Energy and Natural Resources Market Diary (November 29, 2010)
Strengths
- Dubai crude—the benchmark crude for Asia—went into backwardation this week following 16 consecutive months of contango this week. Backwardation is when the futures price is below the expected future spot price. This points to a tight spot market and supports the case for strong Chinese demand. China is experiencing fuel shortages and needs to ramp up its refineries and imports in order to ease the shortfall.
- For the second consecutive week, data from the American Iron and Steel Institute showed a rise in U.S. crude steel output. Capacity utilisation levels moved back above 70 percent for the first time since late September as production rebounded to 80.1 million tons on an annualized basis.
- Japan’s output of copper and copper-alloy fabricated products, including sheets and tubes, increased for the twelfth straight month on higher air-conditioner demand, the Japan Copper and Brass Association said. Preliminary data showed production increased 7.5 percent to 74,180 metric tons in October compared with 69,013 tons a year ago. Output in September totalled 73,581 tons.
Weaknesses
- The latest trade data shows that Chinese coal imports fell from 15.3 million tons in September to 12.3 million tons in October. The decline was driven by a pullback in thermal coal imports during the month.
- Rare earth exports from China declined 77 percent on a month-over-month basis in October after the government reduced shipment quotas for the second half of 2010. Exports were 830 metric tons last month compared with 3,660 tons in September.
- Iron ore exports from India slid 30 percent in October from the same time last year, the Federation of Indian Mineral Industries Ltd. said. Shipments dropped to 6.44 million tons, down from 9.24 million tons a year ago.
Opportunities
- German automaker BMW announced that a strong demand outlook for its vehicles has led it to shorten its Christmas break next month. Production is currently running at full capacity and the company expects to sell 1.4 million units in 2010. Analysts at Macquarie attribute the 2010 rebound in auto demand as a key factor in recovering European demand for flat-rolled steel and platinum group metals used in catalytic convertors.
- Massey Energy plans to begin exploring the sale of the company and to solicit offers from potential buyers. The company will form a special board committee to study options and may make an announcement soon, said unidentified people close to the situation.
- The second project that aims to export liquefied natural gas (LNG) from the U.S. is now underway as Freeport LNG and Macquarie Bank announced an agreement to build a liquefaction plant in Texas. The plant will be built on the site of Freeport LNG’s existing import terminal and will have an export capacity of 1.4 billion cubic feet per day with start-up expected in 2015.
- Eramet SA is seeking acquisitions in lithium and rare earths to tap into markets with healthy growth prospects. Eramet aims at broadening its scope to new alloying metals for the steel industry, as well as specialty metals with strong growth potential such as lithium and strategic metals such as rare earths, CEO Patrick Buffet said.
- China authorities are easing power limits on aluminum producers, which may lead to plant restarts as early as next month, according to a metals analyst at CRU International Ltd. Resumption of production may help curb inflation and cool commodity prices, CRU said. China started to limit power to steel and aluminum plants in September to meet energy-saving targets by 2010. Local governments have yet to say when power supplies will return to normal levels.
- Codelco says that global demand for copper probably will increase by 4 percent over the next 12 months while Chinese demand for the metal may rise by 8 percent.
Threats
- The Shanghai Futures Exchange has said that it will raise margins and widen daily price movement limits on its contracts, including copper, zinc and aluminum. The settlement margin on aluminum and copper will rise to 10 percent from 7 percent and 8.5 percent, respectively. Zinc will rise to 12 percent from 8 percent. The daily limit on price moves will increase to 6 percent from 5 percent.
- The tension and number of assaults on oil infrastructure in Nigeria have increased significantly in recent weeks. The surge in violence and assaults comes after a relatively calm period following the government’s amnesty and the disarming of thousands of militant fighters in 2009. Several groups have now decided to re-arm as they are dissatisfied with the amnesty program. The Movement for the Emancipation of the Niger Delta, known as MEND, confirmed it blew up a pipeline that supplies crude to the Warri Refinery earlier this week.
- According to Reuters, Peru's ruling APRA party presented a bill to the country’s congress this week seeking to double royalty levels paid by miners from 1-3 percent to 2-6 percent of the gross sales price. For copper and gold, the levy would be 5 percent and 10 percent, respectively.
