy and predicting 6.6-percent GDP growth for this year.

    China's economic transition will continue and will be positive overall for the global economy, the IMF said in a report after concluding its annual economic health check on the Chinese economy.

    "Many countries could only dream of achieving growth rates that China has and is likely to achieve, which also reflects positively on the reforms that Chinese policymakers have undertaken," said James Daniel, the IMF mission chief for China.
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    Global miner BHP Billiton books record loss, sees good growth in 2017

    Global miner BHP Billiton books record loss, sees good growth in 2017

    A logo for mining company BHP Billiton adorns a sign outside the Perth Convention Centre where their annual general meeting was being held in Perth, Western Australia, November 19, 2015. REUTERS/David Gray/File Photo

    BHP Billiton reported a record $6.4 billion annual loss on Tuesday, hammered by a bad bet on shale, a dam disaster in Brazil and a commodities slump, but said it expects its cash flow to more than double this year.

    The world's biggest mining company said with cost cuts and a reduction in net debt it expects to generate more than $7 billion in free cash flow in the year to June 2017, at current prices for iron ore, copper, coal, oil and gas.

    "While commodity prices are expected to remain low and volatile in the short to medium term, we are confident in the long-term outlook for our commodities, particularly oil and copper," Chief Executive Andrew Mackenzie said in a statement.

    Excluding $7.7 billion in writedowns and charges, underlying profit still slumped 81 percent to $1.2 billion for the year to June 2016 from $6.4 billion a year ago, hit by weak prices for its major commodities.

    The underlying profit was the weakest since the merger of BHP and Billiton in 2001, but better than analysts' expectations of around $1.1 billion.

    Shoring itself up against tough markets, BHP, like rival Rio Tinto, in February abandoned its long-held policy of never cutting dividends, and flagged instead it would pay out at least 50 percent of underlying profit from then on.

    It announced a full-year dividend of 30 cents, which it said was more than the minimum under its new payout policy, although it was just below analysts' forecasts around 32 cents.

    Net debt rose slightly from December to $26.1 billion, which was higher than the $25 billion that analysts had expected, but BHP said it expects net debt to fall in the 2017 financial year.

    "We continue to pursue capital-efficient latent capacity opportunities which will support volume growth of up to four per cent next year, excluding our onshore U.S. assets where we continue to defer activity to maximise value," Mackenzie said, referring to its shale oil and gas business.
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    Oil and Gas

    Hedge funds add bullish positions in oil as short-covering rally starts

    Hedge funds increased their bullish long positions in crude oil by the most for over two months in the week ending on Aug.9.

    Hedge funds and other money managers boosted net long positions in the three major Brent and WTI futures and options contracts by the equivalent of 48 million barrels.

    The increase in net long positions was the largest since the middle of May and comes after hedge funds cut net long positions by a total of 309 million barrels between May 17 and Aug. 2.

    Hedge fund managers seem to have reacted to the prospect of a short-covering rally after short positions reached exceptionally high levels ("Oil short-selling cycle may be at or near a turning point", Reuters, Aug 10).

    Hedge funds had previously amassed short positions in Brent and WTI totalling 374 million barrels, the third-largest short position on record and only 19 million barrels below the maximum short position ever recorded.

    The scale of short positions made a rally highly likely once prices stopped falling and funds started close some positions to lock in previous profits.

    In the week between Aug. 2 and Aug. 9, hedge funds continued to add an extra 1.5 million barrels of short positions in NYMEX WTI.

    But that was a much smaller increase in short positioning than during the previous weeks, when hedge funds added an average of 35 million barrels of short positions per week.

    And in Brent, hedge funds cut short positions by 19 million barrels, the largest one-week reduction since January.


    With short covering creating a strong bid in the market, other fund managers raced to add fresh long positions to profit from the expected rally in prices.

    Hedge funds added an extra 19 million barrels of long positions in WTI and 11 million barrels of long positions in Brent, according to data published by regulators and exchanges.

    The rise in combined Brent and WTI long positions was the largest one-week increase since the middle of May.

    The short-selling cycle that lasted from May 31 until Aug 2 now appears to have turned.

    Both Brent and WTI prices have increased by more than $5 per barrel, around 13 percent, since Aug. 2, as hedge funds have scaled back short positions and started to turn more bullish.


    The short-covering rally has been accelerated by carefully timed comments from Saudi Arabia and other oil exporters seemingly talking up the possibility of an output agreement at informal talks next month.

    In official comments published on Saturday, after leaking on Thursday, Saudi Energy Minister Khalid al-Falih noted "the large short positioning in the market" which has "caused the oil price to undershoot".

    Al-Falih described current prices as "unsustainable" and said oil prices would have to rise from current levels to reverse the decline in investment.

    He reiterated that Saudi Arabia was watching the market closely and was ready to take action to help rebalance the market in cooperation with OPEC and major non-OPEC producers.

    Al-Falih specifically noted the ministerial meeting in Algeria next month would provide an informal opportunity to discuss the market situation "including any possible action that may be required to stabilise the market".

    While the comments were no different to previous statements made by Saudi officials over the last 12 months, their timing and carefully scripted nature have been interpreted as a deliberate attempt to influence prices.

    By hinting at the possibility of an output agreement, the minister's verbal intervention has added to the short-term risk of holding short positions and fuelled the rally.
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    Did Putin just spoil the Oil party?

    Did Putin just spoil the Oil party?  


    This whole ramp was driven by chatter of Russia and Saudis talking which has now been denied...
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    Oil halted below $46 a barrel after the biggest three-day gain since April.

    Futures slid as much as 0.7 percent in New York after rising 9.7 percent the previous three sessions following comments by Saudi Arabia’s energy minister that it’s prepared to discuss stabilizing the market. Nigerian Petroleum Minister of State Emmanuel Kachikwu signaled that production cuts are unlikely from OPEC, according to a Twitter post. U.S. crude stockpiles probably rose for a fourth week, a Bloomberg survey shows before government data Wednesday.

    Oil has gained about 15 percent since closing below $40 a barrel and tumbling into a bear market earlier this month. Russia is open to talks to jointly freeze output “if necessary,” according to a newspaper report. A possible deal on capping production between members of the Organization of Petroleum Exporting Countries and non-member producing countries was first flagged in February but deal discussions in April ended with no final accord.

    “The OPEC comments have caught the market’s attention, but history would suggest that nothing will happen,” said David Lennox, a resources analyst at Fat Prophets in Sydney. “While falling U.S. supply has helped to narrow the surplus, OPEC hasn’t helped. The group has continued to pump. It’s really only disruptions that have reduced supply.”

