Mark Latham Commodity Equity Intelligence Service

Friday 23 August 2019
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The investment by Tsingshan has been at the encouragement of the Indonesian government, which dislikes the export of unprocessed nickel ore, threatening to ban the business unless miners of the material invest in manufacturing facilities.

Too Good For Its Own Sake

The Tsinghsan plant in the Morowali industrial park has proved to be almost too good for its own sake, turning out low-cost stainless steel, some of which made its way back to China, under-cutting rivals who had stayed at home.

In a case that academics might find useful into the inefficiencies of erecting high tariff walls, Tsingshan's rivals convinced the Chinese government that the stainless steel from Indonesia, even though it is being produced by another Chinese company, is being "dumped" in China—with dumping defined as selling a product in an export market for less it is sold where it is produced.

The net result is that Tsingshan's stainless steel, when landed in its home country, is now being whacked with a 20.2% tariff designed to level the playing field with locally made products, but it's also forcing up the costs of stainless steel users.

Tsingshan's Technical Excellence

Exactly how Tsingshan has been able to set a new low-cost benchmark is not fullyunderstood by outside observers, but the company does have a reputation for technical excellence and innovation.

The irony is that if Tsingshan has found a better and cheaper way to make stainless steel it is now being penalized for lowering the costs of its customers, whether in China or elsewhere.

A worker assembles stainless steel sunglass frames at the Randolph Engineering facility in Randolph, Massachusetts, U.S., on Monday, June 29, 2015. The Institute for Supply Management (ISM) is scheduled to release U.S. manufacturing figures on July


Other countries are following the Chinese lead in whacking Tsingshan's stainless steel with tariffs, including the U.S. which has a 25% tariff in place.

Europe is examining the stainless steel market as Tsingshan tries to replace the loss of its home market, and the locking of the U.S. door.

Wood Mackenzie, a British-based consulting firm, last month described the impact of Tsingshan's Indonesia stainless steel plant as sending shock waves around the world.

Warned Off Or Welcomed

"Competitively priced exports of Indonesian stainless product have provoked varying reactions from stainless steel makers in the destination countries," Wood Mackenzie said.

"China has warned off Tsingshan with anti-dumping duties. Taiwan has willingly taken Indonesian stainless instead of melting its own. South Korea is changing its mix of stainless grades and fighting a proposal for a new Tsingshan cold-rolling mill. India is partnering with Tsingshan in a new cold-rolling venture that is about to start production and Europe is worried that more Indonesian stainless might be coming its way," Wood Mackenzie said.

Tariff Lessons

The first take-away lesson from the Tsingshan experience with its Indonesian stainless steel mill is that being the world's best doesn't necessarily make you popular at home when there's a trade war raging.

The second lesson is that tariffs invariably lead to inefficiency and higher costs for everyone.

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China slams 'repeat offender' Minmetals for more pollution violations

Central government inspectors slammed the state-owned China Minmetals Corp Ltd for the second time in a week on Thursday, describing one of its steelmaking units as a “repeat offender” when it comes to violating environmental regulations.

According to a notice posted on the environment ministry’s official Wechat account, Minmetals Yingkou Medium-Sized Plate Co Ltd in the northeastern province of Liaoning had failed to replace its outdated blast furnaces and production lines, and had not properly dealt with pollution discharges.

The subsidiary, which has an annual steel production capacity of 6 million tonnes, had also fraudulently applied for special “green factory” status from the local government, even though it had been fined a total of 23.3 million yuan ($3.3 million) for violations from 2014 to 2018, the notice said.

A spokesman for Minmetals told Reuters that the company would “further strengthen” the management of the Yingkou subsidiary and “conscientiously rectify” the problems identified during the surprise inspection. It will also conduct an investigation to determine who was responsible for the lapses.

Minmetals is one of two state-owned enterprises now subject to a comprehensive central government audit into environmental compliance, along with the China National Chemical Corp

The audits were first launched in 2015 to look at the compliance records of local governments. Inspection teams are led by retired senior Communist Party officials and they have the authority to visit any site at any time and summon any official to explain their conduct.

As a result of the inspections, Minmetals said last week that it would suspend operations at a rare earth subsidiary that had also failed to rectify a series of environmental offences.

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US Manufacturing PMI Unexpectedly Crashes Into Contraction With Lowest Print In 10 Years

With all eyes focused squarely on Germany's dismal PMI prints, which have been in contraction for over half a year, the investing public forgot that the US economy is similarly slowing down. And moments ago it got a jarring reminder when Markit reported that the US manufacturing PMI unexpectedly tumbled into contraction territory, down from 50.4 last month, and badly missing expectations of a 50.5 rebound. This was the first print below the 50.0 expansion threshold for the first time since September 2009.

But wait, there's more, because whereas until now the US services segment appeared immune to the slowdown in US manufacturing, in August the service PMI tumbled to 50.9, down from 53.0 in July, matching the lowest print in at least 3 years, and well below the 52.8 consensus expectation.  According to Markit, subdued demand conditions continued to act as a brake on growth, with the latest rise in new work the slowest since March 2016. This contributed to a decline in backlogs of work for the first time in 2019 to date.

Meanwhile, business expectations among service providers for the next 12 months eased in August and were the lowest since this index began nearly a decade ago.

As the report further notes, the decline in the headline PMI mainly reflected a much weaker contribution from new orders, which offset a stabilization in employment and fractionally faster output growth.

This however was offset by new business received by manufacturing companies, which fell for the second time in the past four months during August. Although only marginal, the latest downturn in order books was the sharpest for exactly 10 years. The data also signalled the fastest reduction in export sales since August 2009.

Survey respondents indicated that a drop in sales often cited a soft patch across the automotive sector, alongside a headwind to manufacturing exports from weaker global economic conditions. Meanwhile, manufacturing companies continued to trim their inventory levels in August, which was mainly linked to concerns about the demand outlook. Pre-production inventories fell for the fourth month running, while stocks of finished goods decreased to the greatest extent since June 2014 fastest reduction in export sales since August 2009.

