Articles in Category: Commodities

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Before we head into the weekend, let’s take a look back at the week that was with some of the stories here on MetalMiner:

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As readers of MetalMiner are no doubt familiar, tariffs have changed the commodities landscape over the last year-plus.

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That very subject was at the center of a conference last week in Grand Rapids, Michigan.

During The Right Place/Supply Chain Management Council’s Commodity Trends 2019 Outlook, MetalMiner Executive Editor Lisa Reisman delivered an address on steps companies are taking toward tariff mitigation. Businesses have been forced to pay extra attention to risky links in their supply chains, particularly as tariff totals continue to rise between the U.S. and China.

Other speakers at the event covered other angles of the tariff topic, including exemptions, Section 301 at large and the long-term view.

MetalMiner’s Taras Berezowsky covered the event for sister site SpendMatters:

From the multiple expert presentations to numerous audience questions and comments on the topic, it didn’t take much to pinpoint the effects of tariffs as a recurring theme of the half-day conference, at which MetalMiner Executive Editor Lisa Reisman presented our 2019 metals outlook. Indeed, the current onslaught of tariffs — including those implemented under Sections 201, 232 and 301 of U.S. trade law — seemed to be one of the primary concerns on everyone’s minds.

 

The hosting group’s primary goal is to equip West Michigan businesses, mainly small and medium-sized manufacturers, with the knowledge they need to manage their commodity strategies. Given the current trade environment, it’s no surprise that many of the event’s key takeaways centered around what types of actions these manufacturers can — or should — take to avoid risks created current and potential tariffs.

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Read Berezowsky’s full recap of the event here.

To be fair, not all shale gas drilling is slowing, but in the Permian Basin, which has seen the most incandescent growth in recent years, according to the Financial Times, growth is slowing markedly, according to Schlumberger, Halliburton and the U.K.’s Weir Group – all majors suppliers to, or active players in, the fracking industry.

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Source: Financial Times

The article cites logistical challenges, including labor costs and a lack of adequate pipeline capacity constraining growth. The article states the following factors have undermined the economics of oil production in the region:

  • rising costs for labor and equipment
  • difficulties in disposing of the unwanted water and natural gas produced alongside the oil
  • and, above all, a shortage of pipeline capacity for taking crude from the wilds of west Texas to refineries and export terminals along the Gulf of Mexico coast.

The Financial Times quotes Bill Thomas, chief executive of EOG Resources, who said: “When you’re focused on one basin, one play, it gets very difficult to continue high rates of growth.”

Source: Financial Times

From a low two years ago, the tight oil industry’s rebound has been impressive. Much of it is coming from the Permian Basin, with national production up by 1.5 million barrels a day in the 12 months to July.

But questions are being asked as to whether or not the Permian may be reaching a plateau. New wells drilled alongside older wells are relatively less productive than the original when assessed on the basis of their length and the weight of sand used in the fracking process — so-called “parent” and “child” wells, as the Financial Times calls them.

That would suggest the long-term potential for the region to continue impressive growth at ever-lower cost is called into question.

Whether that proves to be the case remains to be seen. Of course, the Permian is not the only tight oil resource in the country. While others haven’t seen the level of investment the Permian has enjoyed in the last two years, subject to oil prices, the other regions still have huge potential.

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

What it probably does say is the stellar growth of recent years is unlikely to continue and may be slower from the middle of this year onwards. With the dramatic rise in steel prices following the U.S.’s imposition of a 25% import tariff on steel products, it was to be expected drillers would find both exploratory work and infrastructure investment slowing. However, the Financial Times suggests the slowdown has caught many in the industry by surprise and suppliers’ share prices have taken a hit as a result.

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Before we head into the Labor Day weekend, let’s take a look back at the week that was and some of the storylines here on MetalMiner:

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  • MetalMiner’s Stuart Burns took a look at Chinese domestic consumption and its impact on commodities.
  • On Monday we delved into recent trends in the world of aluminum, from prices to company investments.
  • How big of an impact are U.S. tariffs having on Turkey? In short, a big one, given the prominent place its steel sector has in its overall economy.
  • The U.S. and Mexico announced an agreement in principle on certain NAFTA provisions, as talks awaited between the U.S. and Canada with respect to the 24-year-old trilateral trade deal.
  • You’ve probably heard President Trump’s call for a s0-called “Space Force,” touted as a sixth branch of the armed forces. Burns looked into that and what the call for a Space Force will, in all likelihood, turn out to be (if anything).
  • Not surprisingly, U.S. imports of steel are down through the first seven months of the year.
  • The Department of Commerce made an affirmative determination in a countervailing duty investigation of imports of steel wheels from China. The case will now move on to the U.S. International Trade Commission.
  • Global crude steel production was up 5.8% year over year in July, according to a World Steel Association report.
  • Sohrab Darabshaw touched on Vedanta and its plans to invest billions of dollars, namely in Indian oil and energy businesses.

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

How often have you seen headlines like “Copper rises on strong Chinese growth” and China’s industrial profits rise the most in four years on commodity prices“?

