Author Archives: Stuart Burns

Just a few weeks ago, the future looked bright for the oil price. Back in November, the Organization of Petroleum Exporting Countries and a number of non-OPEC producers agreed to cutbacks intended to reign in surplus global oil stocks and, in so doing, support the oil price.

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Initially, the agreement met with considerable success. Hedge funds and speculative investors went long on oil and the price rose. But, this week several comments and statistical reports coincided to remove some of that optimism and resulted in steep price falls. The West Texas Intermediate benchmark fell under $50 for the first time since December while Brent Crude was also down to $52.41 a barrel, its lowest level since November.

Source: The Financial Times.

According to the Financial Times, Wednesday’s decline came after the Energy Information Administration said inventories of U.S. crude stocks climbed by 8.2 million barrels, far more than analysts expected, as refinery oil purchases declined. If the rise in inventory was solely down to refineries slowing or delaying purchases, the impact would not have been as dramatic but the fear among investors is U.S. shale production is roaring back.

Reshalience Explained

Even Saudi Arabia’s oil minister, Khalid al-Falih, is quoted as saying OPEC’s agreement and the corresponding price increase has helped the U.S. shale market to recover and, perversely, undermined efforts to stabilize crude prices. U.S. shale producers have responded to low crude prices by innovating and cutting costs. Breakeven for many is now $40 a barrel, with some said to be as low as $25. Rig counts have doubled since the Spring of last year and output has continued to rise, contributing to the increase in WTI inventories.

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The oil price faces two major headwinds the FT reports. The first is little or no evidence the global oil market is really coming into balance as signatories to the agreement continue to cheat, and the second is an overhang of speculative length in the futures market. Part of this week’s price falls are said to be due to speculators bailing out of long positions after the realization that the market may not be coming back into balance as hoped late last year.

Where to, Brent?

Where the oil price goes from here is anyone’s guess but with even Saudi Arabia threatening not to renew the cutback agreement in the summer if global inventories do not fall back as expected — if other members of the agreement continue to cheat — the probability is the market overhang could get worse in the second half of the year.

U.S. shale oil producers appear to be enthusiastically ramping up production which will likely add do U.S. oil inventories and further depress the price. The oil price has a level which realistically reflects supply and demand but it’s almost certainly below $50 a barrel in today’s market.

It is rare that companies with a professional reputation like those of Thomson Reuters and the CME Group compete for the privilege of running such an important price benchmark as the London Silver Fix, a global benchmark that has been in place 117 years and has its origins in the London coffee shops of the 1700s. Even more rare? To announce after three short years they are stepping down from providing that service.

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CME Group and Thomson Reuters assumed control of executing the daily Silver Price Fix on Aug. 14, 2014, from the London Silver Market Fixing Company. CME Group has been providing the electronic auction platform on which the price is calculated and Thomson Reuters has been responsible for administration and governance of the LBMA silver price both our own Jeff Yoders and Reuters reported. So why, once a suitable replacement can be found, are the two firms stepping down from their respective roles in running the LBMA Silver Auction?

The simple truth seems to be that they are not making any money out of it. According to MarketWatch, new European legislation set for implementation in January 2018 will regulate the provision of, contribution to and use of a wide set of benchmarks which are highly regulated and deeply scrutinized, the site quotes Ross Norman Chief Executive Officer of Sharps Pixley Ltd. as saying.

“It follows there is much work and cost, but for very modest commercial reward, plus the ever-present danger of legal action or reputational damage — whether guilty or not.” Norman said. ‘Few sensible or sane people would want to create a financial benchmark — and, yet, it is absolutely necessary for the normal functioning of markets.”

You should ask, if that is the case, and Ross Norman probably knows better than anyone, who is going to take it on?

One site valued the total of above-ground silver holdings at approximately 1 billion ounces, putting the physical value at some $17 billion, but Bloomberg assessed the total silver-based financial market at closer to $5 trillion, much of which takes its price cue from the London Fix. It seems inconceivable that one of the major banks, or a number of them in cooperation, that currently contribute to the LBMA silver price will not step in to take over.

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If they don’t, the Silver Fix could conceivably migrate to Shanghai in the same way that the center of gravity for gold price-fixing has been gradually migrating east over the last decade.

After rising aggressively, some would argue that lithium prices have already peaked.

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Reuters quotes Paul Robinson, director at consultancy CRU Group saying that prices have little upside because demand growth has been met with aggressive supply build up, similar to rare earths and vanadium in past cycles. Even though demand is projected to soar 60% to 300,000 metric tons of lithium carbonate equivalent (LCE) annually by 2020, the newspaper quotes a National Bank Financial report saying new players could flood the market.