Survey respondents indicated that a drop in sales often cited a soft patch across the automotive sector, alongside a headwind to manufacturing exports from weaker global economic conditions.

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Asian petrochemical profits slammed by trade war crossfire, oversupply

Profits from making petrochemicals in Asia have plunged to their lowest in months as the unrelenting trade conflict between Beijing and Washington stifles Chinese demand for chemicals and plastics just as waves of new production start to come on line.

The global output capacity for polyethylene, a key ingredient for plastics used in everything from piping to toys, is expected to exceed demand by 3 million tonnes by the end of 2020, compared to overcapacity of 545,000 tonnes in 2019, data from commodity consultancy Wood Mackenzie showed.

That comes as new production is set to crank up in China, South Korea and Malaysia, although the United States and the Middle East will account for more than half of the new volumes.

“In the next two years, the operating rates (of polyethylene units) will be impacted as the capacity additions are faster than the demand addition,” said U.S.-based Wood Mackenzie principal analyst Ashish Chitalia.

Though analysts say polyethylene profit margins are already at their narrowest in around seven years, ballooning supplies could drive them even lower - placing high-cost producers under critical pressure.

The spread between prices for polyethylene and feedstock naphtha gives an approximation of how much profit petrochemical makers can make.

Based on data from the Korea Petrochemical Industry Association (KPIA), the average spread between high-density polyethylene (HDPE) and naphtha feedstock costs in the second quarter was $421.34 a ton - the lowest quarterly average since 2012.

And the pressure is growing. The average spread for HDPE - used to make bottle caps, detergent tubs and piping - was down to $414 a ton in the week ended Aug. 16.

Meanwhile a plastic known as linear low density polyethylene (LLDPE), used in a host of products including food and non-food packaging, is similarly weak.

“The average LLDPE/naphtha spread for July was around $418 a ton and could fall below producer break-even levels of around $400 to $450 in 2020 due to long supplies,” said Tan Yi Ling, principal analyst of polyolefins at IHS Markit based in Singapore. In January the spread was about $542, Tan said.


The year-long, tit-for-tat trade dispute between Washington and Beijing has roiled financial markets and cast a long shadow over the global economy.

China exported 12 million tonnes of its plastic end-products worldwide in 2018, 3 million tonnes of which went to the United States, said Wood Mackenzie’s Chitalia.

But these plastics exports to the United States are now hit by tariffs, the analyst said, pushing some petrochemical companies to look for customers in new regions.

Shin Hak Cheol, chief executive of South Korea’s LG Chem (051910.KS), told reporters in July that South Korea’s top chemical maker plans to tap markets in areas such as Southeast Asia to offset easing demand from plastics makers in China.

“The trade dispute between the U.S and China is not expected to end in the short term,” he said.

“Additionally, South Korean petrochemical makers expanded their facilities five years ago during a peak time in the petrochemical cycle, and some of those increased supplies have hit the market and will keep coming to the market in 2020.”

In the petrochemicals trade it typically takes four to five years from initial investments to start-up of commercial operation.

Meanwhile, Malaysia’s state energy firm Petronas is expected to start up a 1.2 million tonnes-per-year ethylene facility in the south of the country later this year, looking to supply local markets.

“These new capacities illustrate the new paradigm confronting petchem (petrochemical) producers,” said Paul Hodges of The pH Report, part of consultancy firm International eChem. “Low-cost supply is no longer the key to success ... Sustainability is replacing globalization as the key driver for the industry.”

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Midstreamers Race To Expand Midland Basin Crude Oil Gathering Systems

Finally, after what seemed like a long period of crude oil pipeline takeaway constraints out of the Permian, significant new takeaway capacity is coming online this month. Just last week, Plains All American’s Cactus II pipeline from the Permian’s Midland Basin to the Corpus Christi area entered service. And on Monday, EPIC Midstream announced that it has begun interim crude service on its EPIC NGL Pipeline, which will move crude from the Permian’s Delaware and Midland basins — also to Corpus — until the company’s EPIC Crude Pipeline starts up in January 2020. With takeaway constraints alleviated, the focus on the crude-oil front now shifts to gathering system capacity, and it’s being added in spades. So much so that we’re writing two full Drill Down Reports (one on the Midland and one on the Delaware) to cover them in detail.  Today, we discuss highlights from the first of our new Drill Down Reports, which focuses on crude oil gathering systems in the fast-growing Midland Basin.

It’s a rare event to have two crude oil pipelines with a combined capacity of nearly 1 MMb/d — and serving the same general area — commence operation within a few days of each other. But that’s what’s been happening in August with the start-up of the 585-Mb/d Cactus II and the beginning of crude service on the 24-inch-diameter EPIC NGL Pipeline, which EPIC Midstream says will be able to move up to 400 Mb/d of oil to Corpus. Things will only get better on the Permian takeaway front soon after New Year’s Day, when the even larger (590-Mb/d) EPIC Crude Pipeline enters service and EPIC NGL transitions back to NGL service.

As we’ve blogged about often, Permian crude oil production growth continued through 2018 and 2019 to date despite pipeline takeaway constraints that sometimes resulted in big price discounts for crude at Midland vs. Cushing and the Gulf Coast. According to RBN’s new weekly report, Crude Oil Permian, the sum of Permian-area refinery demand and pipeline takeaway capacity at long last exceeds Permian production, which suggests that big price differentials are a thing of the past, at least for a while. And it may be a long while at that, since still more crude takeaway capacity is under development and expected to be added in 2020 and beyond, as is new export-dock capacity in Corpus Christi, Houston and other port cities.

