Don’t Play Monopoly with your Portfolio

Thursday, November 10th, 2011

This Week’s Feature: BMO Equal Weight Utilities ETF ( Ticker: ZUT )

Globally equity markets staged an incredible recovery from their October lows. However, Europe’s ongoing troubles ensure that heightened anxiety will remain. Even more reason to keep a careful eye on risk inside your portfolio.

Major equity indices for the United States, Europe and Emerging Markets rallied by 14% to 20% over the last five weeks. The S&P TSX 60 rose 12.5%. Commodities rallied too, with crude oil and copper up about 19%.

Euro-zone relief drove the rally, just as Euro-zone despair drove the drop. Until the Euro-zone begins to resolve its debt issues, every move it makes will agitate markets. When the Greeks decided to put their debt plan before a referendum last Tuesday, European equity markets fell 5%.

In this volatile environment, investors must be more vigilant in managing portfolio risk. One risk often overlooked is counterparty risk. As the exchange-traded market has developed, more, er…esoteric, ETFs have arisen, some of them with counterparty risk.

First, I should stress that most ETFs invest directly in stocks or bonds. These plain vanilla ETFs pose no counterparty risk. Other ETFs use futures contracts: no counterparty risk here either, but they do have other issues such as leverage that I have discussed before.

Then, there are ETFs that use “over-the-counter” (OTC) derivatives contracts. These are the ones that come with counterparty risk. These ETFs do not invest directly. Instead, they pay a fee to a counterparty, say a bank, and in exchange, the bank pays the ETF the return on some index like the S&P 500. All goes well until the day the bank is unable to pay the return.

How can you tell whether your ETFs have counterparty risk? You must read the prospectus. In a past role as a manager of OTC derivatives for a Bay Street fund manager, I was responsible for controlling counterparty risk. Are most investors ready or willing to do that? Unlikely.

In Europe, institutional investors are selling their OTC ETFs in droves and shifting to plain vanilla ones. France’s second largest bank, Société Générale, has seen outflows of Euro 4.4 billion this year from the OTC ETFs managed by its Lyxor division. There is nothing inherently wrong with the ETFs but investors are worried about SocGen’s exposure to Greek debt. SocGen’s stock price has fallen nearly 60% this year.

In recent notes, I discussed sector diversification and lower-risk, higher-dividend sectors like REITs. Another is the utilities sector.

When we play Monopoly, my sons tend to pass on Water Works and Electric Company in favor of Pacific Ave or Boardwalk. Like them, most Canadians pass on utilities for their portfolios.

That’s largely because the S&P TSX Composite passes on utilities. Three sectors dominate the Composite – financials, energy and materials – with nearly 80% of the weight. Utilities account for just 2%, even though their benefits would seem to mesh well with what most investors want.

Utilities are less volatile than energy, materials and even the Index as a whole. They pay better dividends than the Index and every other sector barring telecoms. Best of all, they are not so closely tied to the events in Europe.

There are a couple of Canadian utilities ETFs available: the iShares S&P TSX Capped Utilities (XUT/TSX) and the BMO Equal Weight Utilities (ZUT/TSX). Of the two, BMO ZUT is larger with about $95 million in assets.

iShares XUT is market cap weighted and holds 11 companies, with Fortis, TransAlta, Emera, Canadian Utilities and Atco making up about 70%. XUT pays a dividend of about 2.9%.

BMO ZUT is rebalanced twice a year to equal weights across 15 companies. It pays a dividend of about 5.3%. ZUT also holds one oil pipeline company, Pembina: not strictly a utility but the same idea.

The high yield will attract longer-term investors. In the near term, keep in mind that valuations are rich. The average price-to-earnings ratio for the companies inside ZUT is 23.4 times, with a price-to-book of about 1.93 times. For the Composite, the values are 15.2 times and 1.84 times.

Some of the premium is justified by the benefits. But a price fall in the near term is possible and that would be a good time to enter.

ZUT is less volatile than XIU, the TSX 60 ETF.

The archerETF Global Tactical Portfolio

archerETF offers Global Tactical Portfolio Management.

Our outlook is Global: we invest across countries, sectors, commodities and other asset classes to improve returns. Our management is Tactical: we strive to select the right opportunities at the right times in response to changing market conditions to manage and minimize portfolio risk.

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Energy and Natural Resources Market Cheat Sheet (November 7, 2011)

Sunday, November 6th, 2011

Energy and Natural Resources Market Cheat Sheet (November 7, 2011)

Strengths

• The Global Resources Fund performed in line with the benchmark for the week.  The NYSE Arca Gold Miners Index, Oil Exploration & Production and the Metals and Mining index were among the few indices positive for the week.  With continual uncertainty around the state of the Eurozone, despite some clarity earlier on this week, investors sought refuge in gold.  The fund’s exposure to the precious metal helped to reduce downside risk.  The indices were up 1.4 percent, 0.86 percent and 0.9 percent respectively.
• Roubini Global Economics highlighted that oil prices rallied in October, narrowing the Brent-WTI spread, with WTI appreciating over 24 percent to $94.2 per barrel and Brent rising by 11 percent to nearly $111 per barrel.  Oil and oil product inventories drew down to below their five-year average, as did growth, which was surprising on the upside at an annualized adjusted rate of 2.5 percent for third quarter.
• Bloomberg reported that the number of India’s power stations with coal stockpiles of fewer than four days’ normal use has tripled in two months, prompting electricity-supply cuts and threatening to curb growth in Asia’s third-biggest economy.  Coal output in India was disrupted with monsoon rains flooding mines and a workers’ strike.  The country’s stockpiles dropped from 70.9 million metric tons of coal on October 18 to 8.1 million tons on November 1, also representing a 33 percent decline from the first of September.

Weaknesses

• Considerable weakness relative to other indices was seen among construction materials, alternative energy and the Baltic Dry Shipping Index, all down 4.39, 4.82 and 4.17 percent, respectively for the week.
• Freeport-McMoRan Copper & Gold’s Grasberg mine in Indonesia is operating at only 5 percent of its capacity of 230,000 tons of ore per day, according to the director general of mineral resources and coal at the Energy Ministry. This works out to a loss of over 1,600 tons per day of copper-in-concentrate. Freeport recently declared force majeure on shipments of copper concentrates as a result of an increasingly acrimonious strike over pay and conditions that is now into its sixth week. Grasberg is the world’s second-largest copper mine equal to around 4 percent of global output and is also one of the world’s largest gold mines.
• A Bloomberg report highlighted that Brazil’s industrial sector has been the hardest hit by Europe’s debt crisis and slowing growth in the U.S.  The economic activity index, a proxy for gross domestic product, contracted 0.53 percent in August, its biggest monthly drop since the global financial crisis of 2008.  It dropped further for the month of September, posting its second steepest decline since the financial crisis, sparking the central bank’s argument for more interest-rate cuts in Latin America’s largest economy.

Opportunities

• Global copper supply remains challenged.  Xstrata estimates 2011 global copper mine output growth to be the weakest since 2002, with mine production to rise by only 40 kilotons this year.
• McKinsey Quarterly published a piece examining the oil industry and whether or not supply growth could accelerate to meet global demand.  The report highlighted that despite high oil prices for much of the past decade and surging investment outlays by many major private and national oil companies alike, capacity has only risen by more than 1 percent a year during that time.  The company’s current projection suggests that the world could reach a realistic supply capacity of around 100 million barrels a day by 2020, which is an increase from 91-92 million barrels per day today.  This number, however, would barely satisfy the roughly 100 million barrels of liquids the world would consume each in day in such a scenario, which is up from 88-89 million today.

Threats

• Bloomberg reported that Brazil plants to limit the expansion of mining companies with concessions in sizeable areas as part of new mining rules.  It has been speculated that this may affect companies, such as Vale SA, negatively.  Vale is a Brazilian diversified mining multinational corporation and one of the largest logistics operators in the country.  It is the largest producer of iron ore, pellets, and second largest of nickel.
• Roubini Global Economics is assigning a 60 percent probability to a recession in developed markets in 2012.  The firm believes this will cap the recent surge in crude prices despite OPEC output tightening in the wake of Libyan supply entering the market.
• ArcelorMittal SA, the world’s number one steelmaker, said that a summer dip in demand is now extending into a second-half slump, with even lower steel shipments and prices in the fourth quarter, leading it to scrap some investment plans.  ArcelorMittal globally supplies between 6 and 7 percent of steel.  It is attributing this to economic uncertainties, the risk of recession in developed markets, and policy tightening in China, and is causing customers to be increasingly cautious.