    West Texas Intermediate for September delivery lost as much as 32 cents to $45.42 a barrel on the New York Mercantile Exchange and was at $45.51 at 12:18 p.m. in Hong Kong. The contract climbed $1.25 to $45.74 on Monday, capping the biggest three-day gain since April 12. Total volume traded was about 32 percent below the 100-day average.

    Output Freeze

    Brent for October settlement slid as much as 37 cents, or 0.8 percent, to $47.98 a barrel on the London-based ICE Futures Europe exchange. Prices added 2.9 percent to close at $48.35 on Monday, the highest settlement since July 12. The global benchmark crude traded at a $1.93 premium to WTI for October delivery.

    Russia sees no signals that Iran will change its position on a production cap and agree to an output freeze, Interfax reported, citing a diplomatic source close to the talks whom the news service didn’t identify. Russian Energy Minister Alexander Novak told Arabic-language newspaper Asharq Al-Awsat that the nation was open to cooperating to stabilize markets after Saudi Arabian Energy Minister Khalid Al-Falih said that talks in Algiers may result in action.

    OPEC members will discuss the market when they gather for the International Energy Forum in Algeria next month, according to Mohammed bin Saleh Al-Sada, Qatar’s energy and industry minister and the group’s current president.
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    Iraq Oil Chief Sees End to Kurd Dispute as War Hurts Output

    Jabbar al-Luaibi, the former head of Iraq’s biggest crude producer who was appointed oil minister on Monday, said that he sees ways to resolve the energy dispute with the self-governed Kurds in the north of OPEC’s No. 2 producer.

    Al-Luaibi’s appointment was approved by parliament on Monday as part of a government reshuffle, according to a statement by deputy parliament speaker Humam Hamoudi. Al-Luaibi is former head of the state-owned South Oil Co. which produces most of the country’s crude. He replaces Adel Abdul Mahdi who had suspended his participation in the cabinet in March, citing disarray in government ministries.

    The new minister told local news service Alsumaria soon after his appointment that there are “various ways to resolve” the conflict with the Kurdish region of Iraq which has split control of the country’s crude exports. He also said that Iraq will seek local investment to develop its natural gas industry.

    Iraq, the second-biggest producer in the Organization of Petroleum Exporting Countries, holds the world’s fifth-largest oil reserves. The drop in crude prices over the past two years has squeezed state revenue as the government waged a costly campaign against Islamic State militants who have seized parts of northern Iraq. Iraq produced 4.36 million barrels a day in July compared with 4.44 million at the end of last year, according to data compiled by Bloomberg.

    Crippled Exports

    Prime Minister Haidar al-Abadi said the cabinet reshuffle was part of reforms, according to a statement on his website. Al-Abadi’s efforts to shuffle the cabinet have been repeatedly blocked by lawmakers.

    More than 13 years after the U.S.-led invasion that ousted former President Saddam Hussein, Iraq’s finances are being drained by the oil-price plunge and the political bickering that has delayed efforts to tackle graft and sectarian divisions. The country has lost sales and revenue from its northern region as a payments dispute with the Kurds and interruptions to the flow of oil for export through a pipeline to Turkey have crippled shipments.

    Al-Luaibi, who has a bachelor of science in chemical engineering, has worked in Iraq’s oil business since 1973, according to a copy of his resume provided by his office.
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    Northern Iraq crude oil exports dive on pipeline outages, oil field attacks

    Oil flows through the Kurdistan Regional Government's export system fell sharply in early August due to pipeline outages and production declines following recent attacks on an oilfield in northern Iraqi, a number of sources have confirmed.

    While the recent pipeline outages were due to a technical glitch which may already have been rectified, analysts expect the loss of output from the Bai Hassan oil field, where saboteurs have damaged production facilities and heightened concerns for future security, to last for months.

    The KRG's pipeline to Turkey, which is the only pipeline currently exporting crude from northern Iraq, has been down for about 80 hours so far this month, an international oil company official familiar with pipeline operations said.

    The outages have been caused by an electricity transmission malfunction at the PS-3 pumping station in Silopi, just over the border in Turkey, said the IOC official, an industry official in Erbil, and an industry official at Turkey's Ceyhan port.

    In July, the export pipeline sent 511,000 b/d of crude to market, the KRG Ministry of Natural Resources reported in early August.

    The pipeline first went down on the afternoon of August 5, the Ceyhan official said. He and the IOC official said exports resumed briefly on the morning of August 7, but only for a few hours.

    Exports came back online early August 9, initially flowing at 458,000 b/d, the Ceyhan official said.

    Temporarily bolstered by crude from storage built up at producing fields during the pipeline outages, exports had risen to 573,000 b/d by Thursday but were unlikely to stay at that rate, the official said.

    Assuming the pipeline stays online, KRG exports for the rest of this month are expected to be significantly lower than the July average following a July 31 attack on the 170,000-180,000 b/d Bai Hassan oil field northwest of Kirkuk.


    The field lies outside the semi-autonomous Kurdistan region's official border with the rest of Iraq, but for the past two years has been contributing to export flows through the KRG pipeline, after repeated sabotage attacks by insurgents closed the Iraqi federal government's northern export pipeline. Bai Hassan has been operated by the KRG since late 2014, following the Islamic State group insurgency in much of northern and western Iraq that peaked in summer of that year

    The July 31 attack, which authorities have also attributed to IS, caused the 70,000 b/d southern section of the field to be shut down, several officials familiar with operations said. Bai Hassan South remains offline, industry officials said.

    A subsequent attack August 10 struck a different section of Bai Hassan but had a negligible effect on production. Saboteurs also planted improvised explosive devices along the pipeline connecting Bai Hassan and the Avana Dome of the Kirkuk field to the KRG export system, Kirkuk security officials said.

    In response to the loss of Bai Hassan crude exports, the KRG ministry of natural resources has redirected some crude production previously earmarked for domestic consumption to the export pipeline.

    The 100,000 b/d Kalak refinery near Erbil, the Kurdistan regional capital located less than 100 km north of Kirkuk, has been offline since August 4 due to lack of feedstock, government and industry officials in Erbil said. The refinery had been taking between 30,000 and 40,000 b/d from the KRG-operated Khurmala Dome of the Kirkuk field, but that production has been diverted to the export pipeline.

    The KRG's other major refinery, Bazian, located in the east of the Kurdistan region, is also operating at reduced capacity due to the crude diversions. An industry official briefed on operations at Bazian said the refinery had recently been taking between 20,000 and 25,000 b/d of crude for processing and would likely be operating at that level until Bai Hassan's production recovers.

