Energy and Natural Resources Market Radar (August 19, 2013)
Strengths
- The price of copper gained 1.6 percent this week to $3.37 per pound. This is the highest level since May on declining inventories and stronger import data into China, the world’s largest consumer of the metal.
- Iron ore prices have been rising since early July, recently reaching $138 per metric ton, according to The Steel Index (TSI).
- Power consumption in China experienced a sharp rebound in July, reaching 495 billion kilowatt hours (kWh), according to the latest National Energy Administration (NEA) data. This could potentially signal a rebound in industrial production in the region.
- India’s gold imports more than doubled in the second quarter of 2013. India’s gold imports rose to 338 metric tons (mt), up 121 percent year-over-year in 3 months ended June 2013. Total demand rose 71 percent year-over-year to 310 mt during the same period, according to the World Gold Council, after a slump in prices in April spurred consumer demand.
Weaknesses
- Gold demand hit a four-year low of 856.3 mt in the second quarter of 2013, down 12 percent year-over-year on ETF liquidation and lower central bank demand, despite surging appetite for jewelry, coins and bars, according to the World Gold Council. Consumer gold demand rose by 376.4 mt, while gold ETFs and central bank buying fell by 402.2 mt and 93.4 mt, respectively. Separately, India and China’s gold demand may hit 1,000 mt each in 2013, reads data from Reuters.
- Despite gains of 22 percent year-to-date, midstream master limited partnerships (MLPs) fell for the fifth consecutive week as rising interest rates weigh on high dividend yield investments.
Opportunities
- Massoud Amin, an electrical engineering professor at the University of Minnesota in Minneapolis, who has also been a supporter of better electrical grid technology, says the benefit to improving grid far outweighs the cost of investment. He estimates that a modern national grid would cost $21 billion per year for twenty years, and calculates that the cost savings would amount between $79 billion and $94 billion.
- Despite the skeptical response by industry pundits and investors, Mexico’s proposed energy reform could be the beginning of philosophical and political change that would infuse much needed investment into the country’s rapidly declining oil production. If this reform is enacted, it would mark the biggest private sector opening in decades for Mexico, which was nationalized in 1938. Under the proposal, profit-sharing contracts would be given to private contractors that would allow for the control of current oil production, but the state would retain ownership of the oil and gas reserves in the ground. However, some analysts believe that significant investment would not be realized until oil companies are also given private ownership rights to the reserves.
- Iron ore inventory at Chinese ports has fallen back to the lowest level since February 2009. Current inventories represent just one month of cover and compares to an average stocks and imports ratio of 1.7. Even if this is just a restocking rally, low levels of inventory at mills and ports suggest there is room for further upside.
Threats
- Workers at BHP Billiton’s Escondida mine in Chile, with 1.1mt of copper in 2012, have halted their strike. However, these workers left the door open for further action. They went on a surprise, twenty-four hour strike on August 14 demanding an annual bonus, which they say has not been given this year, according to Reuters.
- South Africa’s gold producers raised their offer for wages by 50 basis points to 5.5 percent, with additional compensation linked to a gain-share scheme to resolve an impasse in negotiations with workers. However, Bloomberg Finance LP says that NUM, which demanded a 60 percent hike, and UASA, rejected the offer.