Strong Demand is Company, 60% Growth is a Crowd

“It’s crowded, no doubt about it, and it will get culled,” said Jon Hykawy, president of Stormcrow Capital, calling lithium, the “latest bubble sector.”

An indication of extent to which lithium fever has gripped investors and junior miners is illustrated in a Bloomberg article which reports that in the wake of President Mauricio Macri’s decision to remove currency and capital controls and taxes introduced by his predecessors, about 40 foreign companies began to consider opportunities in Argentina’s mining industry. More than half of those planning to mine lithium. Read more

The serial entrepreneur is never shy of making bold claims, and recently he announced plans for Space X to fly two private citizens on a mission around the moon by late 2018.

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The journey would take about a week and the astronauts will travel deeper into space than any human has ventured before, the Washington Post reports. Let’s think about this. Space X has never flown people before and in the last two years has had two rockets blow up on the launch pad or in flight. Even more challenging is that the mission would require the untested Falcon Heavy Rocket which has yet to fly and a modified Dragon Capsule which is also, as yet, untested in space.

So far Musk’s Space X has operated unmanned missions in a long-running partnership with NASA, to fly cargo to the International Space Station. The program to run manned missions has been delayed but the company still claims it will happen by the middle of next year.

Most, therefore, expect the end 2018 deadline for the lunar mission to be delayed but SpaceX has earned itself a reputation for setting and mostly achieving ambitious targets. It was the first private company to fly to the ISS and the first ever to land the first stage of a rocket that had lifted its payload into orbit. Along with Boeing, Space X has worked closely with NASA to develop reusable launch systems that not only service the space station but could ultimately go to Mars. Maybe spurred by this pace, the private sector is setting the agenda for space exploration. NASA recently announced that it is considering adding astronauts to the first flight of its Space Launch System rocket and Orion crew capsule the Post reports.

Interestingly, the change of administration in the White House has also had an impact on space exploration. Bob Richards, the chief executive of Moon Express, a private company that plans to land a robotic spacecraft on the moon this year is quoted as saying “With the new administration, regardless of what you think politically, comes a new sense of commercial partnerships which is good for us in the space industry. I feel, as many do, a lunar tide rising. The political environment is catching up with logic. With the moon as an important step for even deeper space exploration.”

As the Trump administration looks for a big win in space exploration, somewhat like Kennedy’s promise to send a man to the moon over 50 years ago, there is a new willingness to commit dollars. Some, particularly outside the U.S., look back on that decade in the 1960’s as America’s greatest hour, when the country achieved something no one else dared or could develop the technology to do.

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Not just for that generation, but in the years that followed it was an inspirational program that developed technologies and advanced science for decades to follow. Maybe it is with one eye on history and a fondness for private enterprise that the new administration is looking at the private sector to again take America to new goals. One man who does not lack the ambition to fulfill such ambition is Elon Musk. We should applaud it.

President Donald Trump’s address to Congress this week included a defense department budget request which it claimed was historic.

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“I am sending Congress a budget that rebuilds the military, eliminates the defense sequester and calls for one of the largest increases in national defense spending in American history,” he is quoted by the New York Times is saying.

What’s a Few Hundred Billion?

While claims that the proposed increase to the defense budget is historic might be stretching the truth, Trump’s proposal to add $54 billion to the Pentagon’s budget is said to amount to a 10% increase, a significant rise — If it was true. Unfortunately, the New York Times is not alone in questioning numbers. We have little interest here in making claims about fake news, but we’re more concerned about those communities and industries that rely on military spending for their livelihoods.

You want F-35 fighter jets with those carriers? Better add about $500 billion to that budget. Source: Adobe Stock/Spacekris.

Questions have been raised in recent years about the readiness of today’s U.S. military. After fighting two major wars in Afghanistan and Iraq, troops are said to be exhausted and supplies depleted. Even so, the U.S. spends more money on its military than the next seven countries combined. Read more

“The eagles are coming.” – J.R.R. Tolkien

Is it a case of the cash-strapped French military turning to a cheaper option or is it some kind of quasi-environmental option to train eagles in a counter drone role?

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A ZDnet article explains that the French military turned to eagles to counter the threat of terrorist or insurgent drones, faced by a nation that considers itself almost under siege from terrorist attacks.

D'Artagon goes drone hunting

D’Artagnon may not have been a full Musketeer, but, trust him, you don’t want none, terrorist drones! Source: Youtube/French military.

