Energy and Nat­ural Resources Mar­ket Radar (Jan­u­ary 9, 2012)

Strengths

• First Quan­tum Min­er­als Ltd. resolved a long-running dis­pute with Eurasian Nat­ural Resources Cor­po­ra­tion Pls (ENRC) for $1.2 bil­lion over mines in the Demo­c­ra­tic Repub­lic of the Congo (DRC). The con­tro­ver­sial dis­pute over own­er­ship of the Kol­wezi project will be set­tled with ENRC pay­ing $750 mil­lion plus a deferred con­sid­er­a­tion of $500 mil­lion as part of the set­tle­ment with First Quan­tum, the for­mer owner of the project until its license was revoked by the DRC in 2009.
• Crude oil futures (WTI) moved higher by nearly 3 per­cent this week to close at $101.56 per bar­rel as geopo­lit­i­cal ten­sions sur­round­ing Iran con­tin­ued to escalate.
• Barclay’s high­lighted that China raw coal pro­duc­tion in Novem­ber rose 4.4 per­cent year-over-year to reach 321 mil­lion tonnes while total out­put in the first 11 months of the year rose 11.6 per­cent to 3.46 bil­lion tonnes.

Weak­nesses

• Weekly data released by the U.S. Depart­ment of Energy indi­cates that 4-week trail­ing total demand for oil and oil prod­ucts is down 7.2 per­cent year-over-year and gaso­line demand is down 4.9 per­cent year-over-year.
• Alcoa Inc., the biggest U.S. alu­minum pro­ducer, will close 12 per­cent of its global smelt­ing capac­ity after the price of the light­weight metal slumped amid a global surplus.
• Indone­sia, the world’s largest exporter of power-station coal, cut the bench­mark price for sales in Jan­u­ary by 3 per­cent to the low­est in 13 months. The Direc­torate Gen­eral of Coal and Min­er­als at the min­istry said on its web­site today in Jakarta that the cost of coal with a gross energy value of 6,322 kilo calo­ries per kilo­gram was set at $109.29 a ton on free-on-board basis at ves­sel com­pared with $112.67 a ton in December.

Oppor­tu­ni­ties

• This week on the front page of the Finan­cial Times, it was reported that a cut in Saudi posted prices to Asia is seen as a sig­nal that Asian buy­ers are look­ing for new sources to reduce their depen­dence on Iran as U.S. pres­sure builds over sanc­tions. How­ever, RBC Cap­i­tal high­lighted that Saudi looks to be the most will­ing to offer incen­tives, as Inter­na­tional Oil Daily reports that the United Arab Emi­rates has increased Feb­ru­ary prices, albeit only by a nom­i­nal 2 cents per barrel.
• The Chair­man of the China Iron and Steel Asso­ci­a­tion said this week that China's total appar­ent crude steel con­sump­tion is expected to rise about 4 per­cent to 700 mil­lion tonnes this year.
• Tudor Pick­er­ing reported that pre­lim­i­nary esti­mates show global oil pro­duc­tion rebounded sig­nif­i­cantly quarter-over-quarter fol­low­ing third quar­ter main­te­nance. Biggest esti­mated addi­tions quarter-over-quarter are Libya with 418,000, United King­dom with 111,000, and Brazil with 109,000 bar­rels per day.
• BofA Mer­rill Lynch global invest­ment strate­gist raised energy and gold com­modi­ties to over­weight in its tac­ti­cal asset allo­ca­tion model for the first quar­ter of 2012. In their view, energy is well sup­ported by easy mon­e­tary pol­icy and the risk of a spike due to geopo­lit­i­cal events. Their model con­tin­ues to over­weight gold due to high risk of a sov­er­eign default in Europe and low/negative real inter­est rates around the globe.

Threats

• A poten­tial short-term rise in pric­ing for Colom­bian coal may force Euro­pean buy­ers to seek other sources. Heavy rains have led to a two week delay in coal trans­port from the mine site to the ports for Colombia’s two largest pro­duc­ers – Drum­mond & Prodeco. The rains have also resulted in reduced coal pro­duc­tion at the mines for the two companies.
• Deutsche Bank high­lighted that India’s gold imports, the largest con­sumer, is expected to drop by 48 per­cent in the first quar­ter as a decline in the cur­rency boosts prices and high inter­est rates cool invest­ment demand, accord­ing to the Bom­bay Bul­lion Association.
• Zhu Jimin, head of Shougang Group, one of China’s biggest steel­mak­ers, addressed mem­bers at CISA's annual meet­ing, say­ing that prospects for the steel sec­tor remained gloomy, with the entire sec­tor fac­ing falling prof­its in 2012. "Enter­prises are fac­ing increas­ing oper­at­ing risks, under pres­sure from a vari­ety of fac­tors such as ris­ing costs, falling demand and dif­fi­cult and expen­sive financ­ing," he said. Zhu said a series of poli­cies intro­duced last year to con­trol the real estate sec­tor had reduced demand for steel, and if the poli­cies were not adjusted the sit­u­a­tion could worsen in 2012. Slow­ing growth in domes­tic man­u­fac­tur­ing, rail­way, ship­build­ing and auto sec­tors could also take its toll, he added.
• Resource Daily reported that Niger­ian unions are call­ing for indef­i­nite strike action on Jan­u­ary 9 to shut down both the up and down stream oil sec­tor. The strike is in reac­tion to the recent gov­ern­ment deci­sion to remove fuel sub­si­dies which has seen gaso­line prices dou­ble. In 2010 Niger­ian pro­duc­tion accounted for 13 per­cent of Shell vol­umes and 12 per­cent for Total, 10 per­cent for Eni and 2 per­cent for Statoil.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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