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Energy and Natural Resources Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

Energy and Natural Resources Market Cheat Sheet (October 31, 2011)

Strengths

• The commodities complex, including industrial metals and crude oil, gained across the board as markets welcomed a deal by the eurozone leaders this week. West Texas Intermediate (WTI) crude oil gained nearly 7 percent and copper jumped more than 14 percent this week as investors’ risk appetite exploded. Commodity-related equities also rallied which drove gains in the Global Resources Fund (PSPFX).
• Macquarie Research highlighted that U.S. durable goods orders, excluding transportation equipment, rose 1.7 percent in September. This was greater than the consensus expectation and is the strongest reading in the last six months.
• Scotiabank noted that copper inventories in Asia are falling at a rate of 50,000 tonnes per week, creating upward pressure on the copper price. The rapid decline means there’s potential for zero inventories by Christmas.
• Rising oil prices have led to a rise in corporate earnings for energy companies. Major producers including Exxon Mobil, Royal Dutch Shell and France’s Total reported strong earnings results for the third quarter this week. Both Exxon Mobil and Royal Dutch Shell reported earnings 40 percent greater than a year ago, while Total’s profit rose 13 percent over the same time period, according to Resource Investing News.

Weaknesses

• Despite positive numbers across the board for the week, the Alerian MLP Index and the Baltic Dry Ships Index were laggards in the sector. However, each saw positive gains, up 3.1 percent and 3.8 percent, respectively.
• A Macquarie report this week noted that the latest SteelBenchmarker assessment by World Steel Dynamics has again highlighted the pressures facing the steel industry. The benchmark World Export hot rolled coil (HRC) price fell 4.2 percent over the past 14 days to $656 per tonne, the lowest since December 2010.
• Non-OPEC oil supply outages have been running twice the level seen in 2010. Further evidence of the supply-side deterioration was seen in the extremely poor set of August numbers for U.K. domestic production. At 808,000 barrels per day, total production is at its lowest levels since 1978.

Opportunities

• Data compiled by Bloomberg this month shows that traders have rising bullish expectations for the agriculture sector. Options traders are snatching up protection against declines in agricultural stocks at the fastest rate in four years. Puts to sell the Market Vectors Agribusiness ETF outnumber calls by more than 2-to-1, the largest discrepancy in almost a year. Over the past month, $2.7 million has been invested in the agribusiness ETF, second-most among all U.S.-listed global equity ETFs.
• China will be reporting its October HSBC Manufacturing Purchasing Managers Index (PMI) on Monday, October 31. The flash PMI announced this past Monday showed expansion in the Chinese manufacturing sector for the first time since mid-summer and the country contributed more than half of global incremental oil demand for the month of September, according to the Financial Express. An accelerated PMI could have a meaningful effect on commodities.
• A shortfall in diesel fuel supply is spreading across China. The Xinhau news agency is reporting that private gas stations are scouring the country for diesel supplies and lines are growing longer at filling stations in major cities. Diesel fuel shortages are common in the winter but longer and heavier-than-usual refinery maintenance mixed with a reduction in retail prices could create the perfect recipe for a squeeze once again this year. PetroChina imported 120,000 tonnes of diesel fuel in October to meet the increasing demand while China National Petroleum Corp. (CNPC) is running its refineries at full capacity. Refinery runs have increased 5.7 percent on a year-over-year basis and the company has encouraged refineries to reduce naphtha output to allow for higher diesel production. Further, CNPC has said that it will raise refinery runs to the second-highest level on record next month in order to maximize diesel output.
• Resource Investing News says rising production costs are putting downward pressure on fertilizer profits. Fertilizer production is very energy intensive, with production requiring significant amounts of sulfur, ammonia and natural gas. Analysts worry that rising input costs and shrinking margin profits may negatively impact the entire industry. However, Potash Corporation of Saskatchewan anticipates improving margins over the near future due to “economy of scale” in terms of potash production. According to Potash, “with demand expected to rise, we believe our expanding potash capability provides a unique growth opportunity. The powerful levers of selling more volumes at higher prices, with the potential for lower per tonne operating costs, offer significant gross margin potential in the years ahead. Beyond the opportunity for margin expansion, the potential for lower per-tonne mining taxes and improved earnings from our equity investments provides significant growth potential.”

Threats

• September PMI data across Emerging Europe will be released on November 1. Roubini Global Economics (RGE) is forecasting further weakening in manufacturing conditions, reflecting a decline in export orders and weakening growth outlook in the eurozone.
• On Wednesday, Freeport McMoRan declared force majeure on shipments of copper concentrates from its Grasberg copper mine in Indonesia as an increasingly acrimonious labor strike over pay and conditions continued into its fifth week. Mineweb suggested that this would mean that the company is not anticipating a protracted period of disruption at the mine.
• In the midst of earnings reporting season, Resource Investing News reported that many analysts are skeptical about producers being able to reach their production targets. As an example, Exxon Mobil will need to pump out 5 million barrels a day to reach its 4 percent growth target for 2011. For the September quarter, Exxon Mobil reported producing 4.28 million barrels a day. Analysts have speculated that one problem for the producers is that companies must sign production-sharing contracts with local governments in some countries. This means oil producers receive a smaller output when countries cash in on rising crude prices. Such agreements are prevalent in Africa, which accounts for 20 percent of Exxon Mobil’s crude oil supply.

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Tags: agricultural, Alerian Mlp Index, Commodities, Copper Price, Corporate Earnings, Crude Oil, Durable Goods Orders, Earnings Results, Exxon Mobil, Hot Rolled Coil, Industrial Metals, Laggards, Opec Oil, Outlook, Rapid Decline, Resources Fund, Rising Oil Prices, Risk Appetite, Royal Dutch Shell, Same Time Period, Steel Dynamics, West Texas Intermediate, World Steel Dynamics, Wti Crude Oil
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Sprott: Investment Outlook (October/November 2011)

Friday, October 28th, 2011

Oil or Not,
Here They Come

By Kevin Bambrough
Contributing Author: Paul Dimitriadis
Sprott Asset Management

Oil has been markedly absent in the financial headlines lately. While the recent clamor over EU solvency and weak global growth has temporarily displaced its media attention, oil’s crucial importance to the world economy has not dwindled in the slightest. Oil remains the world’s greatest single energy source today, providing over 1/3 of our energy supply. Although it is well understood that the oil price is critical to the global economy, we sometimes neglect to appreciate how tightly oil supply is correlated to global growth. By historical standards, the world has been coping with constrained oil production and high oil prices for most of the past six years. This tightness in oil supply has been a significant factor limiting global growth, and it would appear that no matter what financial solutions are eventually engineered by our politicians, global growth will remain significantly restricted by the real economy’s ability to produce oil. Limited global supply growth means that the Western world now faces significant competition for oil from emerging markets whose citizenry are willing to work much harder for far less. This will continue to result in a narrowing gap of per capita consumption between emerging and developed economies as the emerging economies continue to gain relative economic strength, wage growth, currency appreciation and purchasing power. We believe strategic investments in oil producers and service companies will offer an effective way to profit from this trend.

Production – Where’s the Growth?

We begin with a review of global oil production. We first wrote about Peak Oil back in 2005; and speculated that we were approaching the pinnacle of global crude oil production.1 As Figure 1 below illustrates, since that time, global oil production has grown very little, appreciating by a mere 2% in total production. This production plateau generated the 2008 oil price spike to nearly $150 per barrel. Subsequently, despite the economic stagnation experienced by developed economies, the price of Brent Crude Oil has averaged over $78 per barrel, four times higher than the ~$18 average that Brent traded at in the 1990s.2

Despite this extremely large and sustained increase in price, oil production has failed to grow meaningfully. Over the past ten years, most experts have consistently overestimated future production growth and have continually revised their forecasts lower as a result. Figure 2 from the U.S. Energy Information Administration (“EIA”) below charts production forecasts made in 2000, 2005 and 2010. Over the last decade the EIA has revised its global oil production estimates lower for 2015 and 2020 by 14% and 18%, respectively. In light of these downward revisions, it still seems extremely optimistic that supply will increase significantly in the coming years.

Figure 3 above illustrates that the International Energy Agency (“IEA”) estimates have been just as inaccurate, forcing it to reduce its global oil production estimates year after year.