    Bazian's current capacity is at least 40,000 b/d. In 2014, Qaiwan Group, the local company that owns and operates the refinery, announced plans to increase that to 125,000 b/d by 2018.

    In another setback for the KRG, which depends almost exclusively on crude export revenues to finance government operations, the quality of KRG export crude has suffered following the attacks on Bai Hassan. The IOC official said recent loadings at Ceyhan, the current delivery point for all KRG crude exports, have had a higher API gravity, higher sulfur content and more water than usual.
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    Only special Russian decree could bar Rosneft from Bashneft sale - ministry letter

    Russia's Economy Ministry has advised Prime Minister Dmitry Medvedev he would have to issue an unprecedented special decree if he wants to bar state-controlled oil major Rosneft (ROSN.MM) from the privatization of a mid-sized energy group, according to a letter seen by Reuters.

    The planned auction of a 50 percent stake in state-owned oil producer Bashneft (BANE.MM) later this year will pit some of Russia's most powerful businessmen, executives and officials against each other if Rosneft and other state-controlled groups are allowed to participate.

    The sale is designed to plug holes in the government budget caused by a slump in oil prices and Western sanctions imposed over Russia's actions in Ukraine.

    However, the interest shown by Rosneft, whose head Igor Sechin is a close ally of President Vladimir Putin, has drawn criticism from some government officials who have said this would essentially involve the state transferring assets from one firm to another.

    Rosneft argues its involvement would boost competition and the price the government can fetch for Bashneft.

    Deputy Prime Minister Arkady Dvorkovich and some other officials have opposed the idea of allowing Rosneft to take part but Putin - who holds the ultimate say-so over such major decisions in Russia - has so far stayed silent on the subject.

    Rosneft has said it is considering a bid for Bashneft, which produces around 20 million tonnes of oil a year. If it goes head, Sechin is likely to be up against Vagit Alekperov, one of Russia's richest men whose private group Lukoil (LKOH.MM) is interested in buying all of the company.

    In its letter to Medvedev, dated Aug. 10, the Economy Ministry said the government has no legal grounds for stopping state-controlled groups such as Rosneft from bidding.

    "It is possible to set additional criteria to limit the participation in the transaction of entities directly or indirectly controlled by the state ... based only on a separate decree by the government," it said.

    The economy ministry was not immediately available for comment.


    The letter gave no indication of Medvedev's views on the issue. But if such a decree were issued, it would be a setback for Sechin and would leave Lukoil, Rosneft's main rival, as the main contender to buy Bashneft.

    Lukoil has said it would not overpay for the company, whose market capitalization is around $10 billion. Lukoil says it values the firm at no more than $4.0-$4.5 billion.

    If the government decided against issuing such an order, it would turn the Bashneft privatization into one of Russia's most hotly contested auctions of the past decade and could allow Sechin to expand his giant firm further.

    Russia also plans to sell a minority stake of 19.5 percent in Rosneft to reduce its budget deficit.

    Sechin argues that Rosneft's participation would increase competition at the Bashneft auction. Rosneft became the world's largest listed oil producer by output in 2013 when it acquired Anglo-Russian oil company TNK-BP for $55 billion.

    The economy ministry's letter to Medvedev cites a letter from Sechin to the ministry from Aug. 5 as saying that if Rosneft were banned from the privatization it could see its shares fall and possibly draw law suits from its minority shareholders.

    Sechin also argues that if Rosneft were allowed to purchase Bashneft, it would create synergies of around 160 billion rubles ($2.5 billion) and result in higher revenues for the government when the Rosneft stake is sold.

    Rosneft declined to comment.

    Russia appointed state-controlled bank VTB Capital (VTBR.MM) as its agent to sell Bashneft. VTB has invited around 10 potential bidders including state-controlled Gazprom, Tatneft and the Russian Direct Investment Fund.

    If the government banned all state firms from bidding, this would leave Lukoil as well as mid-sized firms Russneft, Independent Petroleum Company, Tatneftegas, Energia and the Antipinsky refinery among remaining bidders.
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    Forecast FLNG spend of over $41 billion following wave of landmark projects

    Despite challenging market conditions, global capital expenditure (Capex) on FLNG facilities is forecast to increase significantly over the 2016-2022 period. The protracted oil price downturn has impacted the sanctioning of capital intensive liquefaction units over the last 24 months. However, the need to move towards cleaner sources of energy and diversify gas supply has stimulated the floating regasification market - over 14 countries are expected to commission their first floating import unit over the forecast period.

    These are some of the findings from Douglas Westwood's (DW) latest World FLNG Market Forecast with global FLNG Capex expected to total $41.6 billion (bn) during 2016-2022, compared with $11.4bn 2011-2015 - an increase of 264%. Report author, Mark Adeosun, commented, 'Liquefaction vessels will account for approximately 59% of forecast expenditure, with the remaining 41% allocated to import and regasification terminals. Near-term growth in expenditure will be predominantly driven by a number of flagship liquefaction projects sanctioned prior to the oil price downturn.

    'Global expenditure is expected to peak in 2017 as the first wave of sanctioned projects come onstream. Reduced project sanctioning will likely impact the market towards the end of the decade - with expenditure forecast to decline significantly in 2019 - before stagnating over the 2019-2021 period. Long term prospects are positive; a marginal uptick in spending is expected in 2022 driven by the sanctioning of a second wave of capital intensive liquefaction projects. Over the forecast period, Africa and Asia will be key areas for liquefaction and regasification units - with both regions accounting for 54% of total global expenditure. Spend in Australasia is set to decline post 2018 after the installation of the Prelude FLNG.

    'Despite near-term concerns, the long-term viability of FLNG technology is clear. In the decades ahead, natural gas will continue to play an increasingly important role in meeting global energy demand. Furthermore, the rising cost of onshore development terminals and the shorter lead times of floating units make the technology a viable option in the current market environment.'

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    Rosneft Second-Quarter Profit Falls 34% as Oil Recovery Stalls

    Rosneft PJSC’s second-quarter profit decreased about 34 percent, coming in better than analysts estimated, even as a recovery in oil prices sputtered out at below last year’s price levels.

    Net income fell to 89 billion rubles ($1.4 billion) in the second quarter from 134 billion rubles a year earlier, according to the Moscow-based company. That was higher than the 83 billion-ruble average estimate of nine analysts surveyed by Bloomberg News. Revenue dropped 7.9 percent to 1.23 trillion rubles.

    A rout in commodities prices has Russia facing its second year of recession. The government is considering selling nearly 20 percent of Rosneft, the nation’s biggest company, as early as this year to help fill a gap in its budget. State finances have borne the brunt of oil’s crash. The companies themselves have been sheltered by a progressive tax system.

