Energy and Natural Resources Market Radar (April 16, 2012)

Energy and Natural Resources Market Radar (April 16, 2012)

Strengths

• China's monthly steel exports exceeded 5 million tons in March for the first time since July 2010, according to Chinese Customs data. Exports increased to 5.03 million tons in March, up 48.4 percent month-over-month and 2.4 percent year-over-year.
• Supporting our food and agriculture investment theme, grain imports by China advanced to the highest level in at least seven years in March as the world’s most populous nation stepped up overseas purchases to meet rising demand. China imported 1.64 million metric tons of cereals and cereal flour in March, compared with 280,000 tons a year ago, the highest figure since at least January 2005. Imports in the first quarter totaled 3.84 million tons, up six-fold from a year earlier. “Grains imports are on a rising trend because of limited arable land, water and labour, at a time when demand is growing amid increasing incomes and changing diets,” said Li Qiang , managing director and chairman at Shanghai JC Intelligence Co.
• Soybeans have been the star performer among the agricultural complex so far this year, with spot prices up just over 20 percent compared to small price declines in corn and wheat. Part of this divergence reflects downgrades to the South American soybean crop. Further deterioration in China’s increasing import requirements for soybeans has also contributed.
• The International Energy Agency (IEA) reports that OPEC crude oil production increased to 31.43 million barrels per day in March, the highest level in more than three years.
• Summer demand continued to drive spot prices for Asian liquefied natural gas (LNG) higher this week with May delivery contracts rising to over $16.50 per million British thermal units (mmBtu). With the majority of its nuclear capacity still offline, Japan, the world’s largest LNG importer, was expected to continue stocking up on the fuel as it heads into summer. "Prices are over $16 and could be headed to $17 on the assumption that the Japanese will top up," one market source said.

Weaknesses

• Natural gas futures fell below $2 per mmBtu this week, the lowest price in 10 years as forecasts for mild weather across the eastern U.S. signaled demand may fall even more.
• Overall mining output in South Africa fell 14.5 percent on a year-over-year basis in February as a six-week long strike at Impala Platinum’s Rustenburg mine and the government’s safety-related inspection and work stoppages hit platinum and gold production. Gold and PGMs output dropped 11.5 percent and 47.6 percent year-over-year in February, respectively.
• Aluminum products maker Novelis Inc, which cut its fiscal 2012 earnings estimate because of lower shipments and soft demand, will close its Saguenay Works in Jonquiere, Quebec in August.

Opportunities

• Comments made by the chairman of India’s top iron ore miner indicate a sharp decrease in future exports of iron ore from India. Given increased domestic steel production and government restrictions on both iron ore mining and exports, NMDC’s Narendra Kumar Nanda predicted that India would export only 30-40 million metric tons in the next fiscal year (April 2012 through April 2013). This projection represents a significant drop in exports from the world’s third-largest supplier. India exported 46 million metric tons of iron ore during the first nine months of the 2011-12 fiscal year, down 30 percent from the prior year.
• Investment bank J.P. Morgan filed paperwork to list a copper-backed exchange-traded fund (ETF) with NYSE Euronext. J.P. Morgan Commodity ETF Services filed a proposal to list and trade shares of JPM XF Physical Copper Trust in a filing dated April 2, 2012. The filing is the first sign since mid-2011 that the ETF, a security backed by physical metal, is likely to list. J.P. Morgan first logged a filing for shares of the ETF in October 2010, the same time as a similar filing by Blackrock. These filings against a tight supply backdrop helped fuel a rally in copper prices to record highs above $10,000 a ton in February 2011.
• Russian President-elect Vladimir Putin outlined proposed new rules for development of the country’s vast offshore oil and gas resources, offering some tax breaks for the far-flung projects. Putin offered to cancel export duties on oil and gas from new offshore deposits and proposed to introduce a lower mineral extraction tax for complex hydrocarbon projects in the Arctic. He also pledged that the new rules will be in effect for at least 15 years from the start of industrial output and offered Russian non-state companies access to the offshore oil and gas.
• Reuters cites Vale CEO Murilo Ferreira as stating Chinese demand for iron ore will remain strong. "Those who have been betting against Chinese growth since the 1990s will be wrong again," Ferreira said. "China is just getting going.” To help meet that demand, Vale expects to invest more than $50 billion to expand iron ore, nickel, copper, fertilizer, coal and other mining output.
• Japan’s zinc demand may increase 7.2 percent to a four-year high this year as the economy recovers from an earthquake and tsunami as the weaker yen helps boost exporters, Nobuyuki Nakamoto, GM at Mitsui Mining & Smelting’s zinc business said. Demand will rise to 537,400 metric tons in 2012, up from 501,200 tons in 2011.
• The IEA estimates effective OPEC spare capacity (which excludes Iraq, Libya, Nigeria and Iran) fell to 2.54 million barrels per day in March. This is down from 2.75 million barrels per day in February, reflecting the removal of Iran from the count. Deutsche Bank commodity analysts think that supply disruptions, not only from Iran but a number of non-OPEC countries, will persist this year due to political disputes and weather disruptions. This means spare capacity levels are likely to remain eroded and below 3 million barrels per day for the rest of this year.

Threats

• Chinese data for March shows that real GDP grew 8.1 percent year-over-year in the first quarter of 2012. However, the moderation from 8.9 percent growth in the previous quarter is consistent with the weak monthly data, especially for January and February, already released.
• The Energy Information Administration (EIA) is expecting electricity generation from coal in the U.S. to decline by about 10 percent in 2012. In contrast, natural gas-fired electricity generation is forecast to increase 18.7 percent on a year-over-year basis.
• Spain's foreign minister has reportedly sought an urgent meeting with Argentina's ambassador in Madrid to seek clarity on the Argentine government’s intentions regarding YPF. Persistent rumors have suggested that the current Argentine administration is planning to renationalize the explorer, which is majority owned by Spain’s Repsol.