Energy and Natural Resources Market Radar (November 28, 2011)
Strengths
- Soaring demand for diesel and gasoil around the world is depleting stockpiles, sending U.S. prices to the highest level in three years, relative to gasoline. U.S. diesel and heating oil supplies have fallen 15 percent in six weeks, according to the Energy Department, and stockpiles in Singapore in the week ended November 9 were the lowest since July 2008, according to International Enterprise Singapore, a unit of the trade ministry. Inventories in Europe’s Antwerp-Rotterdam-Amsterdam hub were the smallest in almost three years at the end of October, data from PJK International BV show. Rising fuel imports by China, the world’s second-largest oil consumer, are combining with increased heating demand during the northern hemisphere winter to curb supplies.
- Natural gas prices gained 7 percent this week to close at $3.53 per mmbtu on expectations of colder weather this week and stronger heating demand for the fuel.
Weaknesses
- Mining and energy equities corrected sharply this week due to worsening concerns over European debt problems and a Chinese hard landing scenario. This was triggered by the poor German bond auction and weak Chinese flash Purchasing Manager’s Index (PMI) reading of 48. The China PMI fell to 48 in November from 51 in October, indicative of a contraction in manufacturing output and its sharpest fall since early 2009, although there are more signs that the government is now starting to ease monetary policy.
- Taiwan's largest steel producer, China Steel, has announced average price cuts of 7 percent for January through February 2012. This equates to a reduction of $58 per ton for hot-rolled-coil, which would be over and above the expected cuts in raw material costs into the first quarter of 2012. This highlights that the Asian steel market remains subdued, with steel margins under significant pressure.
- CODELCO, Chile’s state mining company, will cut the surcharge on copper sales to Japan next year by 5 percent, reducing the fee for the first time in three years, according to a Bloomberg News report.
Opportunities
- Analysts at Mirae Assset Management in Hong Kong noted that the geopolitical premium on oil prices could expand further in the coming months because France is pushing for a European oil embargo on Iran. The U.S. has banned oil from Iran since the 1980s. The EU foreign ministers will discuss a range of sanctions against Iran in a December 1 meeting in Brussels.
- Copper supply shortages are likely to persist until next year as labor strikes in Chile and Grasberg in Indonesia curb output, Terry Burgess, chief executive officer of OZ Minerals Ltd. said in an interview in Melbourne. He said OZ expects long-term copper prices to be around $2.50 a pound.
- China’s net coal imports may reach a record 150 million tons this year, Xinhua reports, citing Zhao Jianguo, an executive at the China Coal Transport and Distribution Association. China’s thermal coal stockpile at power plants was 80.3 million tons as of November 20, enough for 21 days use, the report says.
Threats
- Rising taxes on the mineral industries remain a headwind for producers. Australia's plan for a 30 percent tax on the biggest profits in its booming mining industry has cleared its biggest political hurdle with legislation passing parliament's lower house after last-minute support from the Green party. The legislation will go to the senate in early 2012. The government and the Greens have the numbers there to ensure the bills are passed into law.
