Energy and Natural Resources Market Radar (September 17, 2012)
Strengths
- Commodities across the board gained strongly this week leading up to and following the announcement of QE3 by the Fed. WTI Crude oil was up 4.5 percent, LME copper was up 9 percent, NYMEX natural gas was up 5.9 percent, and zinc was up 10.7 percent.
- Oil prices increased 2.6 percent this week after two events – the deadly attack against the U.S. consulate in Benghazi, Libya and the Fed announcing an open-ended QE program. Events in Libya remind us that supply risks persist beyond Iran. Tight OPEC spare capacity levels serve as a supportive oil price backdrop for these supply risks.
Weaknesses
- Aluminum markets remain oversupplied. In an editorial in the Financial Times this week, the CEO of RUSAL said aluminum producers should cap their output, as downward pressure on prices is expected to continue into 2013 as reported by Reuters. Also, Tajikistan's state-owned aluminum smelter, the largest in Central Asia, cut its production forecast for the year by 15 percent.
- The Australian government announced that employment in the mining sector declined 4,600 during the three months ending August, the first quarterly decline since mid-2009. Several of the country's largest miners, including BHP Billiton, Xstrata and Fortescue, have recently announced job reductions amid a difficult environment of declining prices, higher costs and a strong Australian dollar.
Opportunities
- The downward revision of the coal production forecast by the Indonesian Coal Mining Association signals a quantifiable supply response to lower prices which could provide meaningful fundamental price support to the market.
- A slide in iron ore prices to three-year lows is forcing many high-cost miners in top consumer China to curb output, industry sources say, in a move that could reduce the surplus in a market weighed down by near record Chinese stocks. China produces about 1 billion tons a year of iron ore and buys 60 percent of the steelmaking raw material traded globally. But a slowdown in its economic growth has undermined demand assumptions and hit prices hard. Iron ore fell last week to $86.70 a ton, a level unseen since October 2009. Traders and major miners have been waiting for evidence that China is cutting output to help rebalance supply with the slowdown in demand from steel mills, per Reuters.
- Anglo American Platinum said it had halted work at its four Rustenburg Platinum Group Metals mines, which account for 17 percent of its output, due to fears for the safety of its 19,000 staff after labor unrest spread throughout South Africa.
Threats
- According to OPEC, global crude supplies are likely to be abundant and an expected slowdown in oil demand growth next year may be more severe than forecast if the global economy deteriorates. The world oil consumption is expected to decline to 800,000 barrels a day in 2013, from 900,000 a day this year, and OPEC members would need to pump an average of 29.5 million barrels a day next year.
- Reuters reported that the Côte d'Ivoire government plans to unveil a windfall profit tax on gold miners to benefit from higher prices for the metal. The new tax is expected to yield about $79 million of additional revenues to the state. It produced 12 tons of gold in 2011.