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Tags: Author Paul, Canadian, Canadian Market, Commodities, Crude Oil, Crude Oil Production, Dimitriadis, Economic Strength, Emerging Economies, Energy Supply, Financial Headlines, Global Economy, Global Growth, Global Oil Production, Global Supply, India, Investment Outlook, Oil Producers, Oil Supply, Outlook, Peak Oil, Solvency, Sprott Asset Management, Strategic Investments, Trend Production, World Economy
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Commodity Decline Could Provide a “Tax Cut” (Gibley)

Wednesday, October 26th, 2011

Commodity Decline Could Provide a “Tax Cut”

October 24, 2011

by Michelle Gibley, CFA, Senior Market Analyst, Schwab Center for Financial Research

Key points

• The global growth slowdown could offer some positive news: a decline in commodity prices and inflation.
• Domestically oriented countries—those that rely more on consumer or construction spending—could benefit from the consumption stimulus, while domestically oriented, emerging market countries could receive a dual benefit as monetary policy pressure lessens.
• Commodity prices may not decline to the same degree as in 2008, because another global recession appears unlikely.

It’s hard to cheer on a global economic slowdown, but there could be some good news for consumers amid the pessimism. As economic growth slows, the demand for commodities—such as oil, metals and food—typically slows, resulting in falling prices. The impact of this could be similar to a “tax cut” for consumers, giving them more money in their pocketbooks.

The benefit of this “consumption stimulus” is most likely to be seen in countries where growth is generated domestically, either through consumption or construction spending. Examples of developed, domestically oriented countries include the United States, Japan and the United Kingdom.

In addition to the “consumption stimulus,” emerging market countries could benefit from the downward pressure that falling commodity prices puts on inflation—reducing the need to hike interest rates.

Here, we’ll discuss:

• Why might we see a “consumption stimulus”?
• Why is inflation likely peaking?
• Who is likely to benefit from the “consumption stimulus”?
• Why are commodity prices unlikely to decline as much as in 2008?
• What are Schwab’s investment resources for international investors?

Why might we see a “consumption stimulus”?

Commodity prices tend to fall when economic growth slows due to reduced demand from both consumers and businesses. Consumers may cut back on energy use and purchase fewer goods and services to save money. Meanwhile, businesses may reduce production in response to reduced demand.

In addition, most commodities are priced in US dollars. When the dollar falls, commodity prices tend to rise as it takes more dollars to purchase the same amount of a commodity. And as we’re seeing now, the inverse is also true; commodity prices tend to decrease when the dollar rises.

While consumers pay attention to the prices they pay at the register, investors care more about inflation—and notably, we may have seen the top.

Why is inflation likely peaking?

With economic growth slowing, some investors are worried that inflation may increase because they may expect the Federal Reserve to pursue QE3 (quantitative easing, or asset purchases), which could weaken the dollar and raise commodity prices.

However, the dollar may not decline. Thus far, the Fed has done more to stimulate growth than the rest of the world. And with global growth slowing, other global central banks may begin to lower rates or pursue other stimulus measures in a “catch-up” phase. The impact of rate changes on currencies is relative. But the net effect of declining rates abroad and potentially better growth prospects in the United States is that the dollar may have an upward bias.

Commodity prices have already started to fall as a result of the economic slowdown, but inflation has not yet shown a noticeable decline. However, taking out the impact of the dollar and holding commodity prices unchanged from the levels reached this summer, measures of inflation are likely to decline relatively soon. The reason is that inflation is measured as a percent change from the prior period.

Commodity prices likely peaking near-term

Source: FactSet, Commodity Research Bureau, Dow Jones, NYMEX as of October 19, 2011.
* Indexed to 100 = 10/18/2006. 25-day moving average.

Who is likely to benefit from the “consumption stimulus”?

Depending on the type of economy, the “consumption stimulus” can have a different impact:

• Domestically oriented countries, those with bigger consumer sectors or reliant on infrastructure spending for growth, would benefit from lower commodity prices because a “consumption stimulus” could result in better potential for growth to reaccelerate. The extra money in consumers’ pocketbooks can be used for discretionary spending, and make infrastructure spending more attractive.
• Export-oriented countries tend to suffer in a global slowdown, although lower raw materials prices can reduce margin pressures for companies with less pricing power.
• In emerging market countries, food price declines have a large impact on inflation, because food accounts for a disproportional share of consumer spending. Emerging market inflation has been a problem due to rising commodities and expectations that prices increases would continue. Additionally, higher wages, which contributed to inflation when growth was accelerating, are likely to ease along with slowing economic growth. Peaking inflation could provide the cover for central banks to pause rate hike cycles, benefitting stocks.
• In developed market countries, the commodity that tends to get the most attention is oil. According to the Federal Reserve’s model, every $1 move in the price of oil equates to a 0.2% change in GDP in the United States. Through September 30, the price of Brent crude, the index most closely associated with changes of gasoline prices at the pump, has fallen $24 from the May peak. And while gas prices at the pump typically react a lot faster to spikes in oil prices than to declines, the national average price at the pump has fallen back down to $3.50 a gallon on September 30 from the $3.96 May peak.

Emerging market countries with a domestic orientation could receive a dual benefit from the “consumption stimulus” and the reduced pressure on monetary policy.

Current outlook for select emerging market, domestically oriented countries:

• Brazil: the threat of a credit bubble could damage Brazil’s growth, where consumer spending grew on the back of excessive lending. Consumers have started to become delinquent on payments, risking the potential for bad bank loans in the future. Fiscal spending needs to be redirected from social programs toward productivity-enhancing investments. The central bank was one of the first to cut rates. However, with inflation still elevated, there’s the concern that the rate cut came too early, and inflation could resume upward.
• India: persistent inflation forced the central bank to essentially decide to sacrifice growth in the name of fighting upward prices. However, inflation remained above 9% in September, well above the central banks’ 4-6% target, and rate hikes may continue. Additionally, the country has longer-term issues with food supply. Available land has shrunk, crop yields have fallen due to flawed farming practices, and only 45% of fields are irrigated, leaving production at the mercy of weather. Other growth pressures include a large fiscal deficit and the need for foreign capital. Foreigner investors have pulled out money, discouraged in part by ongoing corruption allegations and government bureaucracy.
• Mexico: growth is typically tied to the United States, as it’s the destination for more than 70% of exports. Among developed nations, growth in the United States is attractive relative to the larger probability of a recession in Europe. Meanwhile, Mexico could benefit as auto production comes off the bottom and reaccelerates globally after the slowdown induced by the Japanese catastrophes earlier this year. Relative to other emerging markets, Mexico may have a better potential for growth because many other emerging markets could slow due to reduced growth in China.

Why are commodity prices unlikely to decline as much as in 2008?

While commodity prices fell sharply in 2008, prices may not decline to the same degree this time, because another global recession appears unlikely.

Emerging market incomes have continued to rise, increasing demand for both food and energy. Rising incomes tend to result in improved diets, increasing consumption of protein, which require more grains to produce than basic grain-based diets. This supports underlying demand for agriculture commodities. Additionally, energy consumption has risen in tandem with greater automobile penetration. Emerging markets now outpace developed markets in oil consumption.

Emerging market oil consumption more important than developed markets

Source: FactSet, BP Annual Statistical Review of World Energy as of December 31, 2010.

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Energy and Natural Resources Cheat Sheet (October 24, 2011)

Saturday, October 22nd, 2011

Mosaic K1 potash mine near Esterhazy, Saskatchewan, Canada. Underground, one kilometre beneath the surface. During approximately 45 years of mining activity, around 4700 km of tunnels have been bored. Specially adapted off-road vehicles are used to move around in the tunnels. photo: Martin Mraz

Energy and Natural Resources Market Cheat Sheet (October 24, 2011)

Strengths

• The Global Resources Fund performance this week bested its benchmark and was in the middle of its peer group in another volatile week of trading. Our energy sector bets generally contributed to the outperformance as energy stocks (S&P 500 Energy) gained over 1 percent for the week while the S&P Materials sector fell nearly 3 percent.
• Weak equity markets since early August have created bargains in the oil patch but these may not last long as merger & acquisition activity in the energy sector remains active with two notable deals announced early in the week. Houston-based Kinder Morgan agreed to buy El Paso Corporation for $38.8 billion, creating the largest natural-gas pipeline network in the U.S., and marking the biggest energy deal in over a year. Also on Monday, Statoil of Norway announced an all-cash bid of $4.4 billion for Brigham Exploration which has a large land position in the oily Bakken shale play.
• Chinese coal imports in September rose 25 percent year-over-year to 19.1 million metric tons and set a new record for import volumes. The coal imports were said to have risen as import prices became cheap compared with the domestic prices. China’s National Coal Association said that China’s net coal imports may reach 150 million tons this year while output may exceed 3.5 billion tons, according to a report by Bloomberg news.
• Emerging markets remain the key driver for global oil demand. The latest Indian oil demand increased by 169 thousand barrels per day (6.1 percent) year-over-year in September to 2.935 million barrels per day, the highest September reading ever. The growth rate, in turn, was the strongest pace seen since January this year, and was supported by a very strong reading in diesel demand, which was higher year-over-year by 9.8 percent. Floods and political protests in various coal producing states and strikes at Coal India, the largest and primary coal producer, have adversely impacted coal supplies in the country, thereby leading to higher diesel usage in power.

