Energy and Natural Resources Market Cheat Sheet (May 30, 2011)

Energy and Natural Resources Market Cheat Sheet (May 30, 2011)

The Baltic Dry Index, once an accurate indicator of commodity demand and global economic activity, rose 0.5 percent to 1,474 points, the biggest weekly gain since March, on speculation that record scraping will ease an oversupply of capsize vessels. Ship owners have been incentivized to demolish older/obsolete vessels due to rising marine fuel costs and attractive scrap prices. In fact, this trend may strengthen given that shipping rates are still well below operating rates. Looking ahead, this rally may signal a bottom for the Baltic, particularly given exceptionally strong demand for commodities among emerging market countries that are rapidly building new infrastructure to support economic growth and to become competitive in the global marketplace.

Durable Goods

Strengths

  • The Department of Energy statistics this week reflect the rebounding U.S. oil demand from lackluster indications at the start of the month. The initial 18.1 million barrel per day reading on total demand has been followed by 18.5 million barrels per day and 18.9 million barrels per day in the latest release, as the return of refineries and petrochemical plants from outages helped ease some of the earlier noise.
  • China’s daily output of crude steel reached a new high in the first 10 days of May at 1.95 million tons, despite worries about monetary tightening and power shortages, according to the China Iron and Steel Association.
  • The Japan Copper and Brass Association reported this week that Japan’s output of rolled copper product rose 3.1 percent in April from March, with manufacturers ramping up production ahead of power shortages slated for the summer.
  • Copper premiums in China climbed to a seven month high this week. Premiums paid by Chinese importers over the London cash price are being quoted as high as $120 a metric ton on a cost. Premiums are at the highest level since October and compares with about $70 at the start of May.
  • Chinese oil demand is running higher year-over-year, up 11.5 percent to an impressive 947,000 barrels per day. Gasoline is up 13.8 percent and diesel has increased by 13.3 percent year-over-year.

Weaknesses

  • Steel output in Japan, the world’s second largest producer, fell 6.3 percent in April year-over-year after the nation’s worst earthquake damaged plants and cut demand from customers including carmakers, reported by the Japan Iron and Steel Federation this week.
  • According to the State Grid Corp of China, power deficit will amount to 30 gigawatts this summer and could rise to 40 gigawatts if thermal coal market tightens and water levels are below normal. The northern province of Hebei may face power shortfalls of up to 3.03 million kilowatts, the biggest gap since 2004.
  • The National Union of Mineworkers, South Africa’s biggest labor organization is asking for a 14 percent pay increase, more than three times the inflation rate, according to employers represented by the Chambers of Mines.

Opportunities

  • According to China’s National Bureau of Statistics, China’s annual demand for coking coal will rise by 180 million tons by 2015.
  • India’s Department of Mines and geology has ordered a halt to operations at 99 iron ore mines in the Hispet-Bellary region in the south of Karnataka state, pending a survey. This will further weaken exports from India, which are already 12 million tons down year-over-year in the January through May 2011 period (Karnataka ports accounts for 5.3 million tons).
  • According to Bombay Bullion Association President Prithvitraj Kothari, gold imports by India may rise to an all-time high in 2011 if the nation receives a good monsoon rainfall. Rainfall would result in boosting rural income and purchases could reach 1,000 metric tons; without good rain imports would stay between 650 tons to 700 tons.

Threats

  • The International Lead and Zinc Study Group showed that the global zinc metal production registered a surplus of 111,000 tons in the first three months of 2011 over zinc metal usage.
  • Chinese coal prices rose for ninth consecutive week, up $1.54 per ton last week to average $133.28 per ton for the week at Qinhuangdao port.
  • Iran’s crude reserves increased by 758 million barrels per day following the discovery of a deposit of light oil in southern Iran.
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