Permian producers have been anticipating the end of takeaway constraints and preparing to ramp up their production in the Midland and Delaware basins — assuming prices for the region’s benchmark West Texas Intermediate (WTI) stay at reasonable levels — by working with midstream companies to develop new gathering pipelines, storage capacity and shuttle pipelines to transport increasing volumes of crude oil from the lease. In addition to providing reliable, cost-efficient delivery of oil from remote wells, these smaller-diameter gathering systems are designed to link producers and shippers to multiple takeaway pipelines at key West Texas hubs such as Orla, Wink, Crane and Midland. By offering this optionality — and with it, the ability to access destination markets in Cushing, Corpus, Houston and elsewhere — midstreamers with well-thought-out gathering systems enable those they serve to secure the highest-possible prices for their crude.

The focus of our newly issued Drill Down Report is crude oil gathering systems in the Midland Basin (the 39 counties to the right in Figure 1), the easternmost of the Permian’s three major regions — the others being the Central and Delaware basins (the last of which is in both West Texas and southeastern New Mexico, and which will be the focus of our next Drill Down Report).

Figure 1. Sub-Basins Within the Permian. Source: RBN (Click to Enlarge)

The Midland is where it all began in the Permian; it’s the site of the Santa Rita No. 1 well — generally viewed as the Permian’s first commercial well — which came online nearly a century ago in Reagan County, about 60 miles southeast of Midland. For decades a conventional play dotted by hundreds of vertically drilled wells, the Midland went into a long decline starting in the 1970s. However, producers in 2010 started to apply enhanced hydraulic fracturing and horizontal drilling there, and production started to rise.

Figure 2 shows historical and forecasted Permian production by sub-region (burnt orange yellow, brown and orange layers) from 2012 through 2024, as well as the price of WTI — the basin’s production economics are primarily driven by crude oil — over that same period. (The solid black line shows average monthly historical WTI prices, and the dashed black line shows RBN’s Base Price Scenario of $55/bbl WTI through 2024.) At the start of 2012, the Midland Basin accounted for 50% of total Permian crude production (558 Mb/d of the 1.2 MMb/d total), with the Delaware Basin (Texas plus New Mexico portions) accounting for 29% and the Central Basin 21%. By the start of 2019, Midland Basin production had more than tripled to 1.8 MMb/d (it has since increased to nearly 2 MMb/d), but its share of total Permian production (4.066 MMb/d) had declined to 44%, while the Delaware’s share had increased to 49% and the Central Basin’s had plummeted to only 7%.

Figure 2. Permian Crude Oil Production by Sub-Basin, 2012-24. Source: RBN (Click to Enlarge)

Under RBN’s Base Price Scenario (again, assuming the a WTI price of $55/bbl through 2024), production in the Midland Basin is seen increasing to nearly 2.9 MMb/d by the end of 2024, a gain of 60% from the start of 2019. Production in the Delaware Basin, in turn, is forecasted to rise to more than 3.9 MMb/d (a gain of 48%), and Central Basin production is seen rising to 322 Mb/d (a gain of 22%).

The vast majority of the 2 MMb/d of crude oil produced in the Midland Basin today courses through one of the area’s many gathering systems; generally speaking, the use of tanker trucks to move crude to downstream pipelines is limited to wells that are too remote, that produce too little crude to justify the investment in a gathering system, or that are new and have not yet been connected to a nearby system. Several types of entities are involved in developing crude oil gathering systems in the Midland, including producers themselves and midstream affiliates of producers. In other cases, producers have partnered with unaffiliated midstream companies to help them develop systems to meet their crude-gathering needs — and, often, the needs of producers with wells close by. And sometimes, individual midstream companies or joint ventures of two or more such firms have pursued the development of gathering systems in areas where drilling activity is intensifying — in these cases, the midstreamer or midstreamers often seek to line up an “anchor” producer to jump-start the project, then work to sign on additional producers in the same area.

The ownership of crude gathering systems and other midstream assets within the Permian has also evolved over time. In many instances, the systems have been expanded through a combination of organic growth and acquisitions, often with the involvement of new midstream companies backed by private equity. As some of these systems grew, established good relationships with producers, and increased their fee-based revenue streams, they became attractive targets for acquisition themselves.

The aim of our new Drill Down Report is to describe and discuss a representative sample of the Midland’s expanding gathering systems. These range from the new Beta Crude Connector system being co-developed by Concho Resources and Frontier Energy Services in Andrews, Martin and Midland counties (initial system of about 100 miles, half of which is already in operation) to Medallion Midstream’s 1,000-miles-plus gathering/header system between the Crane and Colorado City hubs (green lines in Figure 3).

Figure 3. Medallion’s Midland Crude Gathering/Header System. Sources: Medallion Midstream and RBN (Click to Enlarge)

Medallion’s network provides a perfect example of how sophisticated and well-connected these systems can become. The system, which entered service in 2014 with less than 100 miles of pipe, was at first developed to support the delivery of growing crude volumes from Laredo Petroleum wells to then-new Midland-area takeaway pipelines like Longhorn and BridgeTex. Over the next few years, as production in the Midland Basin ramped up, Medallion’s system was expanded as needed to serve shippers transporting oil from a number of other producers as well, including Apache Corp., Encana Corp. and Parsley Energy. The fee-for-service business model has remained the same: producers dedicate crude flows from specific acreage to shippers holding firm capacity on the system to multiple delivery points for multiyear periods, and Medallion transports their crude oil to whatever point on the system the producers (or shippers) choose.

In addition to its more than 1,000 miles of 4-to-16-inch-diameter pipeline, the Medallion system offers 1.35 MMbbl of storage capacity, and provides access to firm shippers serving 20 producers across the Midland Basin. (Flows on the system currently average about 400 Mb/d, or about 10% of total Permian crude oil production.) The mainlines within the system are bi-directional, which allows it to operate as an intra-basin header capable of moving crude to any number of points, including interconnections with multiple takeaway pipelines at the Crane, Midland and Colorado City hubs (yellow, blue and red dots, respectively). Important for a header system, wells in the Midland Basin produce crude oil that is relatively consistent in its API gravity (typically, 36 to 44 degrees) and other characteristics, such as sulfur content — in other words, a classic WTI product, and not a less desirable combination of light and superlight crudes.