Weaknesses

• Base metals prices suffered this week from worries over slowing growth in China and the eurozone debt crisis. Copper fell 5 percent and made a 52-week low of $3.05 per pound on Thursday while aluminum also hit a 52-week low price on Thursday and closed the week down 4 percent. Metals and mining stocks generally underperformed the market this week due to the commodity price headwinds.
• Precious metals and related equities also fell this week as haven buying of gold and the dollar eased. Markets generally warmed up to the idea that European leaders will make progress in dealing with the eurozone debt crisis in meetings this weekend and sold the U.S. dollar and gold, which both fell this week.
• The U.S. Architecture Billings Index declined to 46.9 in September, compared to 51.4 in August (a mark of 50 bifurcates the indication of expansion and contraction). The positive reading in August appears to have been an isolated occurrence rather than a trend, as further evidenced by the decline in the new project inquiry index to 54.3 in September from 56.9 in August. The weak readings remain a threat to domestic construction activity and materials construction demand.

Opportunities

• We came away from PIRA Energy Group’s annual client seminar in New York quite constructive on the crude oil markets. Demand expectations are a bit softer in 2012 on assumptions of slower global economic growth; however, supply challenges remain prevalent. Inventories in the largest OECD countries are drawing rapidly, OPEC spare capacity is fairly tight, and non-OPEC supply outages are running nearly 2x the level of last year. Political tensions remain high in the oil supplying Middle East and relative stability seems fleeting which could throw the oil markets into even more disarray.
• Roubini Economics highlighted that Colonel Muammar Qadhafi’s death is unlikely to have any significant effect on the oil markets. In fact, it was noted that the removal of uncertainty over his whereabouts may encourage international oil companies to step up their plans to return to the country. Oil production in Libya has been rising in recent weeks to an estimated 350,000-390,000 bpd.
• The International Energy Agency has said that the Arab Spring has disrupted investment plans in oil and gas projects as governments have had to use the funds and resources for social purposes. As a result prices will have to go higher over the next 5 years to get the supply to meet demand. The IEA estimates that the world needs to spend US$38 trillion to meet projected demand over the next 24 years (US$1.58 trillion a year), up 15 percent from their 2010 forecast of US$33 trillion.
• The US Federal Reserve Bank of Philadelphia’s general economic index rose to 8.7 from minus 17.5 in September, the biggest one-month rebound in 31 years. The weak reading a month ago contributed significantly to the market sell-off seen at that time.

Threats

• Mineweb reported that Freeport-McMoRan Copper and Gold, the world’s biggest copper-gold mining operation, continues to be affected by ongoing strikes. The unrest at the company’s Grasberg operation in Indonesia could have an impact affecting global production of both copper and gold. Beginning in September, the strike is currently showing few signs of being resolved.
• Should the U.S. dollar strengthen, we could see downward pressures on commodity prices. Capital Economics published an article highlighting the inverse relationship between the value of the dollar and commodities when traded in dollars. Based on a chart illustrating the relationship using the U.S. currency’s broad trade weighted index and the CRB index of 19 commodity prices, it appears that a 5 percent appreciation in the dollar is associated with a 25 percent decline in commodity prices. Investors have recently sought safety in the dollar with the recent global financial crisis, and weakening industrial and consumer demand for commodities. Should global sovereign debt uncertainties persist, this could threaten commodity prices further.
• BHP Billiton said a slump in demand for iron ore from European steel mills has hurt prices while orders from China have so far been unaffected. “In Europe, many steel companies have, or are in the process of, reducing their steelmaking capacity and I think that that is what’s played through on the sentiment in the iron ore business,” Marius Kloppers, CEO of BHP said. “In China overall, which will over the long run be the driver of prices, we have not seen anything really happening there yet” he added.
• The U.S. derivative regulator voted 3-2 to curb commodity trading levels and restrict the numbers of contracts that can be held by a single firm. The rule limits traders to 25 percent of deliverable supply in the month nearest to delivery. Caps will go into effect 60 days after the agency defines the term “swap”, and agency declined to estimate when that will be. Limits outside the spot month are likely to go into effect in late 2012.

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News That Matters (October 21, 2011)

Friday, October 21st, 2011

By www.thetrader.se

Ft.com

Saab Automobile’s chances of avoiding bankruptcy dwindled after the two Chinese companies that had agreed to invest in the company instead offered to buy it for a token sum. Citing people familiar with the discussions, http://ftalphaville.ft.com/thecut/2011/10/21/708181/saab-investment-plan…

The Cabinet of Japanese Prime Minister Yoshihiko Noda signed off on steps to deal with the soaring yen on Friday, the WSJ reports. Fleshing out proposals made last month, Tokyo’s plan aims to curb further http://ftalphaville.ft.com/thecut/2011/10/21/708101/japan-moves-closer-t…

Dexia, the stricken Franco-Belgian lender that has been at the centre of recent market turmoil, loaned €1.5bn of fresh capital to its two largest institutional shareholders which then used the cash to buy Dexia shares before 2008, http://ftalphaville.ft.com/thecut/2011/10/21/708106/e1-5bn-dexia-loans-u…

Daniel Tarullo, one of the five governors of the Federal Reserve board, says the central bank should consider large scale purchases of mortgage-backed securities if the economy does not improve, the FT reports. “A large-scale MBS purchase programme has many of the benefits associated with purchases of longer-duration Treasury securities, http://ftalphaville.ft.com/thecut/2011/10/21/708096/fed-urged-to-weigh-n…

European leaders will be forced to hold a second summit, perhaps as early as Wednesday, because of the inability of Germany and France to reach a deal on how to increase the firepower of the eurozone’s €440bn rescue fund. European leaders confirmed that a high-stakes summit on Sunday aimed at finalising a plan to shore up the eurozone would proceed.http://ftalphaville.ft.com/thecut/2011/10/21/708091/europe-forced-into-a…

China will allow local governments to issue bonds directly for the first time in almost 20 years as Beijing acts to prevent potential defaults by provincial and city-level governments that could wreak havoc in the country’s financial sector, http://ftalphaville.ft.com/thecut/2011/10/20/708031/china-municipalities…

Investment banks are exploiting gaps in global pay reforms to persist with some of their most contentious practices, including guaranteeing lucrative bonuses to employees regardless of their performance, industry data show. Guaranteed bonuses to new hires accounted for 8.5 per cent of the average bonus pool for 2010 at 51 top financial institutions, according to a study published by the Institute of International Finance (IIF), an industry lobby group. http://www.ft.com/intl/cms/s/0/ee686396-fa4f-11e0-b70d-00144feab49a.html…

WSJ.com

Asian stock markets were modestly higher in tentative trade Friday, as confusing signals from European leaders on plans to contain the euro-zone debt crisis kept most buyers at bay. Japan’s Nikkei Stock Average rose 0.1%, Australia’s S&P/ASX 200 added 0.4%, South Korea’s Kospi Composite climbed 1.1% and New Zealand’s NZX-50 was up 0.2%. Dow Jones Industrial Average futures were up 18 points in screen trade. Copper ticked up over 1.0% in early Asian trade after the red metal settled down 6.2% at a 15-month low in New York Thursday amid uncertainty over the European sovereign debt crisis, fears of slowing demand from China and the fallout from a Chinese government crackdown on metal-for-collateral. http://online.wsj.com/article/SB1000142405297020461870457664393297263281…

Standard & Poor’s Corp. said on Thursday that it would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession, which many economists say is likely. Bank ratings in the region would also take a hit under the two possible scenarios analyzed in the S&P report. “These stress scenarios are not our central expectation, but a simulation of the possible outcomes if such hypothetical events were to occur,” the ratings company said. http://online.wsj.com/article/SB1000142405297020448530457664329126863486…

Two years ago, a French banker flew to Washington on an emergency mission: Persuade International Monetary Fund chief Dominique Strauss-Kahn that his concerns about the health of the European banking sector were unfounded. The trip was a success. Mr. Strauss-Kahn agreed to keep his fears under wraps to avoid causing market panic, according to people familiar with the matter.http://online.wsj.com/article/SB1000142405297020448530457664156154026649…

Spanish banking giant Banco Santander SA frequently says that it doesn’t shuttle money among its far-flung units, a declaration meant to assure investors that its parent won’t raid those units for cash in a pinch. The bank has “a model of subsidiaries which are autonomous in funding and capital,” Chairman Emilio Botín said in a speech here last month. The same day, Santander’s chief executive delivered a slide presentation that said “Each subsidiary is responsible for its own capitalization and funding needs… no cross border funding.”http://online.wsj.com/article/SB1000142405297020375260457664301323491477…

