Energy and Natural Resources Market Radar (March 12, 2012)

Sunday, March 11th, 2012

Energy and Natural Resources Market Radar (March 12, 2012)

Strengths

• Barclays Capital highlighted robust oil figures out of China this week. Refinery runs touched a record high of 9.368 million barrels per day in January, up 6.7 percent year-over-year. February refinery runs were buoyant and stayed close to those record levels at 9.304 million barrels per day. The record refinery runs come on the back of new processing facilities starting up with Sinopec and PetroChina starting a combined 360 thousand barrels per day of new crude processing units in the last quarter of 2011.
• This week The Silver Institute demonstrated that a steady increase in demand has driven the price of silver up 20 percent in the first 10 weeks of the year, ahead of gold, platinum and palladium. The strength in silver demand has come via a surge in buying of silver-based ETFs, which now represents 586 million ounces of silver, up 10 million ounces year-to-date. In addition, there has also been increased demand for physical silver bars. Global industrial silver demand is expected to contribute to strong silver demand going forward. Total silver demand is forecast to grow 36 percent from 2010 to total 666 million ounces in 2015 due to new applications in industry and lack of substitution.
• Reuters reports that China’s daily crude steel runs reached 1.926 million tons in February, up from 1.83 million tons in January. The increase came as mills began ramping up operations ahead of a projected recovery in demand during March and April.
• The U.S. Energy Information Administration (EIA) released data that supports current crude prices. Despite indicating that crude inventories were up, the numbers also showed that stockpiles of refined products were down.
• Preliminary port data shows Brazilian iron ore exports totaled 23.3 million tons in February. The pace equals 294 million tons per year (mtpy) on an annualized basis, an increase from January but still down 8.7 percent year-over-year. Exports to China totaled 165 mtpy, down only 1.4 percent year-over-year. This put China’s share of Brazilian exports at 56 percent, the third-largest amount since 2009. On the other end of the spectrum, exports heading to South Korea were at the volume in over 10 years.
• Iraq oil production is now over 3 million barrels per day, the country’s highest output since 1979, according to Deputy Prime Minister Hussein al-Shahristani.

Weaknesses

• Preliminary Australian port export figures for February show a month-over-month dip in both met and thermal coal export volumes as a combination of weather-related issues and industrial action hindered shipments during the month. Met coal exports were 139 million tons per annum, down 14 percent month-over-month and the lowest since July. However, the amount of exports was still well above the 107 million tons per annum level seen in February 2011. Thermal exports were 135 million tons per annum, down 13 percent month-over-month but up 14 percent from the previous year.
• The Central Bank of Chile reported that the country’s copper export revenue totaled $3.37 billion in February, slipping nearly 20 percent from $4.17 billion in January. The drop in copper export revenue comes despite a 5 percent month-over-month increase in the average copper price in February and supports our view that Chilean mine production has struggled so far in 2012 with January production reflected in February exports.
• Natural gas futures on NYMEX touched a 10-year low this week as mild winter weather across North America has reduced heating demand. Natural gas inventories were 2.433 trillion cubic feet as of March 2 which is 46.2 percent above the five-year average and 45.3 percent above a year ago. On average, this winter has been 21 percent warmer than last year.

