Energy and Natural Resources Market Radar (December 28, 2011)

Energy and Natural Resources Market Radar (December 28, 2011)

Strengths

• A weak dollar and a new lending program from the European Central Bank helped drive prices for commodities and commodities-related stocks higher this week. West Texas Intermediate (WTI) Crude oil finished the week near $100 per barrel, up about 7 percent. Copper closed near $3.46 per pound, up 4 percent for the week.
• A record level of deals in the coal industry this year has slashed the number of potential takeout targets in Australia, the world’s largest coal-exporting country. Rising demand in China and India has pushed mergers and acquisitions globally to a record high total of $34.5 billion in deals this year. This compares to $30.3 billion in deals last year. Overall, 192 companies have been acquired. Australian deals reached an all-time high this month with the $5.1 billion Whitehaven–Aston deal and the $2.1 billion Gloucester Coal–Yanzhou Coal deal.
• China’s oil refiners boosted daily processing to a record 9.25 million barrels a day in November and increased net diesel imports to the highest level this year in October in order to alleviate a local shortage partially caused by seasonal maintenance.
• The latest Chinese import data shows a major jump in refined copper imports. Despite ongoing concern about a slowing Chinese economy, Macquarie Research highlighted that net imports of refined copper will be 700,000-750,000 tons higher in the second half of 2011 compared to the first six months of the year. Additionally, it was reported this week that refined-copper imports by China, the world’s largest user, climbed to the highest level since June 2009 as lower prices in London prompted an arbitrage trade.

Weaknesses

• Barclays recently analyzed commodity price performance for 2011. It noted that at the end of 2010, only seven out of 48 commodities showed negative price performance. This year, however, only 11 show a positive price performance. In addition, this year’s best performer, which is feeder cattle up 18 percent, is showing a dismal performance compared to last year when cotton led the way with a 93 percent increase. Only seven commodities have posted double-digit price gains for the year, while 37 did in 2010. Barclays said, “This year’s Christmas tree looks like it has been ravaged by the storm of European sovereign debt.”
• Data published by Worldsteel this week showed a 4 percent month-over-month decline in global steel production during November. Global production now totals 1,405 million tons on an annualized basis, marking the fifth-consecutive month below 1,500 million tons annualized.
• Bloomberg News reported that speculators have reduced bets on commodities to a 31-month low on concern that global economic growth is slowing. Commodity Futures Trading Commission (CFTC) data shows that money managers cut net-long positions across 18 U.S. futures and options by 9.6 percent during the week ended December 13.

Opportunities

• After growing almost 24 percent in 2011, Komatsu, the world's second-largest mining equipment maker, expects growth of at least 10 percent next year. President of the Mining Equipment Division, Kazuhiko Iwata, said that demand for equipment in Indonesia, Australia and Chile remains strong despite turbulence in financial markets and a slowing global economy. With mined ore grade degradation set to be a persistent theme in the coming years, analysts at Macquarie see the mining equipment industry as the main beneficiaries.
• It is reported that in its first-ever report about thermal coal, the International Energy Agency (IEA) paints a fairly rosy outlook for the next five years. The report forecast strong demand for thermal coal from China and India until 2016. The IEA said that consumption would continue to expand over the next several years despite calls from environmentalists to cut reliance on this carbon-intensive fuel as a primary energy source. The IEA projects average thermal coal demand to grow by 600,000 tons per day over the next five years. This is a remarkable pace but is actually slower than the growth experienced from 2000 to 2010 when demand growth averaged 720,000 tons per day, according to Nomura Securities.
• Reuters reported that Monsanto won approval to sell a genetically engineered variety of drought-resistant corn in the United States, raising hopes for increased production of the grain. The U.S. Department of Agriculture approved the use of the modified corn after reviewing environmental and risk assessments, public comments, and research data from the seed giant. The company has been developing the product for years in collaboration with German chemical firm BASF.

Threats

• Rising costs to develop natural resources projects remain a common theme many companies are grappling with. For instance, Anglo American announced a 15 percent increase in the capital cost of its Minas-Rio iron ore project in Brazil. This is in addition to more than $5 billion the company had previously projected. The company said the increase in cost is due to general inflation in the mining industry coupled with the need to manage construction of the project around newly discovered caves of special scientific interest. Also, CAP, Chile’s largest steel producer and iron ore miner, has said that the cost of developing its Cerro Negro Norte project has increased nearly 40 percent to $800 million. The increase has pushed the anticipated start-up of the 4 million tons-per-year mine to fourth quarter of 2013 instead of the first quarter.
• Metal demand in China may grow at a slower pace in 2012 and prices may be lower than this year, Wang Huajun, deputy secretary-general of the China Nonferrous Metals Industry Association said at a forum in Shanghai. “It is unlikely to see metals demand to grow at more than 10 percent next year, given the macroeconomic environment,” Wang said. Refined copper demand may increase 6 percent, while primary aluminum consumption may grow 8 percent, he said. Lead and zinc consumption may rise by 7 percent and 5 percent, respectively, Wang said.