Marketwatch.com

The head of Japan’s auto industry asked trade and industry minister Yukio Edano on Friday for a drastic response to the persistently strong yen, warning that Japan’s economy is already “hollowing out” due to the strong currency. In a meeting between Edano and executives of the Japan Automobile Manufacturers Association, JAMA president Toshiyuki Shiga said “fundamental countermeasures are needed against the strong yen.” http://www.marketwatch.com/story/japan-auto-group-head-need-major-respon…

French President Nicolas Sarkozy and German Chancellor Angela Merkel will meet Saturday night in Brussels to prepare for the summit meeting of European leaders set for Sunday, the leaders said in a joint statement Thursday. “The president and the chancellor have agreed to provide a comprehensive and ambitious response to the current crisis in the euro area,” which will include implementing a revamped euro-zone bailout fund, strengthening the capital of European banks and strengthening economic integration and economic governance, the statement said. http://www.marketwatch.com/story/merkel-sarkozy-to-meet-saturday-in-brus…

Reuters.com

ICE Brent crude for December rose $1.37 to settle at $109.76 a barrel, having traded from $107.31 to $110.17. The expiring U.S. front-month November crude fell 81 cents to settle at $85.30 a barrel. U.S. December crude fell only 22 cents to settle at $86.07 a barrel. Brent’s trading volume was 1 percent below its 30-day average and U.S. volume 13 percent under. Brent’s premium to its U.S. counterpart rose to $23.69. Brent’s recovery and a forecast for a cold winter helped push U.S. heating oil futures higher. U.S. gasoline futures also ended with a gain. http://www.reuters.com/article/2011/10/20/us-markets-oil-idUSTRE7922QH20…

“Prices appear to be consolidating within the range of $1,550 and $1,700.” Spot gold gained 0.4 percent $1,625.12 an ounce by 0253 GMT, but was headed for a drop of 3.2 percent from a week earlier, its biggest weekly decline in nearly a month. U.S. gold rose as much as 1.1 percent to $1,630.9, before easing to $1,626.90, on course for a 3.3 percent weekly decline. Technical analysis suggested spot gold could rebound to $1,650 during the day, said Reuters market analyst Wang Tao. http://www.reuters.com/article/2011/10/21/us-markets-precious-idUSTRE78M…

The ranks of the poor rose in almost all U.S. states and cities in 2010, despite the end of the longest and deepest economic downturn since the Great Depression the year before, U.S. Census data released on Thursday showed. Mississippi and New Mexico had the highest poverty rates, with more than one out of every five people in each state living in poverty. Mississippi’s poverty rate led, at 22.4 percent, followed by New Mexico at 20.4 percent. New Hampshire had the lowest poverty rate, at 8.3 percent, making it the only state with a poverty rate below 10 percent. Twelve states had poverty rates above 17 percent, up from five in 2009, while poverty rates in 10 metropolitan areas topped 18 percent, the data showed. http://www.reuters.com/article/2011/10/20/us-usa-states-poverty-idUSTRE7…

Plans to tackle the euro zone debt crisis have stalled with Paris and Berlin at odds over how to increase the firepower of the region’s bailout fund, French President Nicolas Sarkozy said on Wednesday. Sarkozy told French lawmakers the dispute was holding up negotiations and flew to Frankfurt to talk with German Chancellor Angela Merkel in an attempt to break the deadlock ahead of a make-or-break European leaders’ summit on Sunday. The two leaders left that meeting without speaking to waiting reporters. Asked if a deal had been reached, Jean-Claude Juncker, chairman of the Eurogroup of euro zonefinance ministers who attended the evening meeting, replied: “We’re still in meetings Saturday, Sunday.” http://www.reuters.com/article/2011/10/20/us-eurozone-idUSTRE79I0IC20111…

Bloomberg.com

European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis, seeking to break a deadlock between Germany and France that is forcing leaders to hold two summits within four days. Negotiations on combining the European Union’s temporary and planned permanent rescue funds as of mid-2012, while scrapping a ceiling on bailout spending, accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked the French-German clash, two people familiar with the discussions said. They declined to be identified because political leaders will have to decide. http://www.bloomberg.com/news/2011-10-20/eu-said-to-mull-wielding-1-3-tr…

Italian Prime Minister Silvio Berlusconi’s surprise nomination of Ignazio Visco to run the Bank of Italy sets up a possible clash with French President Nicolas Sarkozy over the composition of the European Central Bank’s Executive Board. Berlusconi chose Visco, a 30-year veteran of the Bank of Italy, to succeed Mario Draghi, who is to become president of the ECB when Jean-Claude Trichet’s term ends this month. The Italian premier had indicated he might choose ECB Executive Board member Lorenzo Bini Smaghi for the post, which would free up a seat on the ECB’s decision-making board for a Frenchman.http://www.bloomberg.com/news/2011-10-21/berlusconi-s-bank-choice-risks-…

Federal Reserve Governor Daniel Tarullo’s call for resuming large-scale purchases of mortgage bonds may boost chances the central bank will start a third round of asset buying aimed at reviving U.S. growth. Policy makers should move the tool “back up toward the top of the list” because it would help the economy through lower mortgage costs that would boost home purchases and spending by people who refinance their home loans, Tarullo said late yesterday in a speech in New York http://www.bloomberg.com/news/2011-10-20/fed-s-tarullo-says-central-bank…

India’s rupee dropped past the 50 per dollar level for the first time since May 2009 on speculation slowing economic growth and faster inflation will deter foreign investment. The currency was poised for its biggest weekly loss this month after China reported Oct. 18 that its third-quarter gross domestic product increased at the slowest pace in two years. Food inflation in India accelerated to 10.6 percent in the week ended Oct. 8 from a year earlier, the fastest pace since April, government data showed yesterday. Concern Europe’s debt crisis is worsening also sapped demand for emerging-market assets.http://www.bloomberg.com/news/2011-10-21/rupee-weakens-past-50-a-dollar-…

Dailyfinance.com

The economy appears slightly healthier than many had feared it was a few weeks ago, raising hopes that it can end the year on an upward slope. A raft of data Thursday show layoffs are trending down to a six-month low and factories in the Mid-Atlantic are growing again after contracting for two months. Nevertheless, home sales fell and the housing market is expected weigh on the economy deep into 2012. The outlook for the final six months of the year has improved from August, when many thought the economy was at growing risk of falling back into a recession. Other recent reports showed hiring picked up slightly in September and consumers boosted their spending on retail goods by the most since March.

http://srph.it/r7Qisa

Foxbusiness.com

The Obama administration and the regulator for Fannie Mae and Freddie Mac are expected to unveil new steps to help distressed homeowners in the next week or two, a senior congressional aide said on Thursday. The aide commented on the plan after Democratic Senator Dianne Feinstein said the Federal Reserve planned to send Congress “legislative recommendations” on housing. The aide said Feinstein “misspoke for a second” and meant the administration and the Federal Housing Finance Agency. http://www.foxbusiness.com/markets/2011/10/20/new-housing-plan-expected-…

USAtoday.com

Home sales are on pace to match last year’s dismal figures — the worst in 13 years. The average rate on 30-year fixed mortgages was nearly unchanged this week after rising last week. Freddie Mac says the average rate on 30-year loans edged down to 4.11% from 4.12% last week. The week before, it fell to 3.94%, lowest rate ever, according to the National Bureau of Economic Research. The average rate on the 15-year fixed mortgage ticked up to 3.38 percent from 3.37 percent. It hit a record-low of 3.26 percent two weeks ago. http://www.usatoday.com/money/economy/housing/story/2011-10-20/home-sale…

BBC.co.uk

EU leaders are to hold another summit by Wednesday, because they will not be able to agree a rescue plan for the euro on Sunday. French President Nicolas Sarkozy and German Chancellor Angela Merkel said a crisis strategy would be discussed on Sunday and adopted at the next meeting. EU leaders need to agree a second bailout for Greece, how to recapitalise banks and a stronger bailout fund. President Sarkozy also called for talks with the private sector. The private sector talks would be “to find an agreement allowing to strengthen the sustainability” of Greek debt. Previous disagreements between France and Germany about the bailout plans have centred on how much the private sector would have to contribute to any package. http://www.bbc.co.uk/news/business-15393260