Opportunities

• South Sudan plans to build a temporary underwater oil pipeline along the Nile as part of a project to deliver crude oil for export from ports in Kenya and Djibouti. The pipeline would extend from oilfields to the capital of Juba, where the crude would be transferred to trucks and taken on to Kenya and Djibouti.
• According to the International Oil Daily, China will increase the storage capacity for the second-phase expansion of its strategic petroleum reserves (SPR) program to 32.9 million cubic meters. This would allow the country to store almost 210 million barrels of crude, 24 percent higher than initially planned. At the end of last year, China had built a total of 362 million barrels of crude oil storage capacity including 142 million barrels of SPR capacity and 220 million barrels of commercial oil storage capacity; equivalent to 40 days of the nation’s oil consumption.
• On the supply side, production is expected to finally resume at Freeport McMoRan’s Grasberg copper mine in Indonesia after clashes with workers delayed the restarting of production. Grasberg produces roughly 550 thousand tons of copper per year but Bloomberg says the company is reviewing its full-year production forecast following the disruption. Newmont Mining is also reviewing the economics of its $4.8 billion Minas Conga copper and gold project. The project, which at peak production expected in 2014-15 would yield around 70-105 thousand tons per year of copper, is still on suspension following protests by local residents and politicians. The dispute is predominantly over water usage and environmental concerns and the Peruvian government has undertaken an environmental impact review of the project, the results of which are expected to be ready in a few weeks.
• The Chevron Phillips Chemical Co. said its industry may spend $30 billion to build U.S. factories that convert natural gas into plastics because shale gas has made American production the cheapest outside the Middle East. Output from shale formations will yield enough natural gas liquids (NGLs) such as ethane to support about five new plants that produce ethylene and related plastics, an executive said. Each facility will cost $5-$6 billion and will be built over more than a decade. In addition, U.S. plastics exports may surge as new plants start, creating the need for new infrastructure to handle the increased shipments, the executive said.
• After Colombia’s coal production reached 84.7 million tons in 2011, the government forecasts its coal production to reach 97 million tons in 2012 and grow to 120 million tons by 2014. Colombia expects production to stabilize beyond 2014. The nation is seeing increased investment in the coal and gold mining sectors recently with the two evenly splitting $4 billion worth of investment in 2011.

Threats

• A one-day nationwide strike in South Africa led by the Congress of South African Trade Unions in protest of new road tolls and short-term contract labor agencies hit the mining sector, in particular gold and coal, this week. Gold Fields and Harmony Gold said that their operations were brought to a halt, as most of the workers took part in the strike. Anglo American’s local coal unit also took a hit. However, platinum mining remained unaffected as Impala Platinum and Anglo American Platinum continued to operate normally. Though Impala’s Rustenburg mine is recovering from a six-week long strike, the platinum group metals (PGM) sector remains at risk in our view due to the increasing frequency of labor-related disruptions this year.
• The Times of India reports that Indian Railways on Tuesday decided to increase freight rates by up to 20 percent for several commodities. The move is expected to increase prices of an array of goods, ranging from coal to fertilizers. With inflation, led by food, at a comfortable level, the freight hike won’t spare food grains. However, the agriculture ministry will pay a higher subsidy to ensure that consumers are not adversely affected. As part of the freight rationalization drive, railways increased the rate to be charged per ton per kilometer and changed the distance band to increase its earnings. The hike comes at a time when railway minister Dinesh Trivedi is under pressure to raise resources to drive the state-run transporter out of a financial mess created by his political party boss Mamata Banerjee.
• Bloomberg reports that China’s National Administration has decided to cap coal usage at about 4.1 billion tons of standard coal, a cap that would come into effect starting 2015, according to unconfirmed reports. China may announce the details of the plan around the middle of the year. China consumed a total of 3.48 billion tons of standard coal during 2011, up 7 percent year-over-year.

Tags: Agriculture, Barclays Capital, Crude Inventories, Crude Steel, Current Crude Prices, Energy Information Administration, ETF, ETFs, Gold Platinum, Industrial Silver, Iron Ore Exports, Market Radar, Petrochina, Price Of Silver, Processing Units, Refined Products, Refinery, Reuters Reports, Silver Bars, Silver Institute, Sinopec, Stockpiles, U S Energy
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Case Study: Buyouts Crystallize Value in the Market

Saturday, October 15th, 2011

Case Study: Buyouts Crystallize Value in the Market

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

There’s value in the market. That’s the message the market is sending through the recent strategic acquisitions in the energy and gold mining spaces.

This week it was announced that Sinopec, a large Chinese oil and gas company, is purchasing Canadian energy company Daylight Energy for $2.1 billion in cash. The deal was struck at a whopping 120 percent premium to Daylight’s share price prior to the announcement and a 43.6 percent premium over the 60-day weighted average price, according to Reuters.