    Earnings before interest, taxes, depreciation and amortization were 348 billion rubles, according to the statement. That compared with an analyst estimate of 307 billion rubles.

    Free cash flow came in at $1.3 billion, while Sberbank CIB estimated just below $1 billion in an Aug. 9 note. Net debt fell to $23.4 billion from $23.9 billion at the end of the first quarter.

    Rosneft is targeting higher spending this year as higher oil prices boosted the bottom line of the Russian state-owned oil company in the second quarter.
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    Total Lays Off 70 percent Of Its Russian Workforce

    The Russian edition of Forbes Magazine is reporting that French Oil giant Total has laid off 70 percent of its Russian workforce through its office in Moscow.

    The dismissed staff members are said to have two months’ salary in compensation. Russian media reports indicate that 200 out of 600 employees were laid off, and the balance were transferred to the state owned oil company Zarubezhneft.

    Earlier in August, the company transferred 20 percent of its Kharyaga oilfield production-sharing agreement and operator’s functions to Zarubezhneft. As far as the reason behind the transfer, Total CEO Patrick Pouyanne stated: “Amid low crude prices we need optimize our assets as well as put a priority on spending management.” Pouyanne said that an experienced Russian company would be able to establish working relationships with contractors in the area.

    Among the reported reasons for the move by Total was a withdrawal from the Kharyaga project and sanctions from the west that would prohibit Total from delivering equipment to the project.

    The Russian edition of Forbes, citing an unnamed employee, said that Total had planned to attract technology from America and Europe to the project, but that sanctions blocked the plans. Total had been the biggest foreign investor in Russian oil prior to selling its stake in the Kharyaga project. The project itself aims to develop a pair of oilfields in the Nenets Autonomous region, which produced 1.5 million tons of crude in 2014.

    In related news, while Total is in the process of pulling out of the Kharyaga project, Russian oil company Rosneft said last week that its overall hydrocarbon production for the second quarter of 2016 was up due to that country’s drilling boom. Oil production for the second quarter was at 4.1 million barrels per day, which is 0.5 increase from the prior period.
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    Libyan Forces Under Haftar Move Closer to Zueitina Oil Terminal

    Libyan forces loyal to eastern-based military commander Khalifa Haftar have entered Zueitina and established a presence about 10 kilometers (6 miles) from the city’s oil terminal.

    Photos on local media websites showed a small number of Haftar’s Libyan National Army troops arriving to cheers. The port is under force majeure and is controlled by the Petroleum Forces Guards linked to the United Nations-backed unity government, or GNA, in Tripoli.

    Haftar spokesman Ahmed Mismari said in a news conference on Aug. 11 that his force wasn’t planning to capture the port and only wanted to protect Libya’s wealth. He couldn’t be reached on Monday to explain why LNA troops had moved from positions they held over the weekend, something Mismari had earlier ruled out.

    Nearly nine months after the unity government was formed in Tunis and four months since Prime Minister Fayez al Serraj arrived in Tripoli, Libya remains divided. In June, UN envoy Martin Kobler told the Security Council that a buildup of armed forces in the so-called oil crescent raised the possibility of conflict between groups that had gathered there to confront Islamic State.

    Six Western countries -- Germany, Spain, the U.S., France, Italy and the U.K. -- on Aug. 8 called for all parties to avoid any damage to oil infrastructure at Zueitina.

    Oil Slump

    Libya’s oil output has dropped 85 percent as factions fought for control of natural resources during the five years since the ouster of Muammar Qaddafi. As a result foreign-currency reserves have plunged, deficits widened and now worsening living conditions are causing unrest.

    Zeid Ragas, an independent analyst based in Benghazi, said any attempt by Haftar to take Zueitina port would be self-destructive.

    “The move was made by Haftar to widen his control on the ground and overcome achievements made by the GNA across the country," he said. “But with warnings by the international community and tribes in the area, any action is going to be suicidal."
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    Cheniere files for permit to begin commissioning of Sabine Pass LNG Train 3

    Cheniere files for permit to begin commissioning of Sabine Pass LNG Train 3

    The Houston-based Cheniere Energy filed a request with the United States Federal Energy Regulatory Commission to introduce fuel gas and begin commissioning activities for Train 3 at the Sabine Pass LNG terminal.

    According to the filing, the company requested the approval to introduce gas to Train 3 to be granted no later than August 19.
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    Atlantic Coast Pipeline Makes Progress, FERC Timing Announced

    More good news for Dominion’s $5 billion, 594-mile Atlantic Coast Pipeline–a natural gas pipeline that will stretch from West Virginia through Virginia and into North Carolina.

    In March MDN reported Dominion has agreements for 96% of the capacity along the 1.5 billion cubic feet per day pipeline. Not only that, but 90% of the landowners along the pipeline’s proposed route have granted Dominion survey access and many of them have signed easements allowing Dominion to build the pipeline across their land.

    The new news is that the Federal Energy Regulatory Commission (FERC) has set June 30, 2017 as the date by which the agency will issue their final environmental impact statement for the project.
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    Chesapeake arranges $1 billion loan to buy back senior notes

    Chesapeake Energy Corp, the second-largest U.S. natural gas producer, said on Monday that it had arranged a $1 billion 5-year term loan that it would use to buy back senior notes due between 2017 and 2038.

    The company, whose total debt stood at about $8.68 billion as of June 30, said it had commenced tender offers to buy back $500 million of convertible senior notes due 2037 and 2038.

    The company said it also commenced tender offers to buy back another $500 million of senior notes due between 2017 and 2023.

    Chesapeake said Goldman Sachs Bank USA, Citigroup Global Markets Inc and MUFG helped arrange the term loan.

    The company last week announced the sale of its Barnett shale acreage in Texas and said it renegotiated an expensive pipeline contract, steps estimated to save it more than $1.9 billion in future liabilities.
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    Precious Metals

    Soros and Jana reduce Gold holdings

    Soros Fund Management slashes gold shares in second quarter -13F

    Aug 15 Soros Fund Management LLC sharply cut its shares in SPDR Gold Trust and Barrick Gold Corp in the second quarter of 2016, 13F-HR filings with the U.S. Securities and Exchange Commission showed on Monday.

    The fund reduced its holdings in SPDR Gold Trust, the world's biggest gold exchange-traded fund, to 240,000 shares worth $30.4 million, from 1.05 million shares in the first quarter.

    It cut its shares in Barrick Gold Corp to 1.07 million shares worth $22.9 million, from 19.4 million shares in the first three months of 2016, the filing showed.