Our new Drill Down Report will tell you what you need to know about Midland crude oil gathering systems — big and small — and also describe the takeaway pipelines to which those systems connect, as well as plans by the systems’ owners to expand their lines over time. Backstage Pass subscribers can access the new report on Midland Basin systems by clicking here. And there’s more to come. As we mentioned above, Part 2 of the report — due out in early September — will look at systems in the Delaware Basin.

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Russia confirms proposal to hike oil tax to offset Rosneft subsidies: Ifax

Russia’s Finance Ministry confirmed on Thursday it had proposed raising taxes for the oil industry to offset tax breaks offered to Rosneft and Gazprom Neft for developing the Priobskoye oil field, the Interfax news agency reported.

The tax breaks on the Priobskoye field will cost the budget 60 billion roubles ($914.60 million) a year, ministry official Alexei Sazonov was quoted as saying.

“We are looking for sources of compensation and raising the mineral extraction tax on associated gas is one of them. We have no choice,” he said.

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Asian refiner profits hammered by free-fall in fuel oil margins

Asian refining margins have tumbled more than 50% since mid-July on anticipation of plummeting demand for high sulfur fuel oil (HSFO) ahead of a shift to cleaner marine fuels next year.

Complex refining margins for a typical Singapore refinery, an Asian benchmark, had dropped to $4.31 a barrel by the close of markets on Thursday, down from $7.39 at the start of August and a near two-year high of $9.37 on July 11. DUB-SIN-REF

“Refining margins have been weighed down by bearish HSFO cracks over the past two weeks, with rampant sell-off and de-stocking of HSFO ahead of IMO 2020,” said Serena Huang, senior market analyst at oil analytics firm Vortexa.

Margins for HSFO, an industrial fuel primarily used in ship engines and power generators, have collapsed this month as the global shipping industry prepares for new International Maritime Organization (IMO) rules that start from January 2020.

The new regulations limit the sulfur content of fuels burned in ships to 0.5%, from 3.5% currently.

The slump in the overall Singapore refining margins marks a sharp reversal from the near two-year highs that were scaled in mid-July amid tightening fuel supplies brought on by widespread seasonal refinery maintenance.

But now output of gasoline, diesel and other fuels is surging as the maintenance turnaround season wraps up and new refineries in China, India and Malaysia crank up, hurting the processing margins, analysts said.

“Sluggish demand, alongside rampant refining capacity additions, have fueled rampant exports by (Chinese) refiners, and in turn dragged down prices and margins,” said Peter Lee, senior oil & gas analyst at Fitch Solutions.

China's high levels of fuel production and exports have weighed on Asian refiner margins - here

On the demand side, a protracted trade war between the world’s two largest economies, the United States and China, is denting global economic growth and the outlook for the consumption of transport fuels.

“The overall very negative macro context of slowing growth across Europe and Asia, and even some disturbing signs in the U.S. ... are a major factor,” said Tilak Doshi, managing consultant for Muse, Stancil & Co in Asia.


Looking ahead, refining margins are expected to receive a boost eventually from the new IMO rules, which will force a switch from dirty fuels to cleaner, more expensive ones like low-sulfur fuel oil (LSFO) or marine gasoil.

“An expected increase in marine gasoil and LSFO bunker fuel demand for IMO 2020 should ... support refining margins,” said Vortexa’s Huang.

Ship operators are expected to begin burning the cleaner fuels in the last quarter of 2019, boosting demand for the more expensive fuels ahead of the IMO’s Jan. 1, 2020, deadline.

Simple refiners processing heavy crudes will face headwinds as a result of the collapse of HSFO margins, while complex refiners capable of producing lighter, low-sulfur fuels will see a boost in margins as the fourth quarter approaches, said Sri Paravaikkarasu, director at Singapore-based consultancy FGE.

Still, continued increases in refined fuel output from markets such as China and India might limit overall upside potential for the margins, analysts said.

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Oil and Gas

Oil Collapse Averted

The oil market is facing a near-term supply deficit, despite the growing cracks in the global economy and stagnant oil demand. At the same time, the market is poised for a major surplus next year.

The combination of the OPEC+ cuts, the worsening supply disruptions in Iran and Venezuela, and a slowdown in U.S. shale have all helped to tighten up balances. The second half of 2019 could see a rather significant pace of inventory drawdowns, erasing some of the glut.

In fact, the degree of uncertainty and risk to global oil supplies is staggering, and the sheer number and volume of production outages around the world would have historically sent oil prices skyrocketing. OPEC is keeping 1.2 million barrels per day (mb/d) offline, Venezuela has lost around 1 mb/d relative to 2017 levels, and Iran’s exports have fallen by more than 2 mb/d since the re-introduction of sanctions last year. Meanwhile, tanker attacks and high tensions in the Persian Gulf put even more supply at risk.

Iran’s oil exports have fallen as low as 450,000 bpd, according to July figures. However, U.S. State Department’s special representative for Iran, Brian Hook, said that the export figure is likely down to about 100,000 bpd, close to the “zero” level that he has been targeting. “We have effectively zeroed out Iran's export of oil,” Hook said during a press briefing in New York. “I can't overstate the significance of this accomplishment.” Harsh U.S. sanctions have effectively blocked Iranian oil exports, but they have also exacted a major human toll on the Iranian population, as the economy suffers and hospitals struggle to find adequate supplies.

The precise oil export numbers offered by Hook differ from other sources, but either way, exports are significantly down from the roughly 2.5 mb/d of exports from early 2018.