Back in July, the first large-cap company to go discount shopping was BHP Billiton when it purchased Petrohawk Energy for just over $15 billion. The deal, which gives BHP access to the highly coveted shale gas reserves, was struck at $38.75 per share, a 49 percent premium from where Petrohawk shares were trading prior to the announcement.

Not to be outdone, the gold mining sector got into the action when B2Gold announced it was purchasing Auryx Gold in a $160 million cash, all-stock deal. The deal represented a 74 percent premium on Auryx Gold’s shares from the previous week’s close.

It was also announced that Agnico-Eagle had gained access to promising gold prospects in Mexico via Canada by agreeing to purchase Canadian gold miner Grayd Resource Corp in a $463.5 million deal. At $2.80 per share (Canadian), the buyout represents a nearly 66 percent premium over the trading price prior to Agnico’s announcement.

The strategy behind each deal is specific to the purchasing companies but all four deals crystallize the inherent value in the equity market. Junior exploration and development companies in both the energy and gold mining sectors have suffered steep declines during the market selloff that began in April.

Large-cap companies in both energy and gold mining must continually replace diminishing reserves. For example, decline rates for oil-producing wells in the Gulf of Mexico can range between 15-30 percent a year and significant investments must be made to keep the well producing, according to BP. Establishing new wells is also expensive. An offshore exploration well, for example, can cost $100-$200 million dollars and that doesn’t guarantee it will become a producing well.

In fact, currently the cheapest barrels of oil and ounces of gold aren’t in the ground, they’re listed on the stock exchange. This is why the smart money, such as the world’s largest mining company, is swooping in to pick up reserves at discounted prices. This could just be the tip-of-the-iceberg for BHP. BMO estimates the company will spend between $68-79 billion by 2020 to add unconventional shale assets to the company’s mammoth portfolio.

This isn’t a new phenomenon in the gold sector. As I explained in The Goldwatcher, the big miners have chosen the express route to increasing reserves by purchasing the known assets of their rivals rather than the heartache and headache of drilling core samples and filling out permit applications.

In addition, higher gold prices have filled the coffers of large-cap companies with plenty of cash. BMO forecasts that the gold mining universe will accumulate $120 billion in cash by 2015 if prices remain elevated.

We think this “takeout potential” creates one of the best opportunities in today’s market.

Tags: Agnico Eagle, Bhp Billiton, Buyouts, Canadian, Canadian Energy, Canadian Gold, Canadian Market, Cap Companies, Cap Company, Chief Investment Officer, Chinese Oil, Frank Holmes, Gold, Gold Miner, Gold Mining, Gold Prospects, Junior Exploration, Oil And Gas Company, Resource Corp, Sinopec, Steep Declines, Stock Deal, U S Global Investors
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China Eyes Canada’s Oil, U.S.’ Energy Nest Egg

Monday, June 27th, 2011

CALGARY, Alberta (AP) — In the northern reaches of Alberta lies a vast reserve of oil that the U.S. views as a pillar of its future energy needs.

China, with a growing appetite for oil that may one day surpass that of the U.S., is ready to spend the dollars for a big piece of it.

The oil sands of this Canadian province are so big that they will be able to serve both of the world’s largest economies as production expands in the coming years. But that will mean building at least two pipelines, one south to the Texas Gulf Coast and another west toward the Pacific, and that in turn means fresh environmental battles on top of those already raging over the costly and energy-intensive method of extracting oil from sand.

Most believe that both will eventually be built. But if the U.S. doesn’t approve its pipeline promptly, Canada might increasingly look to China, thinking America doesn’t want a big stake share in what environmentalists call “dirty oil,” which they say increases greenhouse gas emissions.

Alberta has the world’s third largest oil reserves, more than 170 billion barrels. Daily production of 1.5 million barrels from the oil sands is expected to nearly triple to 3.7 million in 2025. Overall, Alberta has more oil than Russia or Iran. Only Saudi Arabia and Venezuela have more.