    Jana exits gold in second quarter as price rises to two-year high

    Gold bars are seen at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna, Austria, March 18, 2016. REUTERS/Leonhard Foeger

    Jana Partners dissolved its share stake in the world's biggest gold exchange-traded fund (ETF) in the second quarter of 2016 as bullion prices rose to two-year highs, U.S. Securities and Exchange Commission filings showed on Monday.

    The move came after Jana Partners, led by activist investor Barry Rosenstein, returned to gold in the first quarter along with other investors as spot gold prices saw their best quarterly performance in nearly three decades.

    In the second quarter, Jana Partners dissolved the 50,000 shares of SPDR Gold Trust, the world's biggest gold ETF, that it bought in the first quarter when they were valued at $5.89 million.

    Inflows into SPDR increased by 16 percent to a three-year high in the second quarter.

    Higher gold prices typically attract investment money to bullion, often seen as a hedge against inflation, and spot prices rose around 7 percent in the second quarter to $1,358.20 an ounce, extending on the 16 percent gains of the first quarter.

    It was a choppy quarter, however, with prices down in May but up again in June, when the U.K. voted to leave the European Union.

    "Gold had rallied quite significantly by that point of time so you had people questioning their entry point," said Steven Dunn, executive director, head of distribution for ETF Securities (US).

    Jana may have used the opportunity to take profits, Dunn said.

    Meanwhile, inflows of the eight gold-back ETFs followed by Reuters rose to the highest in nearly three years.
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    Base Metals

    Chile’s Codelco may slash copper output as it further cuts costs to the bone

    Chile’s Codelco, the world's top copper miner, may soon change its focus from cost reductions to output cuts, as the state-owned miner faces what its chief executive called the “worst crisis ever” since created in 1976.

    Announcing fresh cost-cutting measures to save $242 million this year, CEO Nelson Pizarro said last week (in Spanish) that slumping copper prices, high debt, rising costs and lower productivity have brought Codelco to “an extreme” situation.

    Among the urgent actions proposed by Pizarro, who not long ago said he would rather rein in costs than curb output to navigate the slump in copper prices, there is a further $2.5 billion-cut to the state-owned miner’s multi-billion investment plan.

    The world’s top copper miner reducing investment by a further $2.5 billion.

    The figure, though significant, is minor when taken in the context of Codelco’s ambitious investment plan, originally pegged at $25 billion (now sitting at $18bn), aimed at upgrading its aging mines and dealing with dwindling ore grades.

    While the board has yet to make a decision on the recommended investment cut, sources familiar with the matter told a resolution is likely to be announced after the board meeting scheduled for August 25.

    Output impacts

    Further slashing investment will severely impact Codelco’s production targets, once tallied at 2.5 million tonnes by 2025, but reduced last year to 2 million tonnes by 2020.

    According to’s sources, the company may just decide to keep its current production of 1.7 million tonnes as target, though “scaling down to 1.5 million or lower has not been ruled out just yet.”

    What is clear is that Codelco plans to cut a minimum of $500 million a year, to save a total of $2 billion by 2020. It also expects to increase productivity by 18% at the end of 2018 and 20% by the end of the decade.

    Chile’s government has injected $600 million of capital into the copper giant, which hands over all its profits to the state and has received only 10% of its surplus over the past decade. In comparison, private copper miners reinvest an average of about 40% of their profits.

    The miner’s output amounts to around a tenth of global supply and it has been one of the main forces behind Chile’s transition from one of Latin America’s poorest countries to one of the richest over the past 40 years.

    The red metal climbed just above one-month lows on Monday as slowing economic activity in top consumer China highlighted weak demand growth prospects, with softer US dollar providing some support.

    Benchmark copper on the London Metal Exchange traded at an unchanged $4,761 tonnes in official rings. On Friday, the industrial metal hit $4,750.50 a tonne, its lowest since July 12.

    Attached Files
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    Congo copper deal with China may draw $2bn of investment

    Gecamines, the Democratic Republic of Congo’s state-owned miningcompany, said China Nonferrous Metal Mining Group may invest as much as $2-billion to develop its most prospective copper asset.

    The Congolese miner in June described the agreement, through which CNMC will finance, build and operate acopper-processing facility at the Deziwa concession before transferring full ownership back to the state-owned miner, as a “new type of partnership” designed to increase revenue for the state, but has yet to provide full details of the arrangement.

    “It’s not a partnership, it’s a financing agreement, a loan to be reimbursed,” Kandolo Mafuta, Gecamines’ director of partnerships, told a mining conference Aug. 11 in the capital,Kinshasa. “Total investment could be $2-billion,” he said in an interview at the meeting.

    In June, Gecamines said that CNMC would finance theconstruction of the plant with an initial capacity for 80 000 metric tons of copper a year, in return for a 51% stake in theproject. CNMC will then be reimbursed through an off-take agreement over a fixed period that had not yet been agreed before full ownership is transferred back, Gecamines said at the time. A decision on a second phase of the project, which would increase output to 200 000 tons a year, would be taken at a later date, the company said.

    Repaying Investment

    Kandolo said he could still not confirm how long it may take to repay the investment, or when Gecamines would retake full ownership of the project.

    Gecamines, which currently has $1.58-billion of debt, borrowed $196-million to acquire Deziwa in January 2013, stating that it would provide the reserves needed to reintroduce the company as a major producer. The company produced 18,826 tons of copper last year, compared with peak output of 500 000 in the 1980s. It says Deziwa has the potential to produce five-million tons of copper, placing it among Congo’s biggest metal deposits.

    Local advocacy groups including Patriotes Katangais Aile Radicale have questioned Gecamines’ plan to now give CNMC a 51% share in its “flagship” project, even on a build-operate-transfer basis, and called for more information about the arrangement.

    The Atlanta-based Carter Center and London-headquartered Global Witness have also called on Gecamines to release details of the deal and to publish an initial agreement signed with CNMC in January, in line with Congolese state requirements.

    The company says that talks are continuing and that a January accord with CNMC was designed only to frame negotiations and doesn’t represent a binding contract that needs to published.
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    Antofagasta's heavy cost cuts lift earnings to counter lower copper prices

    Although first-half revenue was lower for Antofagasta, the Chilean copper mining colossus improved earnings and kept its dividend flat thanks to some heavy cost cutting.

    Revenues of $1.45bn in the six months to 30 June were down 18.5% compared to the last year's due to lower copper prices and production levels, which are expected to be weighted to the second half and towards the lower end of January's guidance.

    Nevertheless, management slashed $124m of operating costs, almost a quarter of the total, and were rewarded by earnings before interest, tax, depreciation and amortisation edging 2.3% higher to $571.6m.