Iranian President Hassan Rouhani warned that international waterways “can’t have the same security as before” if Iran’s oil exports were completely forced to zero. “So unilateral pressure against Iran can’t be to their advantage and won’t guarantee their security in the region and the world,” Rouhani added.

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Vietnam says 'deeply concerned' about developments in South China Sea

Vietnam is “deeply concerned” about recent developments in the South China Sea, the Southeast Asian country’s prime minister, Nguyen Xuan Phuc, said on Friday.

Vietnamese and Chinese vessels have since early July been locked in a tense standoff in Vietnamese-controlled waters in the South China Sea, where a Chinese vessel appeared to have been conducting a seismic survey.

The United States also said on Thursday it was deeply concerned about China’s interference in oil and gas activities in waters claimed by Vietnam, and that the deployment of the vessels was “an escalation by Beijing in its efforts to intimidate other claimants out of developing resources in the South China Sea.”

Phuc was speaking at a press conference alongside his Australian counterpart Scott Morrison, who is in Hanoi for a three-day visit.

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U.S. EXIM Bank seeks vote on $5 billion loan to Mozambique LNG project

The U.S. Export-Import Bank said on Thursday its board intends to vote on a $5 billion direct loan for the development of a liquefied natural gas (LNG) project in Mozambique, the bank’s biggest export financing deal in years.

The government export lender said it has notified the U.S. Congress of the transaction, which will be ready for a final board vote in 35 days.

If approved, the transaction would support U.S. exports of goods and services for the engineering, procurement and construction of the onshore LNG plant and related facilities on the Afungi Peninsula in northern Mozambique.

EXIM said over the five-year construction period the financing could support 16,400 American jobs among suppliers in Texas, Pennsylvania, Georgia, New York, Tennessee, Florida and the District of Columbia.

It estimated interest and fee income from the transaction of more than $600 million from a consortium led by Occidental Petroleum Corp.’s recently acquired Anadarko Petroleum Co.

U.S. exports to supply the project, however, face competition from financing offered by foreign export credit agencies.

The project would be the single biggest financing deal since EXIM’s full lending powers were restored in May with the confirmation of three new board members. That ended a drought of nearly four years in which the bank could not approve loans and guarantees of more than $10 million due to a protracted fight in Congress over its future.

The bank, seen by some conservatives as providing taxpayer-backed “corporate welfare” and “crony capitalism,” was unable to finance major infrastructure projects like the Mozambique LNG plant and commercial aircraft built by Boeing Co. It needs Congress to renew its charter before Sept. 30 to keep operating.

U.S. President Donald Trump’s administration views the bank as a tool to boost U.S. exports in an increasingly competitive trade environment.

“This critical project is not only a win for American companies and workers, supporting over 10,000 jobs in the United States, but also for the people of Mozambique as well,” U.S. Commerce Secretary Wilbur Ross said in a statement.

EXIM said the Mozambique LNG project would begin to develop the Rovuma Basin, one of he world’s most extensive untapped reserves of natural gas, with a major impact on Mozambique’s economy.

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Alternative Energy

Chile's SQM profits plummet on falling lithium prices

Chile’s SQM, the world’s No. 2 producer of lithium, saw its quarterly earnings plummet by nearly half amid a slump in prices for the ultralight battery metal, even as sales volumes grew.

Profits sank 47.5% to $70.2 million in the second quarter, from $133.9 million a year earlier, though the figure was largely in line with analyst expectations.

“The second quarter results were mainly impacted by lower lithium sale prices,” Chief Executive Ricardo Ramos said in a statement. “We have seen lithium supply growing more than demand over the past few quarters, putting pressure on prices.”

SQM said its lithium sale price in the third quarter was likely to fall by nearly one-third to $10,000, from its average first-quarter sale price of $14,600 per tonne. The figure also represents a drop from a previous SQM estimate of $11,000-$12,000 per tonne for the second half of 2019.

The miner attributed the sharp drop in its selling prices to higher sales to China, where prices have slumped.

Demand for lithium, a key component of batteries used in cell phones, electric vehicles and other consumer goods, is widely expected to spike by 2025.

But festering global trade tensions, the scaling back of electric vehicle subsidies in China and a wave of new production have pushed down prices in recent months, prompting some miners to put off near-term investments.

World top lithium producer Albemarle said earlier this month it would delay construction plans for about 125,000 tons of additional lithium processing capacity, citing a market oversupply.

Still, SQM expects sales volumes to jump in the near-term, noting it had already boosted sales volumes to China.

“We sold higher sales volumes in the second quarter and expect to sell higher volumes in the second half of the year as we prepare for a 30% to 40% increase in sales volumes next year,” Ramos said.

Sales volumes grew more than 14% in the second quarter, to 22,800 tonnes, the company said.

SQM earlier this year pushed back a key expansion at its Atacama salt flat operations from the end of 2020 to late 2021.

The company blamed the unexpected delay on fast-evolving requirements of the red-hot battery technology industry, but said flagging demand and prices had not weighed on its decision.

China’s Tianqi Lithium Corp, one of the world’s biggest lithium producers, said its H1 profit plunged 85.2% y/y to 193.4 mln yuan due to the drop of lithium chemical products prices and increasing financial costs.


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Precious Metals

Mali's new mining code ends tax exemptions, other protections

Mining companies operating in Mali will no longer be exempt from VAT during production and will have a shorter period of protection from fiscal changes, according to a new mining code announced by the Mines Ministry on Wednesday.

The new code seeks to redress the “shortcomings” of a 2012 law by bringing a “substantial increase” in the contribution of the mining sector to the economy, the Mines Ministry said in a statement.

But it contains some clauses that international mining companies have strongly opposed elsewhere in Africa, most notably in the Democratic Republic of Congo where companies have been at loggerheads with government.

The new code in Mali, Africa’s third largest gold producer, shortens the “stability period” during which mining companies’ existing investments are protected from changes to fiscal and customs regimes.