Alberta is one of the few places where oil companies can invest, as the majority of the world’s oil reserves are controlled by national governments. Only 22 percent of the total world reserves are accessible to private sector investment, 52 percent of which is in Alberta’s oil sands, according to the Canadian Association of Petroleum Producers.

Canada’s only major oil export market is the U.S. But with the product of oil sands and pipeline delivery to the U.S. under perennial clouds of environmental objections, and with Asian demand growing, this country wants to diversify its market, and China is eager to oblige.

Sinopec, a Chinese state-controlled oil company, has a stake in a $5.5 billion plan drawn up by the Alberta-based Enbridge company to build the Northern Gateway Pipeline from Alberta to the Pacific coast province of British Columbia. Alberta Finance Minister Lloyd Snelgrove met this month with Sinopec and CNOOC, China’s other big oil company, and China’s largest banks.

“They are sitting there saying if you need money, we’ve got money; if you need expertise, we’ve got that; whatever you need we’ve got,” Snelgrove said.

Alberta Premier Ed Stelmach said American government officials have expressed concern about a pipeline to the Pacific. They have raised it in terms of “Well, are you still going to be able to supply us?” he said.

That fear may already have fallen aside.

“There are people who still feel that one barrel of oil going from Canada to China could be one more barrel going to the United States. But those are people in the minority. It is a concern but it is not a big concern,” said Wenran Jiang, a professor at the University of Alberta and a senior fellow of the Asia Pacific Foundation.

Stelmach said the U.S. will remain Canada’s primary oil customer.

But aboriginal and environmental opposition to the Pacific pipeline is fierce. The opponents fear it will leak. The local member of Parliament, Nathan Cullen, says accidents are inevitable in the rough waters around Kitimat, British Columbia, where the pipeline will end. And no one has forgotten the Exxon Valdez oil spill of 1989, some 1,300 kilometers (800 miles) north of Kitimat.

However, Canadian Prime Minister Stephen Harper, freshly and convincingly re-elected, is an oil man who has suggested he supports building the pipeline. Also, Calgary-based Kinder Morgan has plans to expand an existing pipeline route to Vancouver so that oil can be shipped to Asia.

Critics dislike the whole concept of oil sands, because extracting the oil requires huge amounts of energy and water, increases greenhouse gas emissions and threatens rivers and forests. Keystone XL, the pipeline that would bring Alberta oil to Texas Gulf Coast refineries to serve the U.S. market, compounds the issue.

Pipeline leaks can affect drinking water and sensitive ecosystems, the U.S. Environmental Protection Agency warns. In a letter to the State Department this month, it cited major pipeline spills last year in Michigan and Illinois, as well as two leaks last month in the Keystone pipeline, a 1,300-mile line owned by the same company that wants to build Keystone XL. The U.S. pipeline safety agency briefly blocked Calgary-based TransCanada from restarting the Keystone pipeline this month because of safety concerns.

But Keystone XL could substantially reduce U.S. dependency on oil from the Middle East and other regions, according to a report commissioned by the Obama administration. It suggests that the pipeline, coupled with a reduction in overall U.S. oil demand, “could essentially eliminate Middle East crude imports longer term.”

Tags: Calgary Alberta, Canadian, Canadian Association Of Petroleum, Canadian Market, Canadian Province, China Eyes, Chinese State, Crude Oil, Dirty Oil, Environmental Battles, Greenhouse Gas Emissions, Intensive Method, Largest Economies, National Governments, Nest Egg, Oil Export, Oil Sands, Petroleum Producers, Private Sector Investment, Sinopec, Texas Gulf Coast, U S Energy, World Reserves
Posted in Canadian Market, Markets, Oil and Gas | 1 Comment »

Emerging Markets Cheat Sheet (April 11, 2011)

Saturday, April 9th, 2011

Emerging Markets Cheat Sheet (April 11, 2011)