Telegraph.co.uk

The ONS said sales volumes including petrol rose by 0.6pc on the month after a fall of 0.4pc in August, giving an annual rise of 0.6pc. Analysts had forecast flat sales on the month and an annual rise of 0.7pc. Excluding fuel, retail sales went up 0.7pc on the month and were 0.4pc higher on the year, above analysts’ expectations for the monthly rise. The figures offer a rare bit of good news for British retailers which otherwise have been struggling. http://www.telegraph.co.uk/finance/economics/8838002/Retail-sales-rise-o…

Independent.co.uk

European leaders were given a stark warning last night that Greece’s debt burden remains unsustainable, despite the €65bn (£57bn) in bailout funding the country has received since May 2010. The warning was contained in the draft text of the decision of the “troika” mission of officials – from the European Central Bank, the International Monetary Fund and the European Commission – on Athens’ progress towards stabilising its public finances. http://www.independent.co.uk/news/business/news/new-greek-bailout-cash-c…

The department store Debenhams and better-than-expected retail sales data have provided the UK’s beleaguered high street with some much-needed cheer ahead of the crucial Christmas trading period. Debenhams unveiled a 10 per cent rise in pre-tax profits to £166.1m for the 53 weeks to 3 September, a share buy-back and said it was “optimistic” about its prospects. The retailer also revealed extensive plans to grow its store numbers in the UK and overseas, as well as expanding online. http://www.independent.co.uk/news/business/news/the-uk-high-street-is-al…

Guardian.co.uk

Policymakers must consider how to stimulate lending to revive the economy, the City’s chief watchdog said, as he also conceded that regulators may never be able to prevent customers being “ripped off”. Lord Turner, chairman of the Financial Services Authority, told an audience at the Mansion House in the heart of the City on Thursday that current economic conditions meant the authorities should switch from imposing strict rules on banks to focusing on ways to make them lend more. http://www.guardian.co.uk/business/2011/oct/20/turner-fsa-regulators-ban…

Smh.com.au

The possibility of an interest rate cut is off the table as inflation is not expected to ease significantly in the September quarter, economists say. The Australian Bureau of Statistics will on Wednesday release the September quarter Consumer Price Index, the key measure of inflation. In recent weeks, some market observers have been predicting an interest rate cut before the end of 2011. The money market has been pricing in a series of rate cuts based on global growth worries, spiralling government debt in Europe and the weak non-mining sectors of the Australian economy.

Read more: http://www.smh.com.au/business/high-cpi-keeps-rate-cut-off-the-table-201…

Greek MPs have passed a deeply resented austerity bill that has led to violent protests on the streets of Athens, despite some dissent from one Socialist MP. The new measures include pay and staff cuts in the public service as well as pension cuts and tax hikes for all Greeks. The bill passed by majority vote in the 300-member parliament. Former labour minister Louka Katseli voted against one article that scales back collective labour bargaining rights. http://www.smh.com.au/business/world-business/greeks-pass-austerity-bill…

Xinhuanet.com

Chinese stocks fell to the lowest levels since March 2009 on Thursday, as mounting concerns over a slowing economy and a standstill of the European bailout talks continued to weigh on investors. The benchmark Shanghai Composite Index slumped 1.94 percent, or 46.15points, to close at 2,331.37, the lowest level since March 2009. The Shenzhen Component Index suffered heavier losses by plunging 3.06percent, or 309.51 points, to close at 9,796.23, breaching the key 10,000 mark and set a new low since June 2010. http://news.xinhuanet.com/english2010/china/2011-10/20/c_131202627.htm

China is expected to replace Japan as the world’s second-wealthiest country after the United States with total fortune shooting to nearly US$40 trillion by 2016, Credit Suisse AG said in a report yesterday.

However, the accumulation of fortune will be achieved along with an expanding wealth gap in China where the Gini coefficient, a commonly used measure of inequality of wealth, has already passed an extremely dangerous level. China, which has surpassed Japan as the world’s second-biggest economy, will soon also catch up with the neighbor in terms of total wealth.http://news.xinhuanet.com/english2010/china/2011-10/20/c_131202237.htm

Peru’s Finance Minister Luis Miguel Castilla said Thursday the coming months won’t see a recession, but warned that financial authorities should “be prepared” for a global economic slowdown as it would have repercussions on the Andean nation. Castilla said there are “remote” possibilities that a recession may hit Peru’s economy, but the ongoing effects of the international crisis are still difficult to assess. “It is not correct to speak about a crisis in Peru, because the country’s rates are growing dynamically and the inflation is showing a downward trend,” he said.http://news.xinhuanet.com/english2010/business/2011-10/21/c_131204245.ht…

Cs.com.cn

China’s social financing, a broad measure of funds raised by entities in the real economy, shrank 1.26 trillion yuan (194 billion U.S. dollars) from a year earlier to 9.8 trillion yuan in the first three quarters, the central bank said Thursday. All sub-indicators grew at slower paces from the same period last year, except foreign-currency loans which expanded by 184.9 billion yuan from a year earlier to 477 billion yuan, and entrusted loans which increased by 562.5 billion yuan to 1.07 trillion yuan, the People’s Bank of China said in a statement on its website. The yuan-denominated lending accounted for 58 percent of total social financing, up one percentage point from a year earlier, according to the statement. http://www.cs.com.cn/english/ei/201110/t20111021_3096128.html

Thehindu.com

Food inflation surged ahead to breach the psychological double-digit barrier at 10.60 per cent for the week ended October 8 against 9.32 per cent in the previous week, leaving no one in doubt that the Reserve Bank of India (RBI) will continue with its hawkish monetary policy stance on October 25. More disturbing is the fact that the fresh spurt in WPI (wholesale price index)-based food inflation does not suffer from the statistical anomaly of base effect as the food price spiral during the same week last year was also at a high of 15.72 per cent. http://www.thehindu.com/business/Economy/article2554825.ece

Even as the U.S. has continued to press India to undertake more investor-friendly reforms under the bilateral Strategic Dialogue, the World Bank on Thursday virtually congratulated India and 29 other countries for significant strides in making their regulatory environments more business-friendly. In a report titled Doing Business 2012: Doing Business in a More Transparent World the World Bank and the International Finance Corporation said that between June 2010 and May 2011, there were 245 business regulatory reforms worldwide, which was 13 per cent more reforms than in the previous year.http://www.thehindu.com/business/article2556115.ece

At a time when India Inc. is saddled with the twin problem of high inflation and low industrial growth, Prime Minister’s Economic Advisory Council (PMEAC) Chairman C. Rangarajan on Thursday pitched for roll back of the excise duty stimulus that was provided to the industry to combat the slowdown in the wake of the global meltdown in 2008. At an interactive session at the Economic Editors’ Conference here, Dr. Rangarajan made out a case for urgent rationalisation of subsidies along with roll-back of excise duties to the pre-crisis levels if the budgeted fiscal deficit target for 2011-12 is to be met. “Adjustment in subsidies will have to be done as early as possible. Otherwise, we will not be in a position to contain [the] fiscal deficit,” he said.http://www.thehindu.com/business/Economy/article2556047.ece

Economictimes.com

An amazing surge in India’s exports to the Bahamas has stoked the lingering suspicion that a slice of the country’s trades is sham transactions done to bring back money stashed in secret accounts with offshore banks. In just two years, exports to the Bahamas – best known as a tax haven – have shot up from $2.2 million in 2008-09 to $2.2 billion in 2010-11, according to commerce department data. The number in no way matches the data on the Bahamas’ global imports, which according to UNCTAD – the global trade and investments monitoring agency – was $2.8 billion in 2010.http://economictimes.indiatimes.com/news/economy/foreign-trade/sudden-su…

Yonhapnews.co.kr

The heads of South Korean banks expressed concerns Friday that the current turmoil in the global financial market may lead to difficulties in securing mid- and long-term overseas borrowing, the central bank said. The Bank of Korea (BOK) quoted 10 chiefs of local banks as saying that local banks have secured a large bulk of foreign exchange liquidity in advance in an attempt to fend off a potential liquidity squeeze. However, lingering concerns about the global financial markets may make it difficult for them to raise foreign borrowing in the mid-and long term, such as from bond sales. The remarks came when BOK governor Kim Choong-soo met with local bank heads in a monthly meeting. http://english.yonhapnews.co.kr/business/2011/10/21/46/0503000000AEN2011…

Themoscowtimes.com

Syria may start using the Russian ruble for banking transactions if the European Union bans it from operations in euros, central bank governor Adib Mayaleh said Thursday. As a first step, the Syrian central bank has begun posting the exchange rate for the ruble as well as the Chinese yuan on its daily bulletin, Mayaleh said in an interview with the Arabic-language Russia Today channel. “Don’t forget that we can carry out operations in rubles,” Mayaleh said, according to an e-mailed transcript of the interview. “In the nearest future we will agree on parameters for switching to close cooperation with Russian banks and using the ruble for international settlements.” http://www.themoscowtimes.com/business/article/syria-may-switch-from-eur…

