Energy and Natural Resources Market Radar (January 16, 2012)
Strengths
- Desjardins highlighted that Chinese December base metal import data is showing that unwrought copper imports reached 508.9 thousand metric tons, up 12.6 percent month-over-month and 47.7 percent year-over-year. Iron ore imports of 64.1 million metric tons were down 0.2 percent month-over-month while up 10.3 percent year-over-year.
- The latest SteelBenchmarker assessment by World Steel Dynamics shows a continuation of the upward trend in U.S. steel prices. The U.S. hot-rolled coil (HRC) assessment topped $800 per ton for the first time since July and scrap prices hit $466 per ton of shredded material, the highest level since August 2008.
- Reuters noted that OPEC’s crude oil production was more than 30 million barrels per day in December 2011, the highest volume since October 2008.
- Preliminary shipping data shows that Brazilian shipments were up 5.6 percent year-over-year. Shipments to China exceeded the 200 million tons per annum mark for the first time last year and iron ore exports reached an all-time high run rate in December.
Weaknesses
- The Global Resources Fund (PSPFX) underperformed its benchmark by a small amount over the last week due to being underweight large capitalization basic materials stocks and being overweight U.S. exploration and production stocks with natural gas exposure.
- Natural gas fell 14 percent this week to $2.64 per British thermal unit (Btu), a decade low. Supply growth in North America from rapid oil and gas shale basin development has created a glut of natural gas that will require a combination of increased industrial and power generation demand as well as a reduction in natural gas well drilling to balance the market.
- Deutsche Bank reported that the dry bulk index has fallen sharply in the beginning of 2012 while iron ore prices remain relatively supported. Deutsch Bank believes the decline in shipping rates is a function of slowing demand from Chinese steel production ahead of its New Year and lower shipments from Australia and northern Brazil due to rainy weather. China steel production has declined for six consecutive months. Deutsche Bank expects spot iron ore and freight rates to face ongoing headwinds in the first and second quarters of 2012. However, an end to the rains and an improvement in global growth during the second half of 2012 could lead to subsequent strength.
- China’s import growth fell to a two-year low in December, underscoring a slowdown in the fastest-growing major economy that deepens risks for the global outlook.
- The Central Dispatch Department of the Fuel and Energy Complex said that Russia’s crude oil exports fell by 3.9 percent year-over-year to 212 million tons in 2011.
Opportunities
- BCA research showed that equity multiples now discount a severe global growth slowdown at a time when mining stocks still offer leverage to the bullish China income convergence story. The unfolding recession in Europe and property slowdown in China have crushed mining share prices.
- Macquarie reports that Vale has now declared force majeure on certain iron ore deliveries, accounting for around 20 percent of January output. They emphasized that this now serves to indicate that the seaborne iron ore market will become fundamentally tighter during the quarter, requiring both destocking in China and a reincentivization of Chinese domestic output through higher prices.
- Deutsche Bank noted that oil production in the state of North Dakota climbed 42 percent (year-over-year) in November to 510,000 barrels per day. Success in developing tight oil plays across the country has created a realistic prospect that U.S. net oil imports as much as a percentage of total usage could fall significantly further. The figure has already fallen from 65 percent in 2005 to 47 percent in 2011.
- The U.S. Energy Information Administration (EIA) released its first Short Term Energy Outlook for 2012, in which the agency revised global oil demand downward by 140,000 barrels per day in 2012. This brings the EIA’s annual growth rate in-line with Barclays’ forecast at 1.27 million barrels per day. However, the key feature of the report was the large downgrade to non-OPEC supply for both 2011 and 2012. Non-OPEC supply growth for 2011 was reduced by a massive 310,000 barrels per day to just 90,000 barrels per day.
Threats
- Italy faces a “significant chance” of a downgrade by Fitch Ratings, which is reviewing all European sovereigns and will make a decision by the end of the month.
- Workers in Nigeria began a national strike, threatening to shut ports and disrupt oil production and exports. Workers are striking in reaction to the government’s decision to lift fuel subsidies, more than doubling gasoline prices. The strike makes Nigeria the third OPEC nation with an ongoing supply threat.
- Vale, the world’s largest iron ore exporter, reported that it had to halt some iron ore shipments from Brazil due to heavy rainfall that has killed dozens of people. Due to the rains that have affected its operations in Brazil, the miner estimates it will lose approximately 2 million tons of iron ore shipments, almost 1 percent of its annual output.