Strengths

• According to Xinhua News, the China National Offshore Oil Corporation (CNOOC) plans to launch another two to three offshore deep-water fleet teams in 2011-15. Its first deep-water offshore fleet team, with total investment of Rmb15 billion in 2006-10, is expected to be ready for operation in 2011.
• Sales of household appliances soared a massive 179 percent in China in March, benefiting from the government stimulus plan in the rural areas.
• China has raised gasoline and diesel oil by 500 RMB/ton and 400 RMB/ton, respectively. This will reduce margin pressure on Sinopec.
• China non-manufacturing PMI surged 16 points to 60.2 in March, showing stronger growth momentum for service sectors. This should be an early indication for sales and earning growth during the first quarter and first half of 2011 for consumer goods and services. We have already seen robust revenue and earnings growth last year reported by service sector companies.
• The index of economic activity in Chile in February rose 7.2 percent year-over-year, above the estimate of 6.3 percent
• Russian sales of new cars and light trucks jumped an annual 77 percent in March, beating forecast, as the government continued its so-called cash-for-clunkers program, the Association of European Businesses said. Half a million people have bought new cars built in Russia under the government’s rebate program, boosting sales by 30 percent last year to 1.91 million.

Weaknesses

• To further tighten liquidity, the PBOC raised its benchmark for the fourth time since the cycle started last year. Both one-year lending and deposit rates were hiked by 25 basis points to 6.31 percent and 3.25 percent, respectively. However, the demand deposit rate is up 10 basis points to 0.5 percent, after being left alone in the last rate hike in February. The overall effect on a bank’s net interest margin is neutral to local banks, but moderately positive to the Agricultural Bank of China (ABC), China Construction Bank, and Industry and Commerce Bank of China due to their better deposit franchises. Particularly, ABC should benefit more due to higher demand deposit and high loan rates in the rural areas in China.
• Televisa’s entry into the mobile market in Mexico through acquisition of a 50 percent stake in Iusacell for $1.6 billion received a negative reaction from the market, as the stock lost 10 percent in the last three days. There are differences of opinion among investors with respect to potential synergies between telecom and media companies
• Russian export flat steel prices have started to come off, according to Morgan Stanley. On the other hand, Russian steel market fundamentals remain strong driven by rising car sales, pipe and machinery production, and construction activity.

Opportunities

• China’s offshore industry is in a 5-to-10-year growth cycle, according to Morgan Stanley. China has already become the largest shipbuilder in the world two years ago. It is rapidly growing by migrating up the value chain from low-end shipbuilding to high-end offshore industry. China’s offshore equipment and rig builders, such as China International Marine Containers, are able to enjoy a rapidly growing cycle because offshore capital expenditure is increasing exponentially by China’s exploration and production companies, such as CNOOC and PetroChina. China’s government is more than doubling offshore capital expenditures from RMB 100-120 billion in 2006-2010 to RMB 250-300 billion in 2011-2015. Offshore rig and equipment orders are mainly from domestic offshore oil explorers. The chart shows China’s offshore market share in 2010.
• CEZ, the Czech utility, has proposed a 57 percent payout of last year’s profit, which will amount to CZK50/share, providing a dividend yield of around 6 percent.
• Lojas Renner of Brazil has agreed to purchase the houseware/bedding/bathroom store chain Camicado for $98 million. Through this acquisition, Lojas Renner will gain 27 stores in the country in the niche that is expected to grow as disposable income rises.
• There are indications that Santander is considering a listing of its Mexican subsidiary on the Mexican Stock Exchange. There is currently only one bank listed in Mexico, Banorte, and we believe that investors would welcome another financial services play onto the market.
• World Bank research suggests that the World Trade Organization (WTO) accession might increase Russia’s GDP by 3.3 percent and consumption by 7.8 percent in the medium term. Extraction of raw materials should benefit from lower trade restrictions, though this is likely to be partially offset by net losses in agriculture and light industry, according to J.P. Morgan.

