Energy and Natural Resources Market Radar (February 20, 2012)
Strengths
- Brent crude oil prices hit a six-month high of $119.28 per barrel this week on reports that Iran might cut crude exports to six European countries.
- The Global Resources Fund’s holdings of pipeline MLP stocks posted solid gains this week as the Alerian MLP Infrastructure Index climbed to record levels.
- Grain prices edged higher this week with soybean futures climbing to the highest level in almost five months after Chinese buyers purchased a record amount of the oilseed from the U.S.
Weaknesses
- The global steel market remains soft as Swedish specialty steel maker SSAB said it is postponing the restart of an idle blast furnace due to weak demand conditions in Europe.
- Rusal, the largest global aluminum producer, said it believes shutdowns in global aluminum capacity will reach 3-4 million tons per year in 2012. The company stated that “as a result of aluminum price decline at the end of 2011, a significant share of the world and European primary aluminum capacity has become unprofitable, resulting in partial or total closing of some smelters . . . a further 6-8 percent of global capacity curtailments are to be expected in the first half of 2012.”
- Preliminary U.S. gasoline consumption statistics for January appear to have diverged from relatively strong macroeconomic statistics.
Opportunities
- Deutsche Bank reported that traders are once again focusing on the Brent-WTI spread within the oil markets. WTI gained almost $2 per barrel to close over $100 per barrel for the first time in February, while Brent remained flat around $117.50 a barrel. With the first phase of the Seaway pipeline reversal due before summer, the differential between Brent and WTI is expected to narrow.
- China’s Ministry of Land and Resources will likely offer more than 20 blocks in its second shale-gas auction, compared to its original plan of more than 10. China is estimated to hold more gas trapped in shale than the U.S.
- Not only did BHP Billiton and Rio Tinto approve a $4.5 billion expansion to their Escondida copper mine in Chile, which is planned to increase the mine’s reserve by 25 percent, but BHP also made plans to reopen its Pinto Valley mine in Arizona, which was closed three years ago. The substantial capital commitments by both companies demonstrates optimism about longer term demand for the metal; analysts have said that tight global supplies for a metal used for everything from power transmission to plumbing have left them with a positive outlook for the metal and its cost structure as well.
Threats
- Peru’s copper producers face the risk of blackouts next year because of power line delays in the southern Andes. Spain’s Abengoa and Colombia’s Interconexion Electrica may cancel new transmission projects unless the government clarifies a law that has delayed three lines by at least a year. Delayed power lines will set back projects including Xstrata’s $5.67 billion investment in the Las Bambas and Antapaccay copper mines and Luz del Sur’s $160 million Santa Teresa hydroelectric plant.
- Low demand and higher costs are expected to further erode profits in the Chinese steel sector in 2012. Also, many big steel enterprises suffered losses in the second half of the year, and the situation was unlikely to improve in 2012.
