Energy and Natural Resources Market Radar (June 11, 2012)
Strengths
- A bounce in stocks over the last week set the Global Resources Fund in a positive direction. For another consecutive week, the fund exceeded its benchmark and the median return of its peer group due to contribution from mergers and acquisitions (M&A) in junior oil and gas stocks and a rally in gold and silver mining stocks.
- The Wall Street Journal highlighted this week that China's overseas investment surged in the first quarter to $21.4 billion as state-owned companies snapped up resource-related assets around the globe, according to a report by a private investment firm that counts China's sovereign-wealth fund among its partners.
- In a sign of relative strength in the agricultural commodities area, Monsanto Co., the world’s largest seed company, will repurchase as much as $1 billion of shares as rising profit boosts the company’s cash hoard to a record. The buyback program is authorized for a three-year period beginning July 1, St. Louis-based Monsanto said this week in a statement. Profit in the three months through May is expected to rise to $1.57 to $1.62 a share, topping analysts’ estimates, as farmers in the U.S., Latin America and Eastern Europe bought more genetically modified crop seeds, Monsanto said.
Weaknesses
- Caterpillar said demand from the U.S. coal-mining industry is slowing after a mild winter, Steve Wunning, Caterpillar’s group president for resource industries said. “Global demand for our equipment will offset any slowdown in the U.S. as it relates to mining,” Wunning said. “We don’t see as much growth in the U.S. in coal as we do in other regions like China and like India,” Wunning said. “The longer-term growth in the U.S. is questionable because the government is not permitting many new coal mine operations and not permitting coal-fired power plants,” he added.
- According to a Reuters news report, coal's contribution to March U.S. power generation at 34 percent was at the lowest level since 1973. Low natural gas prices and record warm March weather led to coal’s share in generation falling again to 34 percent and the natural gas share rising to 30 percent.
Opportunities
- Chevron said it expects global energy demand to rise by 40 percent by 2030. It also stated that world gas consumption will increase by 60 trillion cubic feet a year.
- Macquarie Capital noted that the seaborne coking coal market is looking fundamentally better, with spot and contract prices rising as ex-China buyers return to the market.
- The People’s Daily reported that the Chinese steel industry is gearing up for an expected surge in demand in the wake of a speedup in the approval of major infrastructure and industrial projects, experts said. As the State Council announced a series of policies to stimulate the economy by accelerating the approval of many important projects, including railway, energy and infrastructure construction in rural region and western China, steel industry analysts said the pipeline of new work will increase demand for steel in the long term. They expected steel prices to rebound as early as the end of this month as a result.
- Pipeline company Trans-Canada is planning a new gas pipeline to the port terminal at Kitimat. Canada's federal government is encouraging the gas developments. This builds on a decision by Shell last month to ship 1.6 billion cubic feet a day from the Kitimat terminal. The pipeline project does face a permitting process in British Columbia, but assuming it can be completed, it should reduce pressure on U.S. gas prices from Canadian imports, according to the Wall Street Journal.
Threats
- China is seeing its steel inventory accumulate as capacity expands despite weak domestic demand and falling foreign orders and exports, partly caused by the anti-dumping investigations launched by other countries, according to the 21st Century Business Herald. The China Iron and Steel Association's data showed that as of June 1, total inventory of deformed steel bars, steel wire rods and steel plates in the country's 26 main markets was 15.62 million tons, up 1.19 million tons from last year.
- As of Wednesday, coal stockpiles stood at 8.7 million metric tons at Qinhuangdao port, China's biggest coal port in Hebei province, up 40 percent year-over-year, statistics from Wind Information show. "The inventory level is the highest so far this year," said Xiao Xinjian, industry analyst at the Energy Research Institute. "But destocking will begin as electricity demand peaks," Xiao said. Also, iron ore inventories at China's major ports have surpassed 100 million tons, compared with 90 million tons last year, according to umetal.com. "Iron ore inventories at major ports have been building up since the Lunar New Year, which is quite unusual," said Wei Hongbing, president of Tianjin Harvest International Shipping Co. These ports are almost out of space for storage, Wei added.