At the Mont-de-Marsan military base in southwestern France, the four eagles under training, named after the fictitious four (Athos, Porthos, Aramis and D’Artagnan) heroes of Alexandre Dumas fame, have been undergoing training since June of last year. The article explains that since the November 2015 Paris attacks, France is on high alert for any kind of threat including those from unmanned aerial vehicles or drones feared for their potential to drop small bombs on civilian or even military targets.

In a demonstration at the base one eagle (D’Artagnan) took out an approaching drone at 200 meters in less than 20 seconds, earning himself a food treat. Indeed, food seems to be the key incentive. The young birds are trained from three months of age by serving food on the top of drone wreckage creating an association between UAVs and food, the article explains.

It would seem the French are not alone. Dutch law enforcement officers have also been experimenting with the use of eagles to take out drones. The Dutch police explained the attraction of the birds of prey is that they could takeout drone threats without the need to deploy weaponry which could injure innocents.

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But what about larger drones you may ask? Nevermind those little handheld models available in high street stores or online from hobby shops. Well, the French have a plan. Apparently, they intend to kit out their eagles with leather and kevlar mittens to protect the birds’ talons.

But, you have to ask, what could you reasonably put a 5-kg golden eagle up against before it became unfair competition? Terrorists are unlikely to get their hands on the monsters deployed by major armed forces like the U.S. Army but even category 2 UAVs, like Boeing’s ScanEagle which is used largely for reconnaissance, weigh in at about 20 kg and travel at up to 150km/hr That’s tough opposition for a 5-kg eagle, even if it can match it for top speed and may enjoy Kevlar mitts!

We should not underestimate the effect environmental issues are having on policy in China. For the last 20 years, the West has watched the growing industrialization in China achieved at the cost of massive environmental pollution.

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Western firms have been forced to adhere to ever stricter environmental standards while steel, aluminum, cement and a host of other heavy industries in China, India and the developing world had been allowed to avoid or have flouted environmental standards saving them costs and hence allowed them to outcompete western firms. Read more

We are used to steel producers and their trade bodies raising objections to steel imports from China here in Europe, even from Russia and Ukraine but here’s a new one: Iran.

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Reuters reported last week that Steel lobby group Eurofer said Iranian exports to Europe had leapt to just over 1 million metric tons annually, putting the country just behind India at 1.9 mmt, and third to China at 5.7 mmt last year. Read more

A recent article from news service Reuters raises concerns over the continued strength of the aluminum price.

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Global aluminum prices have risen over the last six months, led by a strong rebound in the Chinese market. From a low of just over 9,000 yuan (electric town) in November 2015, the Shanghai price as risen steadily to above 14,000 yuan today as this graph from Thompson Reuters illustrates.

Source: Reuters

Spurred by healthy demand and the rising price, smelters have responded with gusto. As primary metal production in the rest of the world has fallen by an annualized 182,500 metric tons per year, output in China has surged. Although monthly figures are subject to considerable swings, Reuters reports January hitting a record of 2.95 million mt according to figures from China’s non-ferrous metals industry association. That is equivalent to an annualized rate of 34.7 mmt or 56% of global output, a staggering 19% year-on-year growth. Read more

The surprise announcement that PSA, holding company for the Peugeot, Citroën and DS brands, is in talks with General Motors to acquire GM’s European Opel and Vauxhall brands has set the cat among the pigeons in European capitals.

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One of the first justifications for any major merger or takeover is the opportunity for cost reduction from economies of scale and consolidation. PSA’s interest in the Opel/Vauxhall brands has some logic to it.

Constructeur Automobile Mondial?

Acquiring the brands would catapult PSA into the major league, closer to Volkswagen and Fiat in terms of automobile sales volume. Not surprisingly, the French publication Le Monde was one of the first to cover the story in depth (site est en francais, mes amis). As the newspaper explains, for GM, Opel and Vauxhall make up only 12% of the company’s production of roughly 12 million vehicles a year, but for PSA an additional 1.2 million units on top of the existing 1.9 million should create considerable opportunity for economies of scale, at least in the European market where PSA currently sells 1.9 million vehicles out of a total production of 3.1 million worldwide.

Will a deal selling Opel/Vauxhall to Peugeot mean more 308s? Source: Adobe Stock/mrivserg.

The worry in European capitals, though, is that those economies will be achieved by closing production facilities. With PSA 14% owned by the French government and Opel a major employer in Germany, the telephone lines between Paris and Berlin have no doubt been humming seeking reassurances that if European approval is to be given, no job losses will result in Germany or France. Read more