    Chief executive Iván Arriagada said: "Continued management actions to reduce costs and preserve cash contributed to our EBITDA margin strengthening to 39.5%, from 26.2% in the full year 2015. While reducing costs in absolute terms is important we are focused on achieving improved efficiencies in a sustainable manner to ensure long-term shareholder value."

    Operating profit fell 3.4% to $293.8m, while earnings per share slipped 3.3% to 8.9 cents.

    Arriagada highlighted the resolution of the two outstanding court cases concerning Los Pelambres' Mauro tailings dam, with an agreement reached with the Caimanes community in April. Although an appeal is possible, he said it was unlikely to be accepted.

    He said the board remained "cautious in our outlook and remain conservative in our approach to managing capital" given the current economic uncertainty.

    Capital expenditure of $385.4m was $276.9m lower than in the first half of 2015 and for the full year is expected to be lower than original guidance.

    Group copper production for the year is expected to be at the lower end of the 710-740,000 tonnes guided in January.

    For the full year unit costs are expected to be $0.05/lb lower with cash costs before by-product credits of $1.60/lb and net cash costs of $1.30/lb.
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    Protesters in Peru block key road to Las Bambas copper mine

    Residents of Andean communities in Peru have blocked a key road to MMG's Las Bambas copper mine for the past week, forcing the Chinese-owned company to use an alternate route, the country's ombudsman's office said on Monday.

    The residents say the road passes through their lands and want the company to pay them for using it, said Artemio Solar, the head of the ombudsman's office in the region of Apurimac where the mine is located.

    Las Bambas spokesperson Domingo Drago confirmed the company was using an alternate route but said it had not affected its shipments of copper concentrates.

    Three local residents protesting Las Bambas were killed in clashes with police in September last year when the mine was still being built.

    Peru is on track to become the world's second biggest copperproducer this year because of rising production from Las Bambas and other new copper mines that has been driving economic growth.

    The mine, which began production late last year, produced about 32 900 t of copper in June.
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    Cash-strapped Nautilus to lay-off workers, cancel contracts for delayed Solwara 1

    Despite having $51.3-million in its coffers as at the end of June, marine miningpioneer Nautilus Minerals on Monday announced that it would implement several measures aimed at preserving the company’s capital position while it sought to secure further project financing.

    The TSX-listed company advised that following a review of all aspects of its business, it was reducing the workforce, terminating contracts for the construction of any seafloor production equipment that was in the early stages of development and that it would not enter into any newconstruction contracts until it could source additional funding.

    The company had previously planned for the constructionand development of the entire seafloor production system for initial deployment and testing operations at the Solwara 1project, offshore Papua New Guinea (PNG), to be completed by first quarter of 2018, based on the company's projecttimetable and subject to securing additional project funding.

    However, Nautilus had thus far been unsuccessful to secure the required money, resulting in an indefinite delay of production.

    Nautilus advised that the company and its operating subsidiaries was exploring alternatives for securing immediate bridge financing to facilitate the time required to secure the “significant additional project funding” that is needed and/or to explore alternative transactions aimed at maximising shareholder value. There could be no assurances that the company would be able to obtain the necessary bridge financing on acceptable terms or at all, it advised.

    The total capital cost for the system to deliver dewatered ore on board barges to the Port of Rabaul, including a 17.5% contingency, was estimated at $383-million. The operating cost, excluding contingency, was estimated at $237 000/d, or about $64/t of mined ore, transported to the port based on a production rate of 1.35-million tons a year. With a 10% contingency, these operating costs totalled $261 000/d or about $70/t.

    Nautilus had formed a joint venture (JV) company with PNG’s nominee, Eda Kopa (Solwara), in December 2014 to mine high-grade polymetallic seafloor massive sulphide deposits. Nautilus held an 85% shareholding and Eda Kopa 15%.

    The JV had taken delivery of the three main seafloor production tools (SPTs) from British manufacturer Soil Machine Dynamics’ (SMD’s) facility, in Newcastle upon Tyne. They had been moved to Oman, where they were scheduled to undergo extensive wet testing at the Port of Duqm.

    Nautilus planned to use the SPTs to cut and extract high-grade copper and gold from the seafloor at the Solwara 1project site in the Bismarck Sea.

    The proposed project had been met with fierce opposition from environmentalists arguing that the impact of deep seamining on the various levels of marine ecosystems were not fully understood.
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    UBS makes a bugle call for nickel bulls on crackdown, demand

    Rising demand, deficits and a crackdown in the Philippines are combining to make nickel one of its most-preferred commodities, according to UBS Group, which said the full impact of mine shutdowns in the Southeast Asia nation may be felt only next year when exports fail to ramp up as usual.

    The government’s audit of standards in the mining sector is a front-of-mind risk that’s already shut down about 2% of world supply, analysts including Daniel Morgan wrote in a note. Ore shipments from the top supplier could fall to 314 000 metric tons next year from 410 000 tons last year, it said.

    Nickel has been the best-performing base metal in the second half, rallying to its highest level in a year August 10, on speculation that the Philippine crackdown led by PresidentRodrigo Duterte will crimp supplies. Prices have also been supported as rising stainless-steel output boosts consumption, the UBS analysts said in the August 12 report.

    As Philippine supply usually drops from July to January each year, “the real impact may not be felt until early 2017, when exports fail to ramp up as they normally would,” the analysts said. “Our price forecast is a bullish trajectory and nickel remains one of our most-preferred commodity exposures.”

    President Duterte has pledged to shut any mines that don’t comply with international standards, telling miners that “ we will survive as a nation without you” if they are closed. ThePhilippines accounts for about a fifth of world nickel supply, and became China’s main source of ore after Indonesiabanned shipments of unprocessed raw materials at the start of 2014.

    Signs of the crackdown’s impact are mounting. DMCI Miningsaid on Monday that it’s laying off hundreds of seasonal workers from operating companies in Palawan and Zambalesprovinces that have been suspended by the government. The company said it’s cooperating fully with authorities to facilitate the audit and lift the suspension order.

    In China, production of stainless steel, used in kitchen equipment and chemical plants, expanded 7% to 11.6-million tons in the first half, according to Beijing Antaike Information Development Co. Stainless-steel output accounts for about 65% of nickel first use, according to UBS.
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    Steel, Iron Ore and Coal

    Hebei clears coal, steel sectors from several cities

    Hebei province in northern China moves to cut overcapacity in its coal and steel sectors, and has ordered these industries to basically withdraw from several of its cities, the Hebei Daily reported on August 14, citing an internal government meeting held two days earlier.

