Energy and Natural Resources Market Radar (June 4, 2012)
Strengths
- U.K. coal consumption was at a six-year 46 percent high in the first quarter. The exact opposite of what is occurring in the U.S. is happening in the U.K. where utilities switched from natural gas to cheaper coal supplies. The U.K.’s Department of Energy and Climate Change estimated that coal-fired power generation increased by 20.2 percent, or 6.5 terawatt hours, in the first quarter. The U.K.’s gas-fired power generation fell to 25 percent market share, the lowest in 14 years. Britain’s six largest utilities expect difficult market conditions for gas-fired power generation through 2016.
Weaknesses
- Utility inventories for coal were up again in March to 196 billion tons or 86 days of supply, 62 percent above the 10-year average of 53 days, according to industry research from Stifel Nicolaus.
- Based on Energy Information Administration data, U.S. monthly coal consumption of 57.6 million tons in March 2012 was a 25-year low. With total power generation down 3 percent year-over-year in March, coal generation was down 21 percent year-over-year while natural gas generation increased 40 percent year-over-year. March utility coal inventories of 196 million tons represent 106 days of supply versus 71 days last year. The monthly increases in utility coal inventories have been declining, primarily due to production cuts across the industry.
- Copper producer China Nonferrous Mining Corp. has pulled its planned Hong Kong initial public offering of up to $313 million due to worsening market conditions, becoming the second major IPO to be scrapped in the city this week and underscoring tepid demand for new listings.
Opportunities
- China made stimulus announcements. The Ministry of Finance announced RMB 98 billion ($15 Billion) in central government funding for social housing projects. This compares to 153 billion spend by the government over all of 2011. Also, the National Development and Reform Commission (NDRC) approved construction of three major steel projects, with combined investments exceeding RMB 130 billion. And on Monday, the NDRC approved the construction of a new airport in Sichuan, joining recent approvals of three other airports.
- GlobalOre, the second major physical iron ore trading platform, and rival to the China iron ore platform, launched this week in a bid to boost its price-setting influence. Vale, BHP and Rio Tinto have also joined the platform, reports GlobalOre.
Threats
- BofA-Merrill Lynch warned this week that the global iron ore market may be oversupplied in 2013 due to 100 million tons of additional capacity coming online out of Australia.
- China's Ministry of Commerce reported that domestic thermal coal prices are expected to drop further in the short term. In the week to May 27, domestic crude coal prices dropped 1 percent week-over-week, the sixth week in a row. Weak coal demand from the downstream power generation sector and high stocks at power plants have been behind the downward trend in coal prices. Coal stocks at China's major power plants totalled 88.87 million metric tons on May 20, a record high, up 6.4 percent from the end of April.
- Argentina's Mining Ministry this week ordered mining companies to prioritize the purchase of local products and services, as well as seek prior government approval 120 days before making overseas purchases of goods and services. Since February of this year, Argentina has subjected the import of all goods to a pre-registration and pre-approval regime, called the Declaración Jurada Anticipada de Importación. More than 600 product types must now obtain an import license, such as mining machinery and chemicals.