Threats

• While the PBOC rate hike can withdraw the excessive domestic liquidity from the market, and therefore curtail inflation, China has other potential sources of inflation. For one, it is better for China to minimize trade surplus since it is a major source of excessive liquidity when the PBOC buys foreign currency to maintain a stable but slow RMB appreciation. Secondly, increasing global commodity prices will evidently push up China’s consumer product prices. To manage a soft landing, China will continue to use all available tools to defeat inflation expectations. So far, it has achieved satisfactory results. For example, the CLSA China Soft Commodity Wholesale Price Monitor has shown a benign price increase year-to-date, and a flattish March price over February, which might be indicating that China’s inflation is peaking.
• As the presidential election gets underway in Peru, investors await nervously the outcome after indications that a left-wing candidate, Ollanta Humala, is leading in the polls.
• Oil prices above $100 a barrel are discouraging Russia from diversifying its economy, said Deputy Prime Minister Sergei Ivanov. He also said the current price was unsustainable and that Russia’s budget will fall into a deficit when it drops.

Tags: Brazil, China, Cnooc, Diesel Oil, Earnings Growth, European Businesses, Fleet Team, Growth Momentum, Half A Million, Household Appliances, Interest Margin, Light Trucks, Margin Pressure, Offshore Fleet, oil, Pboc, Rebate Program, Russia, Russian Sales, Service Sector Companies, Service Sectors, Sinopec, Sinopec China, Xinhua News
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China: Investing In The US After Unocal

Monday, August 23rd, 2010

After state-owned CNOOC was blocked from the Unocal acquisition in 2005, China has instead turned toward other countries such as Australia, Canada and Brazil for its natural resource strategic investments.

While China is the top U.S. debt holder in the world, percentage-of-GDP-wise, the U.S. receives relatively very little non-bond investment from China, based on data tracked by The Heritage Foundation. (See chart) Part of this “allocation difference” could be attributed to the long existing tensions over various issues including, but not limited to—trade imbalance and currency–between the world’s top two economies.

The increasing frictions have prompted the U.S. to scrutinize China-related domestic acquisitions with an extra pair of magnifying glasses.  And the resource and infrastructure sectors appear to be the most politically sensitive.  Even as recent as last December, a Chinese mining company had to back out of a deal to invest in Nevada gold mine after security concerns cited by the U.S. government. (The mine is about 60 miles from a U.S. naval base.)

China – Investing Strategy Shift

However, Chinese companies have become much more aggressive and savvy in their approach to deal making, and have adapted to the political environment through joint ventures with local companies and small stakes instead of ambitious, high-profile large acquisitions.

Based on the data from the Heritage Foundation, the bulk of Chinese investment in the U.S. since 2005 has been in the financial and real estate sectors. (see graph)  Nevertheless, the shift in approach has helped the Chinese enter into the U.S. energy and power market through the following major deals:

• In Feb. 2007, Sinopec agreed to provide Syntroleum with $100 million to support a Joint Gas-To-Liquid (GTL) technology development.
• Last October, Norwegian energy group Statoil sold some of its US Gulf offshore oil assets to CNOOC for an undisclosed amount.
• Last November, China Investment Corp. (CIC) agreed to buy a 15% equity stake in Virginia-based power company AES Corp. for $1.58 billion
• In May of this year, Hopu Investment Management Co., a Chinese private equity firm, invested about $100 million for around 1% stake in Chesapeake Energy

U.S. – Jobs, Jobs, Jobs…Or Not?

Meanwhile, a subtle change is also taking place on the U.S. side.

Reuters reported that China state-owned Anshan Iron & Steel Group, the parent of Angang Steel Co. has agreed to pay $175 million for about 14% stake in a rebar plant that Steel Development Co.–a U.S. private startup– is building in Mississippi.

Despite a previous report of shelving the project due to congressional opposition citing national security concern (we are talking about a relatively small base-metal rebar plant here), Anshan now says it is still planning to invest in the U.S. And according to Steelorbis.com,

“The Angang official recalled that the US Department of the Treasury had affirmed that the US Overseas Investment Office would deal with any national security concerns in relation to the issue and would seek to maintain an open investment environment.”

This investment reportedly would create about 1,000 construction jobs and more than 200 permanent manufacturing jobs in the U.S. once the facility is complete.

Union’s Also Warming Up to China…Sort of?