Apparently, a mutually supportive cycle of strong growth fuels rising commodity prices, and rising prices fuels strong growth.

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But recently we have seen a softening in commodity prices and often the reverse explanation has been cited (e.g., “Chinese demand concerns hit metals and related stocks“).

That relentless growth machine that has been China for the last two decades is finally showing signs of distress and, ironically enough, it is not the failure of the country’s long-term, export-led growth model that is to blame; according to The New York Times, it is domestic consumption that is slowing.

I say “ironically” because Beijing has been moving heaven and earth to refocus the economy from export-led growth to domestic consumption. This is in part because they could see the writing was on the wall regarding growing international resistance to China’s mercantilist trading approach. It’s also partly because it was fueling massive and often inefficient or wasteful investment in the country’s industrial sector and because environmentally heavy industry is a much more polluting source of GDP growth than consumption.

For those and other reasons, steering the economy toward meeting domestic consumption was a logical step in the maturation of the economy. Unfortunately, domestic house cost inflation, poor wage growth, an aging economy and trade wars are significantly depressing demand.

According to The New York Times, China is experiencing a “consumption downgrade,” as a generation of young Chinese, struggling with the high cost of property and slowing wage growth, downgrade their lifestyle expectations and spending. A blogger’s headline captured the mood, saying “This Generation of Young Chinese, Brace for the Bitter Days Ahead,” the paper reports.

As the article observes, China has played a major role in global growth. Chinese consumers help fuel growth at global companies like Apple, General Motors, Volkswagen and many others.

Yet retail sales this year have grown at their slowest pace in more than a decade. Wages in the private sector are growing at their slowest pace since the global financial crisis. The stock market has fallen by one-fifth.

In the longer term, consumers’ worries about the cost of living are postponing their decisions to have children, the article states, to the point they decide to remain childless for life. Generally, in developing countries this would not be an issue. Uniquely, China has a precarious demographic following decades of the one-child policy, which has resulted in a shrinking workforce that has been masked by a mass migration of peasant workers to the cities, but has now been largely played out.

Although the one-child policy was relaxed in 2013 to allow two children per couple, the change came about in a period when the high cost of living was pushing in the opposite direction, much as families in Europe and parts of North America, many elected to only have one or even no children.

China faces a demographic time bomb, according to Business Insider, as its aging population meets a dearth of new entrants into the job market.

With no state-supported social security or retirement safety nets, young workers have to save more, after high accommodation costs stretching budgets and dissuading the spending that had been a feature of a more rapidly growing wage economy just 5-10 years ago.

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

If consumption doesn’t spur GDP growth and the export model suffers from rising protectionism, then metal prices will face a future without the customary support of robust Chinese GDP growth to spur investor confidence.

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Before we head into the weekend, let’s take a look back at the week that was and some of the metals-related storylines here on MetalMiner:

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  • MetalMiner’s Stuart Burns took a look at the natural gas sector, which make be in for a shakeup as the summer winds down.
  • The rise in global trade tensions has involved tariffs, tariffs and more tariffs…but what about the impacts on currencies, especially emerging-market currencies?
  • The International Lead and Zinc Study Group this week released preliminary first-half numbers for the global lead and zinc markets.
  • Turkey has filed a request with the World Trade Organization (WTO) for consultations with the U.S. over the recently increased steel and aluminum tariffs.
  • The U.S. dollar has come off a bit recently, which is good news for commodities prices.
  • The Aluminum Association, ahead of the U.S.’s planned meetings with Chinese officials on trade, asked the Trump administration to focus its trade remedies on Chinese overcapacity.
  • India is importing more coal as domestic supply has not been able to meet demand.
  • MetalMiner this week released a new white paper on the “farm-to-table” movement coming to manufacturing — check it out here via free download.
  • A Canadian company, Petroteq Energy, is touting what it claims is a clean extraction process in the hunt for oil under Utah’s Asphalt Ridge.

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

Just when environmentalists and shale oil had pretty much done for any more significant investment in tar sands, a couple of ex-oil industry veterans, David Sealock formerly of Chevron, and Jerry Bailey, formerly of ExxonMobil, are out to do to oil sands what modern drilling and fracturing did to tight oil.

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Where are they doing it? Utah, of all places.

According to an article in The New York Times, a Ukrainian-backed Canadian minnow, Petroteq Energy, is promoting the environmental credentials of a new solvent-based extraction process to release the riches locked up in Utah’s Asphalt Ridge. As its name suggests, the deposit is surface occurring and, somewhat like the Alberta oil sands, is a heavy crude saturated rocky outcrop.

Petroteq claims its process uses “benign” solvents to extract the oil, which are then recycled, leaving virtually clean sand as only waste product.

The process is different from that employed in Canada and elsewhere, which relies on steam and large quantities of water, resulting in toxic tailings pools and horrendous scarring of the landscape.

Few would argue the Alberta tar sands have been an environmental disaster, but Petroteq is at pains to stress its technology is completely different and set to revolutionize the industry.