Fin24.com

Washington – The International Monetary Fund and the World Bank have visited Libya and will return there in “coming weeks” to assess economic and financial needs, an IMF spokesperson said on Thursday. Officials from the IMF and World Bank visited Libya earlier this month to conduct a fact-finding mission on the economy and public financial management issues, IMF spokesman Gerry Rice told reporters. “Follow-up missions are planned to undertake a needs assessment,” he said but was unable to give dates for the next visits. http://www.fin24.com/Economy/World-BankIMF-to-assess-aid-for-Libya-20111…

Thetrader.se

Greece will eventually fall. Where to look for the next set of violence is probably Italy and the very “quiet” Spain. The problems Spain is facing are huge. Spain is also the only country with a property collapse, that is slowly collapsing further, while people enjoy the sun. With so many unsold homes, the balance sheets won’t look good for many years to come. Despite the political juice from Zapatero, austerity plans and talk of a brighter future, people are suffering, and getting poorer by the day. Spain just hit new alarming Poverty levels, and there is no leveraged EFSF to save Spain.http://www.thetrader.se/2011/10/20/remember-spain-pain/

Good summary of the Argentinian Default. What caused the collapse, and what lessons are to be learnt for the current Greek situation? In 1998, Argentina entered what turned out to be a four-year depression, during which its economy shrank 28 percent. Argentina’s experience has been cited as an example of the failure of free markets and fixed exchange rates, among other things. The evidence does not support those views. Rather, bad economic policies converted an ordinary recession into a depression. Three big tax increases in 2000-2001 discouraged growth, and meddling with the monetary system in mid 2001 created fear of currency devaluation. As a result, confidence in Argentina’s government finances evaporated. In a series of blunders that made matters even worse, from December 2001 to early 2002, succeeding governments undermined property rights by freezing bank deposits; defaulting on the government’s foreign debt in a thoughtless manner;http://www.thetrader.se/2011/10/20/argentinas-economic-crisis/

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The Future of Alberta’s Oil Sands

Thursday, October 20th, 2011

by Dave Summers, via OilPrice.com

If one examines the forecast future supply of liquid fuels that the EIA projects in their most recent International Energy Outlook, that for 2011, the agency projects a considerable growth in unconventional supplies of liquid fuels.

EIA projections of future growth in liquid fuel supplies (EIA)

For North America, the projections foresee considerable growth both in production within the United States (rising from 8.5 to 12.8 mbdoe) and from Canada (rising from 3.4 mbdoe in 2008 to 6.6 mbdoe in 2035).

Regional growth in liquid fuels generation 2008 to 2035 (EIA)

The growth in unconventional fuels is most critically anticipated as coming from oil sands, with biofuels (a topic for another day) close behind.

Future sources of unconventional liquid fuels (EIA)

It is, in passing and for folks such as Dr Yergin perhaps, worth noting that the EIA does not see much of a significant role for oil from shales through 2035. But it highlights the criticality of the Athabasca oil sands in the future well-being of the North American fuel supply chain.

There have been a significant number of posts, over the years, both at Bit Tooth and at The Oil Drum, in which both myself and others have written about these reserves that are playing an increasing part in North American oil supply, and that will likely also grow to supply other nations, particularly China. (A topic dating back to the start of The Oil Drum). In this particular post I will therefore just briefly overview the reservoirs, and the technologies used to extract the fuel, in looking at the projected outlook for the future – given that this has been reviewed and changed a number of times in the past. Some measure of that variation comes from the predictive curves that Sam Foucher posted back in 2006.

Predictions of oil sand production from 5 years ago (The Oil Drum)

Considering first the resource, the amount of oil that exists within the oil sands of Alberta has been estimated as being between 1.7 and 2.5 trillion barrels. It is found in three major deposits the largest of which is the Athabasca, and then there are Cold Lake and Peace River.

Locations of the major oil sands in Canada (CAPP)

There are several different ways in which the oil can be recovered, of which the one generating the most visibility is where the sands lie close enough to the surface that they can be mined. Early use of single, large-scale bucket wheel excavators did not work out well, since production is tied to the well-being of a single machine. As a result the sands are mined by perhaps 15 shovels within the mining pit, each scooping about 100 tons of sand at a time, and loading trucks, which then carry the material, 300 tons at a time, to an in-mine crusher which breaks the rock into small fragments. These fragments (with waste rock largely removed) are then mixed with hot water and pumped to large tanks at the primary Upgrader, where the sand, water and bitumen are separated.

Loading a truck, it will take 2 to 4 shovel loads to fill the truck bed, depending on its size.

There is a Youtube video of the process available.

The sand also contains small particles of clay, which are difficult to settle out of the water, and the large tailings ponds used for this have been the focus of considerable controversy. This concern is recognized, and considerable efforts are being made to reduce the time that it takes for the settlement, and for site reclamation. That effort is continuing with a collaborative effort between the mining companies and four universities to improve the technology over that currently used.

Some 80% of the reserves lie too deep for mining to be an effective solution, and with the bitumen being, in natural form, too thick to easily flow to wells, ways had to be found to encourage that flow. The most common, and that most often projected for future development, is based on the use of Steam Assisted Gravity Drainage.

Artist’s illustration of the SAGD process (Devon Canada Corp)

There is a video of the SAGD process on Youtube.

One of the problems with SAGD comes in the need to generate the steam that is fed into the upper pipe, and which migrates up into the sand to heat and thin the oil. The typical method to provide the steam is with natural gas, and as Dave Cohen noted some years ago, the supply of that natural gas becomes more of an issue, as the size of the operation continues to grow.

One of the more innovative of the techniques suggested overcomes that problem through burning some of the oil in place, in a process known as Toe to Heel Air Injection (THAI) . Igniting a section of the oil sand, and after using the heat to drive off the more volatile oil while continuing the burn with residual coke left behind, as the flame front progresses, has been shown to be viable.

It is an artist’s impression of a side view of the site, with the blue dotted horizontal line representing the recovery well and air being fed in from a higher well into the formation.

The video showing the THAI process is also on Youtube.

However, at present it has only a limited planned future, though that may increase as information on the technique becomes more evident.

So what is the likelihood that, using these techniques, that production will rise to the levels which the EIA project? Well in their October 3rd edition the Oil and Gas Journal (OGJ) listed (registration required) those projects currently planned for Canada in the period through 2020 and beyond. The list contains 144 projects, many of which are defined as the separate stages of different developments. Taking just those that relate to oil sand production roughly 70% plan on using thermal methods to recover deeper oil (mainly SAGD, though there are small amounts of THAI, cyclic steam and electrothermal). 30%, roughly 2 mbdoe, of the increase in production is planned to come from surface mining.

It is unlikely that the total 6 mbdoe of increased production will all come to pass. However, given that these are all defined projects, many broken into separate phases that can be geared back or advanced, depending on market conditions, and supply – particularly in the further out years – the projected increases that the EIA project would seem to be eminently reasonable to anticipate. (Caveats on water and natural gas availability are discounted at present).

I would be remiss in not thanking HereinHalifax who led me to the report on Eastern Canadian supplies, which pointed out that the flow of crude in the pipeline from Sarnia to Montreal, about which I wrote earlier, was originally Eastward, carrying western crude, but which was reversed as the market for the oil from Alberta developed in the United States, and Eastern Canadian refineries supply switched to tanker import.

The increasing plans to produce oil from Alberta depend, to a degree, on the ability of pipelines to carry the resulting product to market. Production is therefore likely to hinge on the success with which those advocating the various pipelines are able to achieve. And to a coonsiderable extent these are political, rather than technical decisions.

By. Dave Summers

David (Dave) Summers is a Curators’ Professor Emeritus of Mining Engineering at Missouri University of Science and Technology (he retired in 2010). He directed the Rock Mechanics and Explosives Research Center at MO S&T off and on from 1976 to 2008, leading research teams that developed new mining and extraction technologies, mainly developing the use of high-pressure waterjets into a broad range of industrial uses. While one of the founders of The Oil Drum, back in 2005, he now also writes separately at Bit Tooth Energy.

