Energy and Natural Resources Market Radar (May 21, 2012)

Saturday, May 19th, 2012

Energy and Natural Resources Market Radar (May 21, 2012)

Strengths

• According to the Shanghai Futures Exchange, its copper inventory fell 9,178 metric tons to 187,449 metric tons.
• China’s steel product output rose 7.9 percent last month to 81.1 million metric tons from a year ago, according to the National Bureau of Statistics.
• China imported a record high 25.05 million metric tons of coal in April, up 90.1 percent year-on-year, Platts reported, citing preliminary customs figures. Chinese year-to-date coal imports rose 69.6 percent year-on-year to 86.55 million metric tons of coal.

Weaknesses

• Stocks and commodities fell this week as the likelihood of a Greek exit from the eurozone has increased significantly during the past two weeks.
• Oil prices fell 4.8 percent this week. The current bout of concerns had arisen from the resurgent fears about the Spanish and Italian banking systems and speculation that Greece may have to exit the euro. Since then, for oil in particular, news reports suggesting that President Obama is seeking G8 cooperation on an oil stock release have compounded the depressing effect.
• Reuters reported that Chinese steel mills defer iron ore shipments owing to slowness in the steel market. Some Chinese steel mills are said to have postponed iron ore deliveries from suppliers such as Vale, given the slow steel markets. Producers are also expecting a further drop in prices.

Opportunities

• Global inflation might have already pushed the costs of exploring and producing oil from new most expensive projects, known in the industry as the marginal cost of production, above $100 per barrel, according to JBC energy consultancy. That compares to $50-$75 prior to the 2008 financial crisis. A decade ago, oil companies such as BP were saying they would start a project if oil traded above $17-$20. Even the International Energy Agency, which represents consuming nations, says production costs have gone up sharply. “There is not a single drop of oil in the world that cannot be produced at a price of oil of $85-$90,” IEA’s chief economist Fatih Birol told a summit.
• The Chinese government announced a new batch of new subsidies to promote the consumption of energy-efficient home appliances and autos on Wednesday. RMB6bn will be provided to fuel-efficient vehicles with engines below 1.6L, and an RMB26.5bn financial subsidy will be provided for energy-efficient appliance products, including all the major white goods products. This appears to be a clear signal of the government’s commitment to shift domestic demand toward more personal consumption and away from fixed asset investment.
• Oil industry executives and bankers are assuming oil prices will stay above $100 a barrel in the year ahead, despite mounting economic worries, as any fall below that level would trigger a cut in Saudi Arabia’s output and force closures at high-cost projects around the world. A Reuters straw poll of oil executives, traders, bankers and fund managers showed seven respondents predicting Brent crude trading at $100-$120 a barrel in the next 12 months.
• Boart Longyear, the world’s biggest provider of mineral drilling services, expects demand to remain strong as large mining companies proceed with projects. “We still see very strong demand, particularly from the majors,” Craig Kipp, CEO of the company said. “We haven’t heard from a lot of the majors outside of Australia that there’s a change in their plans or in their budgets. We haven’t seen any change in market dynamics – we’re operating all over the world,” Kipp said. “We do see that juniors, the second-tiers, have had problems getting financing,” he added.

Threats

• In a Wall Street Journal article last year at this time, Chief Executive Marius Kloppers said BHP would invest $80 billion by the end of 2015 to expand further. The eurozone crisis, slower Chinese growth, and falling metals prices are forcing BHP to now say it will be cutting those spending plans. Falling commodity prices and rising operating costs put its cash inflows at risk and, by extension, its commitment both to raising its dividend and keeping its single-A credit rating. BHP’s plans need to become clearer if it wants to reverse the 28 percent fall in its share price since a year ago.
• Agrimoney reported that the Federal Reserve has warned, “The surge in U.S. farmland prices, which in parts of the Plains achieved their strongest run of growth on record, may be about to fade, sapped by the worsened outlook for agricultural profits.” Farmland values posted sharply higher gains in states around Kansas in the year to the start of last month, reflecting higher crop prices and an easing in the drought which has plagued much of the area since 2010. “Strong farm incomes continued to fuel demand for farmland,” the Federal Reserve System’s Kansas City bank said, noting that values had now risen by more than 20 percent for two consecutive years for the first time since it began collecting data in the 1970s. Prices in Nebraska, which avoided drought, were particularly strong, with values of irrigated land soaring 41 percent.

Tags: Banking Systems, Bureau Of Statistics, Chinese Year, Coal Imports, energy, Energy Consultancy, International Energy Agency, Marginal Cost, Market Radar, Million Metric Tons, National Bureau Of Statistics, National Bureau Of Statistics China, Oil Prices, Oil Stock, Platts, Shanghai Futures Exchange, Steel Market, Steel Markets, Steel Mills, Steel Product, Stocks And Commodities
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Emerging Market Equities: China to Lead the Way?

Monday, February 21st, 2011

Markit released the Flash HSBC China Manufacturing PMI for February based on 85% to 90% of responses this morning. The flash estimate came in at 51.5 compared to the final 54.5 in January as a result of a combination of seasonal factors as well as quantitative tightening. Wow, what a drop! That will surely be negative for equity markets and especially the Shanghai Composite Index? No, not necessarily. The manufacturing PMI reading per the official CFLP survey in January dropped from 53.9 in December to 52.9. Conversely, the HSBC survey’s January PMI picked up to 54.5 compared to December’s 54.4. According to the CFLP survey the drop in January was in line with the apparent seasonal trend in the past.

Sources: CFLP; Plexus Asset Management.

What do I expect for February’s CFLP manufacturing PMI? In previous articles I argued that the seasonal trend in January and February pointed to weakness, especially if the Chinese New Year and Golden Week fell in the early part of February. The timing of this year’s Golden Week was reminiscent of that of 2008. In 2008 the PMI in February picked up slightly from January’s but I suspect the number for February this year is likely to be unchanged to somewhat lower but not the significant drop as reported by the HSBC survey. My view that March could see a significant rebound continues to hold.

Sources: CFLP; Plexus Asset Management.

It is apparent to me that the markets do not really focus on the HSBC PMI survey but rather on the official CFLP survey. The Chinese equity market as measured by the Shanghai Composite Index is an excellent anticipator of the CFLP manufacturing PMI and leads the PMI by one month. It is telling me that the manufacturing PMI in February will come in unchanged or slightly improved. The surge in Chinese equities since the end of the Golden Week indicates to me that the market shares my optimism regarding the seasonal strength of the PMI in March.

Sources: I-Net; CFLP; Plexus Asset Management.

The bond market seems to share the optimism regarding the CFLP PMI in March and is looking through the current period of seasonal weakness.

Sources: I-Net; CFLP; Plexus Asset Management.

Is the Baltic Dry Index trying to tell us that China’s economy is stronger than generally thought?

Source: I-Net.

I guess so. It is no wonder the PBoC has again raised the reserve requirements of banks.

Are we therefore seeing a seasonal low in emerging-market equities? It is extremely difficult to anticipate the unfolding of the protest action in North Africa and the Middle East, though.

Tags: Asset Management, China, China Manufacturing, Chinese New Year, Chinese Year, Emerging Market, Emerging Markets, Flash, Focus, Gold, Hsbc, Lead, Leads, Market Shares, New Year, Optimism, Pmi, Rebound, Seasonal Factors, Seasonal Trend, Shanghai Composite Index, Survey
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