    Zhangjiakou, Chengde, Qinhuangdao and Baoding will speed up pace to become "cities without coal mines," according to the report, citing a plan drawn up by the Hebei Development and Reform Commission. No time frame was given.

    Local governments are making plans for the total relocation of the steel sector from the cities of Zhangjiakou, Baoding and Langfang.

    In total, five cities in Hebei province will bid farewell to coal mines or steel mills, or both.

    "Most of the steel mills in these cities are smaller, privately held companies. The measures will clear the cities of less important industries," said Wang Guoqing, research director at Beijing Lange Steel Information Research Center.

    Wang noted that Zhangjiakou, Baoding and Langfang are close to Beijing, and closing steel mills will bring environmental benefits to the capital, which will hold the 2022 Winter Olympics with Zhangjiakou as a partner city.

    Besides, the province pledged to retain only 40 key coal mines or so owned by Jizhong Energy and Kailuan Group in Tangshan, Handan and Xingtai cities by 2020, with capacity combined at 50 million tonnes per annum or so.

    As part of the nationwide task of cutting China's excess capacity, Hebei province proposed to cut 17.26 million tonnes of iron-making capacity and 14.22 million tonnes of steel-making capacity before end-2016. In addition, it will close 50 coal mines with production capacity of 13.09 million tons.

    Since the de-capacity campaign started in 2013 to the end of 2015, Hebei has trimmed 33.91 million tonnes of iron-making capacity and 41.06 million tonnes of steel-making capacity, the report said.
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    Coal's rally is at risk from lower China imports in August

    If you believe that thermal coal's rally this year has been largely on the back of rising Chinese imports, it follows that any sign of moderation in demand in the world's biggest buyer would raise a red flag of caution.

    That banner may be in the process of being hoisted, with shipping data suggesting August imports of the fuel used mainly for power generation may be the lowest for six months.

    Ship-tracking data compiled by Thomson Reuters Commodity Research and Forecasts estimate that 13.07 million tonnes of coal will arrive in China in August, down substantially from the 18.92 million tonnes in July, which was the most so far this year.

    It's worth bearing in mind that the August figure will likely rise somewhat over the next few days, as ships leaving Indonesia will still have time to reach China by the end of the month.

    It's possible that some vessels could still depart from Australian ports and make China by the end of August, but they would have to leave by today and steam faster than normal, as the usual voyage time from Newcastle port, the world's largest export harbor for thermal coal, to southern China is around 18 days.

    It's also worth noting that the Thomson Reuters data doesn't exactly match up with Chinese customs data, largely because the Thomson Reuters data is for seaborne coal imports and therefore excludes rail and truck cargoes from countries such as Mongolia and North Korea.

    But even allowing for some more cargoes to be added into the August arrivals, it does appear likely that China's seaborne imports will drop substantially in August, possibly by as much as 5 million tonnes from July's figure.

    If this is the case, it will hardly be positive for the main Asian coal price benchmarks, which have enjoyed strong gains this year.

    The Newcastle Weekly Index, the main thermal coal marker, has rallied almost 42 percent since its year-low in late January to end last week at $67.13 a ton, while ICE Newcastle futures have surged 41 percent over the same period.

    The futures curve for the ICE contracts <0#NCFM:> also suggest that Newcastle coal won't suffer steep declines, with the December contract at $63.15 a ton and August 2017 at $64.70, both only slightly below the close of $68.30 on Aug. 12.


    However, much will depend on whether China's imports of coal continue to surprise to the upside, as they have done so far this year.

    Customs data show total coal imports of 129.2 million tonnes in the first seven months of the year, a gain of 6.7 percent over the same period last year.

    Thomson Reuters Commodity Research and Forecasts have pegged seaborne imports at 123.6 million tonnes in the year to end August, up 3.2 percent from the 119.8 million recorded for the same period in 2015.

    This rate of growth, while still positive, is down from 5.2-percent growth in the first seven months of this year compared to the same period in 2015.

    Although too early to call a definitive trend, if final numbers do confirm weakness in China's coal imports in August, it will call into question the sustainability of the rally in coal prices.

    India, the world's second-largest coal importer, is also unlikely to have increased imports in August, with vessel-tracking data forecasting the arrival of 13.96 million tonnes in August, down from 17.14 million in July.

    Again, the August figure may rise slightly in coming days as both cargoes leaving from Indonesia and South Africa could still make it to the South Asian nation by the end of the month if they sail by the end of this week.

    But even if a surge of cargoes does materialize in the next few days, it's still unlikely that India will record an increase in coal imports in August from July.

    India's coal imports in the first eight months of the year are also likely to be lower than for the same period in 2015, with Thomson Reuters data showing 134 million tonnes arriving by the end of August, down 3.8 percent from the 139.3 million recorded in the January to August period last year.

    What the market will have to decide is how well a 40-percent rally in coal prices sits with a much more modest, single-figure gain in Chinese imports and a decline in Indian purchases.
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    Tashan Coal Mine adopts leaner approach

    Tashan Coal Mine, the world's largest single-entry underground mine, has cut its production capacity by 15 percent over the last four months, in a key feature of the supply-side reform in China's coal industry.

    "The company has been strictly following the 276-working-day limit and the production safety notice issued by the central government and the provincial administration," said Zhang Meiping, director of Tashan Coal Mine, located 15 kilometers to the southwest of Datong, Shanxi province.

    Tashan Coal Mine, which became operational in 2006, has an annual designed capacity of 15 million tons. It is owned by Shanxi Datong Coal Mine Group, the third-largest mining company in China.

    China is the world's largest coal producer and consumer, but the coal industry has long been plagued by overcapacity and felt the pinch even more in the past two years as the economy cooled and demand fell.

    According to the earnings of 2015, the liabilities of seven State-owned mine companies in Shanxi province were 1.1 trillion yuan ($165 billion), a 10 percent increase year-on-year.

    Among those, Datong Coal Mine Group, the largest mining company in the province, has the most liabilities, up to 219 billion yuan.

    In early April, the central government stepped up its efforts to reduce both oversupply and pollution in major cities by reducing the number of working days for its coal miners to 276 a year from 330.

    Since then, Tashan Coal Mine has reduced its annual designed capacity by 15 percent to 12.6 million tons.

    Shi Li, a manager at Tashan Coal Mine, said the biggest benefit from the new regulation was the great improvement in work safety, since workers can rest efficiently and equipment can be repaired properly, Shi said.

    "After the reduction of output, we changed the manufacturing technology, which helps reduce manufacturing costs and improve working efficiency," he added.

