Energy and Natural Resources Market Radar (August 27, 2012)
Strengths
- U.S. coal stocks finished higher with the Bloomberg U.S. Coal Index up 3.71 percent following news that the Environmental Protection Agency’s regulation of interstate air pollution was found unlawful and cannot be enforced according to a U.S. Court of Appeals.
- Copper prices gained nearly 2 percent this week to finish at $3.48 per pound as expectations are growing that the Chinese government may issue some stimulus policy to boost the economy. Also, global demand for refined copper outpaced supply by 21,000 metric tons in May, the International Copper Study Group said in a report this week.
- Global crude steel output was up by 2 percent year-over-year to 1,528 million tons on an annualized basis in July. Year-to-date production was 1 percent ahead of the same period of 2011 at 897 million tons for the 62 countries reporting to Worldsteel, which published its latest data this week.
Weaknesses
- Iron ore prices dropped to the lowest level in 32 months as slowing growth curbed demand in China, the biggest buyer. Ore with 62 percent iron content delivered to the Chinese port of Tianjin dropped 0.8 percent to $109.30 a dry ton this week, the lowest since December 24, 2009, according to a gauge compiled by The Steel Index Ltd.
- BHP confirmed that it will sanction no further projects in the next 12 months and appears to be reining in spending across the portfolio in response to lower commodity prices. Management is now considering a cheaper development option for Olympic Dam, the copper/uranium mine, while the Outer Harbour project was not mentioned, highlighting the pressure current iron ore prices are putting on future capacity expansions.
Opportunities
- Iron ore stocks continue to run down aggressively in China. The volume of stocks held by 50 "smaller" steel mills, surveyed by Mysteel, has fallen by 12 percent in the last two weeks alone and almost 30 percent in the last two months. Measured on a days-of-use basis, iron ore stocks held by these mills have now fallen to less than 20 days for the first time in at least two-and-a-half years. The average stockholding over that time frame is 31.5 days and the low point reached during the last sharp sell-off in iron ore prices in October/November of last year was 20.7 days.
- Vale received a loan of Real 3.9 billion (~$2 billion) from state development bank BNDES, half of a planned R8 billion investment, to boost logistics capacity in the northern region by 30 percent to 150 million tons/year and key to cutting iron ore costs.
Threats
- Australia's resources boom is secure for some time to come, Prime Minister Julia Gillard told Parliament speaking just hours after her Resources Minister, Martin Ferguson, appeared to declare it dead. Speaking on ABC radio about BHP's decision to shelve a number of projects, Mr. Ferguson said, ''You've got to understand, the resources boom is over.” But Ms. Gillard told Parliament, ''The Minister for Resources has indicated that prices have come off a bit, that, if you like, the commodity price boom has passed its peak. But there is a huge investment phase with still some way to run and the export boom in resources still has a very long way to run.''
- The world’s second-largest platinum producer, Impala Platinum, has warned industrial action at South Africa's mines could become more widespread. "The platinum industry is experiencing increased levels of industrial action…. These developments pose a significant risk to the industry," said new CEO Terence Goodlace.