Under the previous law, the stability clause was 30 years. It was not made clear on Wednesday what the length of the new stability period would be, but the Economy Ministry said last year that the government aimed to reduce those protections to the lifespan of a mine.

Mali’s government had been negotiating with mining companies to draft a new mining code, but it said last year that it would move to implement a new law unilaterally if no compromise was reached.

It was not clear on Wednesday whether the new code was the product of compromise or if it was proposed without consultation.

Companies with stakes in industrial gold mines in Mali include Barrick Gold Corp, AngloGold Ashanti, B2Gold and Hummingbird Resources.

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China eases restrictions on gold imports: sources

China has partially lifted restrictions on imports of gold, bullion industry sources said, loosening curbs that had stopped an estimated 300-500 tonnes of the metal worth $15-25 billion at current prices from entering the country since May.

China’s central bank had for several months curtailed or not granted import quotas to commercial banks responsible for most of the gold that enters the country, Reuters reported last week.

Sources said those measures had possibly been designed to reduce capital outflows and bolster the yuan, which has slumped to 11-year lows against the dollar as a trade dispute with the United States batters China's economy. CNY=CFXS

The central bank began to issue quotas again last week, but for lower amounts of gold than considered normal, three people with direct knowledge of the matter in London and Asia said - without specifying exact amounts.

“Some (quotas) have been given,” said one of the sources, adding that these were “less than usual.”

It’s a “partial lift” of the restrictions, another source said.

The Chinese central bank did not respond to a request for comment.

China is the world’s biggest importer of gold, with around 1,500 tonnes of metal worth some $60 billion - equivalent to one-third of the world’s total supply - entering the country last year, according to its customs data.

Chinese demand for gold jewelry, investment bars and coins has trebled in the last two decades as the country has rapidly become wealthier. China’s official gold reserves meanwhile rose fivefold to nearly 2,000 tonnes, according to official data.

Beijing has previously taken steps to curb capital outflows when its currency weakened. These steps included some restrictions on gold imports in 2016, sources have said.

No clear data for capital outflows exist but a measure from China’s balance of payments called errors and omissions points to $88 billion leaving in the first three months of this year, the most on record.

Chinese customs figures show the country imported 228 tonnes less gold in May and June - the last month for which data is available - than in the same two months of 2018.

By mid-August, up to 500 tonnes less gold had entered China since May than over the same period last year, people in the bullion industry said.

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Base Metals

Anglo American agrees to earlier community payout in Peru after protests

Anglo American PLC will spend some $30 million on community projects near its Quellaveco copper project in Peru three years earlier than planned after protests threatened to disrupt construction last week, a company manager said on Wednesday.

Protesters in the southern region of Moquegua blocked a road to the Quellaveco deposit last week to highlight concerns about the $5 billion mine’s environmental impacts and to push for more jobs for local residents.

Eduardo Serpa, Anglo American’s sustainability manager in Peru, said the protests did not halt construction of the mine, which is now 25% built and on track to start operating in 2022.

But he said the protests led the company to double down on efforts to improve community relations.

In a deal with community leaders that ended a week of protests on Monday, Anglo offered to finance 100 million soles ($29.6 million) in short-term local development projects for communities in Moquegua this year instead of in 2022.

“What we’re doing is bringing forward what we’ve already committed to spending. We’d planned to spend 650 million soles on this in the operation stage, now we’re bringing 100 million of that forward to the construction stage,” Serpa said.

“With regards to the rest, we’re within the budgets set out for the project,” he added.

Serpa said Anglo has already invested $2 billion on Quellaveco, which Anglo bought in 1992. The deposit holds 7.5 million tonnes of copper and is expected to give a 20% return on investment, according to the company’s website.

Quellaveco has largely steered clear of the kind of stiff local opposition that has derailed other mining investments in Peru, thanks in part to a deal the company signed with local communities and President Martin Vizcarra when he was governor of Moquegua in 2012.

But in the past year, authorities and civil society leaders have pushed Anglo to provide more jobs to local residents, accusing it of failing to fulfill its 2012 commitments, a charge the company denies.

Last week, concerns about Quellaveco’s potential impact on a local river flared following demonstrations in the neighboring region of Arequipa against another copper project, Southern Copper Corp’s Tia Maria mine, which farmers oppose due to fears it will pollute their crops.

Serpa said that monthly talks with communities in Moquegua will continue to address demands for jobs and that government officials were traveling to the region to discuss the company’s environmental plan.

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Antofagasta cuts costs to beat copper price fall

Chilean miner Antofagasta Plc delivered slightly better than expected half-year profit as it reined in costs to cope with lower copper prices, which have been hit by softer Chinese demand and the drawn-out Sino-U.S. trade dispute.

The copper producer posted core earnings of $1.31 billion, up 44% on the year and just beating analysts’ average forecast of $1.29 billion as costs came in slightly lower than expected.

The company said it was striving to offset the impact of lower copper prices, which have fallen 4% this year.

“The uncertainty caused by the continuing trade negotiations between the USA and China has had a significant negative impact on market sentiment and copper prices,” the company said.

Net cash costs fell 22% year-on-year in the first half to $1.19 per pound, helped by an ongoing drive to make savings and boost productivity, as well as higher output, a rise in by-product revenues and a weaker Chilean peso, Antofagasta said.

It sees full-year net cash costs at $1.25 per pound.

Shares in the FTSE 100 company slipped as much 3.8% in early trading, but had pared losses to trade down 0.3% at 816.6 pence as of 1040 GMT in a largely flat London market.

The stock has fallen 13% in a turbulent few weeks for global markets due largely to concerns over the trade dispute’s impact on global growth and commodity prices. It is still higher for the year and outperforming the FTSE’s mining index.

The company stuck to its full year output forecast, but said it expected copper production to decline in 2020 towards 2018 levels due to a reduction in grades at its Centinela mine. It anticipates the decline will be partially reversed in 2021.