    In order to upgrade its regional coal industrial chains and echo the national development priorities, Shanxi province announced plans to reduce its coal overcapacity by 20 million tons by the end of this year, and the reduction amount is expected to reach 100 million tons by 2020.

    Hu Wansheng, deputy director of the province's coal industry department said technological innovation on non-pollution mining and cleaning, low-carbon, and efficient use of coal is the only way forward for the coal industry.
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    Liaoning to cut coal capacity of 30.4 Mtpa by 2020

    Liaoning province in northeastern China planned to cut coal capacity of 30.4 million tonnes per annum (Mtpa) through closure of 140 coal mines by 2020, in response to the government-led supply-side structural reform to tackle the surplus capacity, Liaoning Daily reported, citing a provincial meeting held on August 15.

    A total of 13.27 Mtpa of coal capacity in the province will be shut by the end of this year, and 83 coal mines will be closes by 2018, with capacity combined at 27.31 Mtpa, according to the plan.

    It will be painful for the province to put it into actual practice, as lots of workers depend on the industry for livelihood.

    Data showed that the province has 259 coal companies that run 289 registered mines with total production capacity of 75.42 Mtpa.

    The priority of the capacity cuts falls on coal producers owned by provincial government — Fuxin Mining, Liaoning Tiefa Energy and Shenyang Coal Industry Group. The three producers have cleared coal capacity of 3.5 Mtpa by end-June this year, 29.2% of their 2016 target of 12 Mtpa.

    Meanwhile, Liaoning pledged to cut crude steel capacity of 6.02 Mtpa this year, compared with the current capacity of 86 Mtpa.

    The de-capacity task in steel industry will mainly involve three cities in the province—Anshan, Liaoyang and Chaoyang cities.
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    Iron-ore seen back at $40 by Morgan Stanley as seasons shift

    Iron-ore’s 2016 rally may be about to face a challenge from the changing of the seasons. Morgan Stanley has forecast that prices may tumble back to $40 a metric ton this half as the approach of winter in Chinatypically blunts steel demand and output.

    “Our short-term forecast still features a September-October seasonal pullback as China’s steel demand and production rate abates,” analysts including Joel Crane wrote in a report. Over the past 10 years, iron-ore prices have on average dropped in September, October and November, according to the report.

    iron-ore has soared in 2016, snapping three years of declines, as stimulus and a credit-fueled property boom in China lifted demand. The upsurge confounded expectations for further losses, and prompted banks including Morgan Stanley andGoldman Sachs Group Inc. to revise forecasts higher earlier this year. While China’s steel production has been robust so far in 2016, demand may ease as the summer ends, according to Morgan Stanley’s note.

    The “season is mature now; the reliable September-to-October pullback is nigh,” Crane wrote, adding that rising mine production in Australia and Brazil may also help to blunt prices. “Beyond the seasonal pullback, ore prices should also become increasingly capped in the second half by ongoing supply growth.”

    Record Rate

    The raw material with 62% content delivered to Qingdao has risen 38% in 2016 to $60.22 a dry ton on Monday, according to Metal Bulletin Ltd. The gains have come as steel prices surged and daily rates of output in China hit a record, while shipments of steel products held near an all-time high. Futures in Singapore and Dalian gained on Tuesday.

    Construction in China typically slows in the colder, winter months. Asia’s top economy accounts for about half of globalsteel production, and its mills are the world’s largest buyers of seaborne ore. Winter constraints on Asia’s trade and deployment of steel are profound, according to Morgan Stanley.

    The bank maintained its forecasts for the raw material to average $45 a ton this quarter and $35 in the final three months of 2016, with a base-case estimate of $40 for the second half. So far this year, the Metal Bulletin benchmark has averaged about $53 a ton.

    Morgan Stanley flagged prospects for increased output fromBrazil’s Vale SA, which is expected to start output from its S11D project before the year-end. There’s also new supply from Australian billionaire Gina Rinehart’s Roy Hillproject in the Pilbara, which is ramping up production this year.
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    EU to boost steel trade defences as imports surge

    The European Commission is expected to further strengthen its steel trade defences, possibly as early as October, industry leaders say, as a global trade war in the alloy intensifies and imports keep flooding into the bloc.

    The Commision has ramped up trade defences over the past year, slapping anti-dumping duties on products like reinforced bar, cold-rolled carbon steel and cold-rolled stainless steel, ranging between 18.4 and 25.3 percent for imports from China.

    Despite that, carbon steel imports in the year to May rose 21 percent, with China now representing 27 percent of total imports, while stainless steel imports rose 17 percent over the period, EU data shows.

    "The European Commission know they'll have to act because too many other agents of this planet are fencing off borders," Voestalpine Chief Executive Wolfgang Eder said in a conference call with reporters.

    Eder, also chairman of World Steel Association, expects to see more "efficient and effective" measures in place this autumn, saying that duties in the region of 20 to 30 percent would go some way to helping the industry.

    A European Commission spokesman declined to comment on future trade defences measures.

    China, which produces half the world's 1.6 billion tonnes of steel, has struggled to reduce its estimated 300 million tonne overcapacity, and rising prices have encouraged its firms to ramp up production for export.

    But Beijing denies its firms are dumping or selling steel at below fair value. It says global steel overcapacity is due to the collapse of demand after the 2008 financial crisis.

    Countries from Asia to the Americas disagree. The U.S., in the midst of an election year, has slapped duties of up to 450 percent on some Chinese steels.

    Still, industry representatives say they are not advocating U.S. style protectionism, but that the EU's renewed determination to protect steelmakers is encouraging.

    "A full-fledged war on steel is now ongoing with China," said an EU official familiar with the bloc's steel sector plans.

    The crunch point could come in October, when the EU might cut the time frame for imposing duties from nine to seven months, and water down or scrap the 'lesser duty rule', which severely limits tariff levels.

    "There's been a shift in understanding amongst EU members which we welcome, but we would call on them to do more to efficiently and effectively defend the industry," a spokesman for European steel association Eurofer said.

    The EU is scheduled to rule on preliminary anti-dumping duties on plate and hot rolled coil from China in November.

    Industry representatives expect a positive ruling, adding that besides the renewed EU drive to protect steelmakers, Britain's vote in June to leave the EU should free the bloc's hand.

    Britain was one of a small minority of countries that opposed duties due to concerns about potential retaliation from Beijing.

    "Following (Britain's) EU referendum, we see a very high potential for the EU to politically favour domestic steelmakers," Berenberg analyst Alessandro Abate said.

    The Commission has 37 anti-dumping and anti-subsidy measures in place for steel products, 15 of them concerning China.
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