Energy and Natural Resources Market Radar (October 28, 2013)
Strengths
- World industrial output, one of the key determinants of commodity demand, rose 2.6 percent this year, as of August 2013, according to data released on Thursday by Dutch research group CPB. This was the fastest year-over-year growth rate seen for world industrial production since July 2012. The advanced economies gained 0.5 percent, also the best performance since July 2012, while the emerging economies rose 4.7 percent, their best since November 2012.
- Global copper market continues to be supported by global deficits. The world copper market showed a deficit of 151 thousand metric tons in July, the third straight monthly deficit, mostly due to refined copper demand in China, according to the International Copper Study Group.
- U.S. HRC prices rise again. The CRU Weekly assessment shows the U.S. benchmark at $658 per short ton, up $5/t and 1 percent from the prior week. Also, so far this quarter, HRC is now at $651/st per ton, above the third quarter and second quarter averages of $640/st and $604/st, respectively.
Weaknesses
- Caterpillar cut its 2013 sales and profit forecast and said revenue will be little changed next year after a slump in orders from commodity producers. Earnings will fall to about $5.50 per share on sales of $55 billion this year, the company said in a statement. In July, it forecast per-share profit of about $6.50 on sales of $56 billion to $58 billion. Revenue in 2014 will be in a range of 5 percent lower to 5 percent higher than this year because of “very low” mining- machinery orders and uncertainties over global economic growth, the company said. Caterpillar said demand from the mining industry has been difficult to forecast this year after customers decided to focus on existing projects instead of new mines.
- Crude oil futures (NYMEX) fell under $100 per barrel for the first time since early July as rising inventories and seasonal weakness weighed on prices which fell nearly 3 percent this week.
- The Baltic Dry Index fell 13 percent this week after setting a two-year high recently.
Opportunities
- With the scheduled shutdown of Japan's one operating nuclear power plant last month, Japan is likely going to be running without nuclear generation until at least year end. According to Platts / BENTEK, this will likely require that an additional five or six liquid natural gas (LNG) cargoes to cover normal winter demand; however, with gas-fired generation running close to capacity this summer, it is likely that incremental generation requirements will fall to coal and petroleum products. Two new coal-fired generators were commissioned in April this year while one unit that was damaged by the tsunami was restarted in May.
- Sinopec Group wants to sell half of its two biggest shale gas acreages in Canada to spread costs and accelerate their development, as the Chinese energy company focuses increasingly on return of investment, an executive said. A sale of an overseas asset would be a rare move for one of China’s state-owned energy companies, which have spent hundreds of billions of dollars investing in hydrocarbon resources from North America to Australia to secure China’s energy needs. “We are not only buyers, but also actively seek joint venture partners to optimize assets,” said Feng Zhiqiang, newly appointed chairman of North America operations of Sinopec International Petroleum Exploration and Production Corp., Sinopec Group’s main acquisition vehicle. “There is no such thing that a state-owned company’s job is only to obtain resources. Scale is important, profitable scale is more so,” Feng told Reuters in an interview. Sinopec Group, the parent of top Asian refiner Sinopec Corp., is looking for an equal equity partner for Montney and Duvernay, two shale gas plays totaling about 500,000 acres (2,023 sq. km) in Western Canada. They are part of Daylight Energy that Sinopec acquired in 2011 for more than $2 billion and later expanded.
- The Australian federal government has released draft legislation that would repeal the Minerals Resource Rent Tax (MRTT), a tax long opposed by recently elected Prime Minister Tony Abbott. “The MRRT is a complex and unnecessary tax which struggled to raise the substantial revenue predicted by the former Government,’’ Treasurer Joe Hockey said today. “Further still, this failed tax imposed significant compliance costs on one of our most important industries, while damaging business confidence which is critical to future investment and jobs.’’
Threats
- Growth in U.S. farmland prices fell to its lowest in more than three years, sapped by weaker crop prices, which are prompting farmers to cut back on machinery purchases too. A farmland price index compiled by Nebraska-based Creighton University fell to 50.9 this month, the lowest reading since January 2010. The figure, down from 54.0 in September, was only just above the 50.0 level which indicates no growth at all, with figures below that level meaning falling prices, and comes as the market enters its key autumn sales period. Prices are already falling in some major agricultural states, including Illinois, Kansas, Nebraska and North Dakota, which suffered a particularly steep decline in its farmland market. However, values are still rising – albeit at relatively slow rates - in Missouri and Iowa, the top corn and soybean producing state, where 80 acres of land sold last week for $17,600 an acre, which Hardin County Savings Bank claims is a record. The pullback in agriculture sector prosperity was also evident in an index figure for agriculture machinery which came in at 44.6, its lowest since March 2010, and indicating market shrinkage.
- The global glut of nickel will extend into a fourth year in 2014 as new technology lowers costs for Chinese furnaces producing record amounts of a lower-grade substitute that helped drive prices into a bear market. Chinese producers will supply 456,000 metric tons of nickel pig iron (NPI) in 2014, or 49 percent more than last year. Costs at their rotary kiln electric furnaces more than halved to $11,000 a ton in five years, according to Beijing Antaike Information Development Co. That implies they’re still profitable even after prices slumped 17 percent since the start of 2013, reaching a four-year low of $13,205 in July. China expanded NPI output from 3,000 tons in 2005 to make the stainless steel needed for its construction boom after costs for pure nickel reached a record $51,800 in 2007. While slumping prices previously shut furnaces in China and curbed excess supply, the new technology means they can now compete with traditional refineries. The cumulative surplus since 2007 will have reached about 589,000 tons by the end of 2014, or almost four years of U.S. demand.