“Antofagasta remains the best positioned of the European copper pure plays,” said Edward Sterck, an analyst at BMO Capital Markets.

Its strong balance sheet, quality of assets and operational performance, along with consistently high shareholder returns over time, justifies its higher price compared with its peers, Sterck said.

A report by ratings agency Fitch on Wednesday said growth in copper demand in China would only modestly recover from current levels as the car and consumer sectors, where a large portion of the metal is used, struggle for growth in 2020.

Antofagasta’s revenue rose 19% to $2.53 billion, in line with analysts’ expectations, which had predicted costs of $1.20 per pound, according to a company-compiled consensus of 15 estimates.

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Steel, Iron Ore and Coal

Wu’an to deepen production curbs on steelmakers, coke plants till end-Aug

Wu'an, one of China's major steelmaking hubs in Hebei province, will ramp up its production curbs on nine steelmakers and two coke plants during August 22-31, in a bid to improve air quality. This came on top of the city’s anti-smog control plan for August.

In terms of the composite index and PM2.5 improvement rate, Wu’an has been the worst performer in the province since August.

According to the notice issued by the city’s smog-control office on August 20, nine of 14 steelmakers across the city are required to suspend all their sintering machines and all but one blast furnace for up to 10 days. Five of the nine steel mills will face additional restrictions.

Coke plants are ordered to extend their coke production period beyond 36 hours during that period.

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Global steel demand to enter low growth period: worldsteel

Global steel demand is continuing to grow in the short term against a backdrop of great uncertainty as only a mild deceleration in global growth is now expected, World Steel Association Chairman Andre Gerdau Johannpeter told the Brazilian Steel Institute’s annual congress in Brasilia Wednesday.

However, in the long term, global steel demand is moving into a low-growth zone as new megatrends shape the industry, Johannpeter warned.

“Steel demand is at another inflection point which may be followed by a prolonged period of low growth,” said Johannpeter, also a board director of Brazil-based steelmaker Gerdau Group. “Steel demand is facing new challenges: the deceleration of population growth and aging populations in developing economies, rising income inequality threatening growth and the middle-class base.”

Environmental concerns are also affecting the global steel sector, with sustainable development now “the crucial concept,” he said.

Global steel demand remains concentrated in China, which uses almost 50% of global steel production, but the market for steel in China is expected to grow just 1% this year to 843.3 million mt, while its steel production rate is expected to reach 930 million mt, up nearly 2%, Johannpeter said. In 2020, China’s steel demand is expected to fall to 834.9 million mt, he added.

Politically driven uncertainties point to downside risks outside China: while steel demand from developed economies is moderating, emerging nations have a positive but mixed demand outlook, he said. In this scenario, India is expected this year to overtake the US to become the world’s second biggest user of steel but will still remain far below Chinese levels. Worldsteel forecasts Indian steel consumption at 110 million mt in 2020, followed by the US on 101 million mt and Japan on 64 million mt.

Global steel production capacity was put at 2.235 billion mt in 2018, with consumption at 1.840 billion mt and overcapacity of 395 million mt, which remains the subject of international discussions and negotiations, the worldsteel executive said. The location of this overcapacity was: 154 million mt in China; 81 million mt in the Commonwealth of Independent States; 80 million mt in Asia (outside China); 47 million mt in Europe; 26 million mt in Central and South America; 13 million mt in Oceania and the Middle East and North Africa; and minus 6 million mt in NAFTA.


While the use of steel, which is highly recyclable, may enable CO2 mitigation in other sectors, inequities introduced regionally by carbon pricing mechanisms could jeopardize fair competition within the steel sector, and it is in this area that government participation is needed, according to Johannpeter.

“Governments should promote and encourage a circular economy approach,” the worldsteel chairman said. “Progress in breakthrough technology development in steelmaking and its implementation must be maintained or accelerated, requiring the financial burden to be shared.”

The steel sector should be able to take “a great leap forward when it manages to reduce emissions via technology,” he said.

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Baosteel's first-half net profit plunges on high raw material prices

China’s Baoshan Iron & Steel Co Ltd reported net profit fell 38.2% in the first half of 2019 from a year earlier on surging raw material prices and sluggish auto sales.

Known as Baosteel, China’s biggest listed steel firm reported a net profit of 6.19 billion yuan ($873 million) in the first six months of 2019, compared to 10.01 billion yuan a year earlier, according to a statement filed to the Shanghai Stock Exchange.

During the April-June period, profits earned by Baosteel were 3.5 billion yuan, according to Reuters calculation. That was up from 2.73 billion yuan in the first quarter of this year, but still well below last year’s 4.99 billion yuan.

“Overall auto demand is weak this year and demand plunged. The surging raw material prices also narrowed purchase and sales price differentials,” said Baosteel, adding that output cuts and other measures mandated by Beijing to reduce pollution and protect the environment are still the company’s biggest risk.

Baosteel’s results followed iron ore supply concerns as a deadly tailings dam collapse in Brazil in January and a tropical cyclone in Western Australia in March disrupted operations at iron ore mines. Iron ore prices were driven up by as much as 62.8% in the first half of this year.

Meanwhile, demand for metal for autos and construction steel was dampened by cooling economic growth at home and the trade war with the United States.

China’s vehicle sales have contracted for 13 consecutive months, the China Association of Automobile Manufacturers said earlier this month.

Most of China’s listed steel firms reported lower profit or net losses in the first half. Jiangshu Shagang Co Ltd, the listed arm of China’s biggest privately owned steel mill Shagang Group, said last week its first-half net income fell 56% from a year earlier.

Beijing has rolled out stimulus measure, including raising infrastructure spending, to prop up the economy and its fixed-asset investment during January to July rose 5.7% from a year earlier, supporting steel demand.