Specifically, the process takes large chunks of the oil-saturated sands and crushes them into small chunks, then mixes with solvents. The mix is then transferred to a second tank, where a centrifuge spins the lumpy liquid, separating the oil from the sands. Clean sand is moved to a reclamation landfill. Finally, the solvents are distilled out of the oily liquid and recycled over and over again. The company claims virtually no chemicals are left in the sand that is put back as landfill.

Petroteq itself is not going to rock the oil industry boat; it only employs 20 people at present. Although it is shortly ramping up from proving outputs of 250 barrels a day to 1,000 barrels a day, even peak output is only put at 10,000 barrels, some years down the line.

But the cost of production is said to be U.S. $32/barrel, including all costs and taxes. So, on current price predictions, the technology appears feasible. Much will depend on the firm’s ability to support its claimed environmental credentials.

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

Environmentalists call tar sands a carbon bomb, the article notes, and will lobby hard to prevent expansion if there is evidence that the plant is leaking solvents into the air, soil or water.

So much for peak oil.

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When it comes to coal, India’s litany of woes continues.

Despite high prices in international markets, imports continue to rise — and there’s no letting up on that front.

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After a dip in FY 2017, overall coal imports increased 10% in FY 2018. What’s more, the situation is so bad that India’s largest power producer, the National Therma Power Corporation (NTPC), is running short on supply and has sought bids to import coal.

NTPC Ltd. is seeking 2.5 million metric tons (MT) of imported coal, according to two separate tenders on its website. The last time it sought foreign coal was in 2014.

One of many reasons for the shortage is that India’s largest coal producer, Coal India Ltd. (CIL), which produces more than 80% of India’s coal, continues to fall short in production and just cannot keep up with the rising demand, driven largely by higher electricity generation.

But if you were to ask CIL, it would in turn blame India’s congested railway network and a shortage of railway carriers to ship the coal to its customers; this, they argue, has forced consumers from power plants to aluminum smelters to purchase the fuel from overseas.

Rating agency CRISIL said here in a report that the power sector imports in India were projected to cross 75 MT by FY 2023, most of it driven by demand from imported coal-based plants. This comes even as non-power sector imports are expected to decline to 70 MT due to “improvement in domestic supply post linkage auctions and development of key captive blocks allocated to the non-regulated sector,” according to the CRISIL report.

But a report by news agency Reuters had an even more interesting explanation for the continued shortage.

It cites Tim Buckley, Director of Energy Finance Studies at the Institute for Energy Economics and Financial Analysis (IEEFA), as saying that a large part of India’s coal imports was used by consumers other than on-grid power plants. Buckley pointed out to Reuters that there were about 30 gigawatts (GW) of coal-fired generation capacity that was used by captive power plants.

They included aluminum smelters, cement makers and other industrial users, more reliant on coal imports as their demand wasn’t prioritized by Coal India; meaning, these folks were last in the queue.

According to Buckley’s calculation, if this 30 GW was run at 61% capacity, it would need about 96 MT per annum, which represents about two-thirds of current thermal coal imports. So, captive power plants had to resort to imports when Coal India couldn’t meet their needs.

However, the shortages are not limited to just power stations. Coking coal, used in steelmaking, has also seen a sharp surge.

Left with little choice for now, the Indian government has directed CIL to raise daily output and sales to 2 MT from 1.4 MT achieved in the last quarter.

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The coal ministry told Coal India that it must produce and sell 1.9 MT and 1.94 MT, respectively, throughout the year. In the June quarter, CIL managed daily production and sales of 1.4 MT and 1.61 MT, respectively.

The dollar dropped this week and stocks pulled back following comments early this week form President Trump that reversed earlier optimism over U.S.-China trade talks later this week.

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According to the Financial Times, the index tracking the U.S. dollar was down 0.3% at 95.606, its lowest since early August. The drop cut its year-to-date gain to just under 4% and prompted a modest rally in commodities, which have been depressed by a persistently strengthening dollar.

This graph from the Financial Times shows the relatively benign bounce after a marked period of strengthening:

Source: Thomson Reuters Datastream (via Financial Times)

Brent oil settled at $72.21 a barrel, up 0.5%, after some volatility while U.S. West Texas Intermediate was 0.8% higher at $66.46. Gold was up $5 at $1,189 an ounce, after hitting an 19-month intraday low of $1,160 last week. Commodities generally trade inversely to the dollar; if the dollar weakens, as it has this week, commodities tend to rise.

The president poured cold water on the prospects for a deal from the upcoming talks, but that may have been a calculated step to apply pressure to the other side to come to the table willing to compromise.

Talk of a meeting between Trump and Chinese President Xi Jinping in November is, at this stage, highly speculative and will depend on compromises being made on both sides — something Trump appears in no mood to make. He seems to feel the U.S. holds all the cards, and indeed from a trade balance point of view, an escalation of sanctions would likely hurt China more significantly than the U.S.

There is likely to be more currency-influencing news this week, with the minutes of the latest Fed meeting due to be released on Wednesday and opening speeches at Jackson Hole due later this week.

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In China, the Shanghai stock market is down about 20% this year, reflecting worries the economy was slowing before the tariffs were applied — a situation that is deteriorating as the weeks go by and the rhetoric is ramped up.