Energy and Natural Resources Market Radar (July 2, 2012)
Strengths
- In reaction to an insurance embargo on Iranian oil vessels, effective this Sunday, South Korea will halt all oil imports from Iran. These vessels rely on insurance to protect them against any accidents they may encounter, and most companies that provide this type of insurance are based in the EU. South Korea, Iran’s fourth largest oil consumer, is currently in talks with countries such as Iraq, Kuwait, Qatar, and the United Arab Emirates to find a new route to meet their demand.
- Strikes in Norway regarding pensions and retirement age led to the closing of three more oil fields, restricting more than 15 percent of the country’s oil supply and 7 percent of its natural gas supply. Last month, Norway produced 1.63 million barrels of oil per day, and Statoil has already reported losses of up to 250,000 barrels per day. Brent Crude Oil prices saw a slight increase as a result.
- Vale received an environmental license to expand the biggest iron-ore mine in the world, estimating that about $1 trillion worth of reserves are to be found. They hope to double their iron-ore capacity at Carajas in Northern Brazil, and by 2017 hope to increase their output to 230,000 tons per year.
- Crude oil futures (West Texas Intermediate) gained nearly 6 percent this week with most of the gain on Friday following news that European leaders had agreed to allow struggling European banks to borrow directly from bailout funds.
Weaknesses
- Aluminum has dropped in value to $1,845 per ton, its lowest price since June 7, 2010. Because of these deteriorating prices, Rusal plans to curtail 8 percent of its smelting capacity by 2013. Furthermore, provincial governments in China have granted subsidies to smelters to increase aluminum production. This comes after the government faced a loss in tax revenue and higher unemployment from the reduction of output in Henan, a province that contributes 20 percent to China’s total aluminum capacity. After the news let out, aluminum prices dropped 3 percent on the Shanghai Futures Exchange.
- Arch Coal, in the midst of low natural gas prices and slowing electricity consumption, temporarily suspended mining operations across the country, resulting in 750 layoffs. SouthGobi Resources also has plans to halt its coal mining operations in Mongolia because of weak demand and an unpredictable future.
Opportunities
- Lennar Corp. is in talks and has signed a memorandum of understanding with China Development Bank Corp. regarding an approximate $1.7 billion loan. This loan would help transform two former naval bases into a $13 billion housing project and greatly benefit the timber industry.
- Within a year, Bangladesh is planning on boosting domestic natural gas supply by 63.25 percent to meet a demand that has been increasing by about 14 percent a year since 2003. Chevron and many state-owned companies have already prepared to increase supply to the country.
- In a slow diamond market, Botswana’s Minerals Minister believes the country can turn towards copper and silver, in addition to coal mining, to provide a more prominent source of revenue. This transition of focus may diminish the weight the diamond industry has on Botswana’s economy.
Threats
- Iraq’s oil output has reached a 20-year high, passing 3.07 million barrels per day for the month of June, as it seeks to overtake Iran in becoming OPEC’s second largest producer. Iraq plans on producing 70,000 barrels a day at Halfaya field during the first week of July and hopes to more than double its output by 2015. This increase in output will weigh heavily on global oil prices.
- Guatemala’s President, Otto Perez Molina, has proposed reforms to the constitution, essentially giving the government up to 40 percent ownership in mining and exploration companies in the area. Molina campaigned on increasing foreign investment, but there may be unintended consequences should these proposals be ratified.