Separately, the United Steelworkers (USW), which has backed a myriad of trade cases against China, announced in early August that it had signed agreements with Chinese power generation companies A-Power Energy Generation Systems Ltd., (AAPWR) and Shenyang Power Group (SPG) to supply wind turbines to the SPG-owned 600-MW Texas wind farm set to begin construction soon.

Apparently, the initial criticism that U.S. stimulus money will be funding jobs in China was quelled by A-Power’s plan to purchase up to 50,000 tons of steel from American mills and set up a facility in Nevada, thus creating perhaps 1,000 American jobs.

The USW is calling this “vision for win-win relationships between manufacturers and workers,” but indicates it will not back off its trade cases against China.

A Japanese Evolution

These two deals in the metals sector took place in the context of high unemployment and job losses caused by the global financial crisis, which most likely has somewhat softened the opposition to Chinese investment.

On the other hand, Chinese firms seem to have embarked on an evolution similar to that of the Japanese firms. Back in the 1980s when Japanese companies burst onto the world market, there was a global widespread defensive reaction, particularly in the United States. Then, Japanese firms began to change their investing approach by setting up assembly and full production facilities in the U.S. and eventually found acceptance.

Foreign Investments Contribute To U.S. Growth

The U.S. has the advantage of being one of the most politically stable and attractive regions with rich intellectual and natural resources. Meanwhile, with good cash-flow, strong balance sheets and the implicit support from Beijing, the Chinese state-run as well as private enterprises will continue their overseas expansion.

Most importantly, foreign investment inflows– including China’s—contribute to the economic growth and development of the United States, and could potentially help the trade imbalance.

Politics aside, given the size and relative competiveness of its economy, the U.S. should be able to handle a few more billions from China or other trading partners without raising the risk to national security. Otherwise, by alienating allies, the United States could find itself isolated in an increasingly interconnected world, while potentially putting employment, competitiveness, and innovation at a disadvantage.

On the other hand, although the increasingly multi-faceted approach by the Chinese is expected to continue evolving, managing PR, host country perception, political environment and developing relationship could prove to be a greater challenge than anything for Beijing, partly because much of China’s overseas investments are still going through state-owned companies. From that perspective, it would be to China’s benefit to speed up its privatization process in order to truly transform its economy.

A Crash or Collision Course?

Foreign investment in US companies and assets has long been controversial since World War I, but this financial crisis has pushed both China and the U.S. on an accelerated learning curve of cross-border investments. However, taking a crash course–instead of a collision course–will require some give and take from both of the world’s top countries.

So, which course would it be?  Only time will tell.

Disclosure: No Positions
Dian L. Chu, Aug. 21, 2010

Tags: Bond Investment, Brazil, Canadian Market, China, China Investment, Chinese Companies, Chinese Investment, Cnooc, Commodities, energy, Energy Group, Frictions, Gold, Gold Mine, Gtl Technology, Heritage Foundation, Infrastructure Sectors, Magnifying Glasses, Natural Gas, Natural Resources, Nevada Gold, Norwegian Energy, oil, Oil Assets, Real Estate Sectors, Sinopec, Strategic Investments, Strategy Shift, U S Energy
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China’s Back-Door Push Into Our Front Yard

Wednesday, May 26th, 2010

This article is a guest contribution by *Dr. Kent Moors, Oil and Energy Investor.

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Li Hui – we all call her Nancy – is one smart young lady. But don’t let the pleasant smile and social graces fool you.

As one of the new South American project managers for China Petroleum & Chemical Corp., or Sinopec (NYSE:SHI), Nancy is one of the shrewdest energy business negotiators I have ever met – and the only woman at a level still controlled by rapidly rising Chinese male execs.

What Nancy is doing will change the way you need to think about investment opportunities in oil and gas in both North and South America. Sinopec is awash with cash and on a development spree.

And that means new wealth is about to come pouring into our corner of the world.