In the first six months of 2019, Baosteel churned out 22.8 million tonnes of iron ore and 24.3 million tonnes of steel. It aimed to produce 45.46 million tonnes of iron and 48.18 million tonnes of steel this year as announced in April.

“Trade friction will still bring relatively big uncertainties to China’s steel products exports in the second half,” according to the company.

“We expect our production and sales basically to remain stable in the second half of this year, and will further explore the potentiality to cut costs,” it said.

Shandong Steel H1 net profit slumps 66% YoY

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Hubei steelmakers to cut production on weak prices, demand pessimism

A slew of steelmakers in Hubei, landlocked province in Central China, announced their plans for maintenance and production curtailments in recent days, as high costs and low steel prices have pushed them to the verge of losses and as demand is expected to falter ahead of the Military World Games in October.

This came after steelmakers in Shaanxi, Shanxi, Gansu, Sichuan, Hunan and Shandong said earlier this month that they will slash their production to prop up steel prices.

Ezhou Hongtai and Wuhan Shunle will conduct maintenance for seven to ten days, starting from August 22, with daily output of 5,500 mt estimated to be impacted.

Jinshenglan will lower the scrap rate to cut one-third of its production.

Echeng Steel will put its bar production line under 45-day maintenance from the middle of September, which is expected to affect rebar output by 100,000-110,000 mt.

Steelmakers in Hubei saw higher costs compared to counterparts in other regions, as it takes more fees and time to deliver iron ore to the inland province. SMM research found that shipping charges for iron ore with Hubei as destination came in at 140-160 yuan/mt, compared to 30-50 yuan/mt to east China.

Longer delivery period of 25-40 days, meanwhile, means that steelmakers in Hubei are using iron ore of higher prices. Spot iron ore prices averaged 879 yuan/mt in late July and 808 yuan/mt in early August, while the price stood at 719 yuan/mt in the middle of August, SMM assessments showed.

Steelmakers in Hubei cost close to 200 yuan more than mills in other regions to produce one mt of steel, showed SMM calculations.

Weak steel prices also weighed on Hubei steel mills. Prices of building materials in the Wuhan market have been the lowest across the nationwide markets since the second half of this year, as local demand was more sluggish than other regions in a low season, after a construction rush in the first half of the year as builders expected operation limitations or suspension ahead of the Military Games.

Echeng Steel’s rebar traded at 3,660 yuan/mt in Wuhan on August 22, 134.5 yuan/mt lower than the nationwide average of 3,794.5 yuan/mt, showed SMM assessments.

The long-anticipated Military World Games will take place in Wuhan during October 18-27. Trucks will be forbidden to travel on the roads in the center of the city from September 1, according to the city’s traffic authorities.

This, together with market talks that local construction sites will suspend from middle or late September, is set to depress demand for steel building materials.

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India's steel consumption growth seen waning as downstream demand tanks

 India's steel consumption growth is likely to slow down for its financial year-ending March 31, 2020, as its domestic downstream industries face weaker demand for their end-products.

Steel consumption for April-July amounted to 33.706 million mt, about 6.6% higher than the 31.607 million mt recorded a year ago, data from state-run Joint Plant Committee showed.

The 6.6% rise was less than the year-ago growth. April-July 2018's consumption was 9.7% higher from the 28.820 million mt seen in the corresponding months of 2017.

By tonnage, the April-July 2019 increase against 2018 was 2.099 million mt while the corresponding rise in 2018 from 2017 was 2.787 million mt.

Another indicator of the weaker demand was that both imports and exports fell during the four months. The former was down 6% to 2.496 million mt on the year while the latter fell 23.5% to 1.474 million mt, a report from the Ministry of Steel showed.

The lower usage comes as demand from the automotive industry has slumped. The country's vehicle production from April to July amounted to 9.72 million units, down 10.65% on the year, amid a cash crunch that has affected the availability of credit, and market concerns around slower economic growth.

The automotive industry contributes about 49% to India's manufacturing GDP, Vishnu Mathur, director general of the Society of Indian Automobile Manufacturers said in August.


Early August, the Reserve Bank of India revised lower its GDP growth forecast for 2019-20 to 6.9% from 7% in June. Also, the RBI has cut interest rates four times in 2019 so far to support the economy. The last cut was on August 7, when the rate was reduced 35 basis points to 5.4%, the lowest since April 2010. As of August, the RBI has cut its repo rate by 110 basis points in 2019.

In addition to a slowdown in the automotive sector, the state bank said, "Construction activity indicators slackened, with contraction in cement production and slower growth in finished steel consumption in June."

"Two key indicators of construction activity, viz., cement production and steel consumption, also contracted/slowed down," Shaktikanta Das, governor of the RBI, said.

As a result, India is not expected to hit 7% GDP growth for fiscal 2019-20. In 2018-19, its GDP growth slowed to 6.8%, the lowest since 2014-2015. Over January-March 2019, GDP growth reached a five-year low of 5.8%. The April-June GDP result is expected end of August.

Other financial reports point to lower economic growth. For instance, in mid-August, the Australia and New Zealand Banking Group cut its forecast for India's economic growth to 6.2% from 6.5% previously.

Although India's steel production has turned it into the second largest global producer after China, its apparent finished steel consumption per capita has lagged far behind other leading countries.

For instance, India's per capita steel use stood at 66.2 kg in 2017, while leading producer China was at 549.0 kg and South Korea was in the lead with 1,104.6 kg, data from the World Steel Association showed. China was the sixth-largest user while India was in 85th place.

"Based on early results of listed companies, demand conditions in the manufacturing sector remained weak in Q1 2019-20, with sales of manufacturing companies contracting by 2.4% [year on year], caused mainly by petroleum, automobile, and iron and steel companies," Das said.

"Given the current and evolving inflation and growth scenario at this juncture, it can no longer be a business-as-usual approach. The economy needs a larger push," he added.

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