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Energy and Natural Resources Market Cheat Sheet (October 17, 2011)

Saturday, October 15th, 2011

Tagebau Garzweiler Open Pit Mine, North-Rhine Westphalia, Germany

Energy and Natural Resources Market Cheat Sheet (October 17, 2011)

Strengths

• Copper prices continued to rally this week, gaining 4 percent to nearly $3.40 per pound, as sentiment towards commodities improved and the potential of mine worker strikes threatens supply.
• China’s coal imports steamed ahead in September to reach an annualized rate of 244 million tons, which marked a 43 percent year-over-year rise.  Exports fell by 35 percent on the same comparison to only 14.7 million tons annualized.
• Brent Crude oil gained over 7 percent this week to $114 per barrel, the highest level in 4 weeks, as supply concerns in the North Sea and Middle East support prospects of a tightening market.
• China, the world’s biggest iron-ore buyer, boosted imports to an eight-month high in September following gains in steel prices. The nation imported 60.57 million metric tons of the steelmaking material last month, China’s General Customs said this week, which is the highest since January and 15 percent more than a year ago.
• Copper imports by China climbed to the highest level in 16 months in September as lower prices lured traders to place orders after domestic stockpiles were reduced earlier this year. Inbound shipments of the refined metal, copper alloy and products rose 12 percent to 380,526 metric tons from 340,398 tons in August, according to General Administration of Customs.  Imports gained for a fourth month to the highest level since May 2010, and were 3.3 percent higher than the 368,410 tons of a year earlier.

Weaknesses

• The World Steel Association lowered its growth forecast for India’s steel use to 4.3 percent for 2011 from 13.3 percent predicted in its April 18 report. The forecast for next year was cut to 7.9 percent from 14.3 percent as slower economic growth is expected to weigh on demand.
• In its third quarter 2011 earnings release, Alcoa highlighted weakness in European demand in an otherwise positive picture, while maintaining its view for global demand growth of 12 percent in 2011 with an upward revision to Chinese demand growth to 17 percent offsetting weakness elsewhere.

Opportunities

• China’s cabinet announced on Monday it will tax all resource products starting on November first. Crude oil and natural gas nationwide will be taxed at a rate between 5 and 10 percent of their sales value. The regulations impose a sales tax ranging from 8 yuan (1.25 U.S. dollars) to 20 yuan per metric ton on coking coal, and from 0.40 to 60 yuan per metric ton on rare earth ore. Taxes on other types of coal stood unchanged at 0.30 to 5 yuan per metric ton. The tax rate for other non-ferrous metals is set between 0.4 to 30 yuan per metric ton. Ferrous metals will be taxed at two to 30 yuan per metric ton. China’s current resource tax is levied based on production volume instead of sales value.
• According to a report from Business Line, the Indonesian government has circulated a new draft decree seeking comments on imposing a ban on the export of coal below 5,100 gross kilo calories per kilogram (Kcal/kg) from 2014. The ban, if implemented, could reduce the exports by 120-130 million tons; the country exported 270 million tons in 2010. India will be impacted the worst as it imports coal grades from 5,000 Kcal/kg to as low as 3,500 Kcal/kg from Indonesia.
• Colombian Mines and Energy Minister Mauricio Cardenas said the country seeks to ensure that gold, coal and other mining projects move ahead at full speed to boost production and government revenue.  Colombia wants growth in its mining industry to match rising investment in oil production by helping projects that meet environmental and social standards and avoid delays, Cardenas said. Milton Rodriguez, a member of a Senate commission overseeing natural resources, and other lawmakers had pushed for tax increases on mining companies. Colombia should work on implementing recent changes in how mining revenue is distributed by the government, rather than on changing tax rates, Cardenas said.  The Global Resources Fund holds several investments in Colombian energy and mining assets.

Threats

• The International Energy Agency (IEA) cut forecasts for global oil demand in 2012 for a second month as the economic recovery loses momentum. The Paris-based adviser reduced estimates for world demand for next year by 210,000 barrels a day, to 90.5 million barrels a day in its monthly oil market report. That means consumption will increase by 1.3 million barrels a day, or 1.4 percent, from this year. Oil inventories in industrialized nations fell below their five-year average for the first time in more than three years, according to the IEA.
• Copper supply will begin outpacing demand in 2013 as new mines enter production, according to consultancy Brook Hunt. The surplus will start to accelerate toward 2015, according to Richard Wilson of Brook Hunt. The researcher estimates the market will be in deficit by 200,000 metric tons this year and balanced in 2012.

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Energy and Natural Resources Market Cheat Sheet (October 11, 2011)

Monday, October 10th, 2011

Energy and Natural Resources Market Cheat Sheet (October 11, 2011)

Strengths

• This week, the Global Resources Fund outperformed its peers and benchmarks due to its defensive positioning of the portfolio. Exposure to seniors and larger market cap stocks helped limit the downside risk to the Fund. Junior exploration stocks also rebounded from 52-week lows.
• Deutsche Bank highlighted that global stainless steel production rose 3.8 percent to a record 16.4 million tons in the first half of 2011.
• Copper prices gained 4 percent this week on reports that LME cancelled warrants jumped to 60,000 tons, the highest level in over two years.
• According to the International Monetary Fund, Thailand, Bolivia, and Tajikstan added a combined 18.2 tons of gold last month.
• Crude oil gained 5 percent this week after the U.S. Department of Energy reported a surprise drop in crude stockpiles and on signs the U.S. may take further steps to sustain an economic recovery.
• Deutsche Bank reported strength among agriculture markets. Corn was supported by the U.S. Grains Council prediction that China will need to import five times more corn than the 2 million tons the USDA is currently estimating in 2011-12.  Wheat futures rose by increased tenders from the MENA region.  Many nations there stocked up after last year’s Arab Spring, but now are in a position where they need to import again. Additionally, Thailand, the world’s largest exporter of rice, cut its main harvest production forecast by almost 10 percent after floods damaged crops.

Weaknesses

• Bloomberg reported that Nigeria, Africa’s top oil producer, plans to end fuel subsidies, saving the government $7.5 billion in 2012. Nigeria is facing declining revenue as the price of oil, the source of more than 95 percent of export income and 80 percent of government earnings, fell 28 percent in the past six months.
• Macquarie Research drew attention to precious metals’ year-to-date performance, which has remained low. Palladium prices have been hit by large ETF redemptions, with palladium ETF holdings now close to levels seen in mid-2010.
• The latest steel market sentiment survey results were highlighted by Macquarie Research.  Fifty-seven percent of companies globally now expect prices to be lower in a three-month timescale, with only 13 percent seeing upside. Eleven percent of global respondents expect global demand to rise this coming quarter, with 46 percent expecting it to fall.

Opportunities

• Goldman Sachs Group reported that commodity prices may rise 20 percent over the next year as growth in emerging markets offsets the impact of the sovereign-debt crisis in Europe and a slowdown in developed economies. “With recent GDP revisions by our economists falling hardest on Europe but emerging market growth expectations still relatively solid, we continue to believe that demand growth in 2012 will be sufficient to tighten major commodity markets,” an analyst for the bank said.
• Fed Chairman Ben Bernanke said the central bank can take further steps to sustain a recovery that’s close to faltering and cautioned lawmakers against making changes in fiscal policy that may harm growth. He went on to say that the Fed can give more information about its pledge to keep interest rates low at least through mid-2013, reduce the rate paid on banks’ reserve deposits or buy more securities.
• Codelco said buyers in China should take advantage of a 14-month low in copper prices to boost imports of the metal. Customer orders from Asia look quite strong for next year, CEO Diego Hernandez said, adding that Codelco has started talks with buyers for 2012 sales and expects them to match this year’s number. Clients in Europe are cautious on requirements and the company has had some cancellations, Hernandez said. Other customers have sought to bring forward deliveries, he said.

Threats

• An International Monetary Fund official warned that the eurozone could see a “meltdown”’ in two to three weeks, unless policy actions take place, says JPMorgan.  This in turn would trigger a domino effect, producing a meltdown across the European banking system.
• Claudio Scliar, the Ministry’s Secretary for geology and mineral royalties, announced that Brazil had plans to boost taxes on iron ore and that the government is considering a plan to double the royalty on iron ore to 4 percent of gross revenue from 2 percent of net sales, Nomura Research highlighted.  She further went on to say that the ministry aims to send Congress three bills this month to alter minerals royalties, change the way mining concessions are granted and create a new regulating body.
• An energy economist and publisher of Petroleum Economics Monthly recently said, “Natural gas as an energy source is now roughly the equivalent of $24-per-barrel oil.”  Furthermore, the publisher believes that projections of crude-oil demand in 2025 are typically 20 percent to 30 percent too high, and that crude-oil prices are likely to drop sharply as those forecasts go awry.
• Macquarie reported that Grasberg, Freeport McMoRan Copper and Gold’s mine in Indonesia will see union workers extend their strike for a second month. Freeport has experienced on-going labor disputes at a number of their mines.

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