China Is Ready to Spend Big on Western Energy

Here, it is another sunny day in the Bahamas… and Sinopec’s turn to spend an afternoon at my place on the water, watching the yachts drift by. Nancy and three of her staff have come up from Guayaquil, ostensibly to confer on the refinery project I advise – and Sinopec is building – in Ecuador.

But, as on previous occasions, the discussion quickly moves elsewhere.

Nancy is more interested in my views on unconventional oil and gas production, U.S. refinery margins, the offshore market in Brazil … and problems with the Red Sox starting rotation. (I brought her to her first ballgame at Fenway Park years ago, and she has followed my team ever since. The scientist in her likes crunching numbers – and baseball has plenty of those.)

Nancy has been here so many times, she moves freely about the house. She asks a question and then walks over to hit the refrigerator behind the bar while I answer. When I am with her, there is always a feeling of a decision about to be made, an environment of there not being quite enough time…

And for good reason.

These days, Nancy and the Sinopec staff are moving rapidly into what used to be our front yard – the Western Hemisphere.

They have their marching orders from higher-ups. As China continues to wrestle with exploding domestic energy demand, the country’s main oil and gas companies are frantically scouring the globe for sources and projects. They are finding more and more of those over here.

In the last 18 months, roughly the time the Ecuadorian refinery has been in development, Sinopec:

• acquired vast oil sands reserves in Alberta from suddenly debt-ridden ConocoPhillips (NYSE:COP) for $4.6 billion;
• provided a $10 billion line of credit to Brazilian oil major Petrobras (NYSE:PZE), from which it will receive seven million tons (51 million barrels) of crude this year and over 10 million tons next year;
• struck a multi-billion dollar deal with Hugo Chavez in Venezuela to process heavy oil;
• became an upstream operating company in its own right by investing the first $500 million of a $2.5 billion to $3 billion commitment to develop the Oglan deposit in Ecuador’s Amazon; and
• is currently being wooed by Columbia and Brazil for major investments in hydrocarbons.

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Beijing is sitting on at least $2 trillion in immediately available foreign hard currency reserves – funds that can be spent on any acquisition worldwide. In addition, Sinopec has just received permission to float 20 billion yuan ($6.3 billion USD) in bonds. So there is plenty of money to go around as Sinopec sets out to achieve its goals.

Sinopec is no longer only China’s largest refiner. It is about to embark upon major projects in unconventional gas sources coal bed methane (CBM) and shale gas, both at home and wherever it can find them abroad, to complement the huge track of unconventional oil (oil sands) it just obtained in Canada. In addition to deposits, that means the company will need to acquire technology and expertise as well. That access will come through the financing of, acquisitions in, and joint venturing with American and Canadian technical providers and specialty drillers.

Turns out, that is precisely the reason the delegation came up to see me.

It took several bottles of Kalik Export (the best local beer) to get to the main subject Nancy had in mind for our meeting. Once the discussion moved in that direction, however, she focused all of her attention on it. Sinopec wants to move into the Marcellus Shale Play in Pennsylvania and the Power River Basin CBM deposits in northeastern Wyoming. They are less interested in control over volume from these drillings and more interested in gaining access to the technology used. And they will pay top dollar.

Sinopec, of course, knows I advise both operators and technical companies in both basins. So stay tuned.

I just might end up with back-door access of my own – right into where the Chinese may be putting a chunk of their energy investments in our hemisphere.

Kent

Copyright (c) Oil and Energy Investor

Dr. Moors has appeared over 1,400 times as a featured television and radio commentator in North America, Europe and Russia, including ABC, BBC, Bloomberg TV, CBS, CNN, NBC, Russian RTV and regularly on Fox Business Network.

A professor in the Graduate Center for Social and Public Policy at Duquesne University, where he also directs the Energy Policy Research Group, Moors has developed international educational programs and he runs training sessions for multiple U.S. government agencies. And until recent revisions in U.S. policy, Dr. Moors was slated to be the deputy director of the Iraq Reconstruction Management Office (IRMO) in Baghdad.

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Canada: Boring is Good

Monday, May 10th, 2010

Canada’s great, “boring,” economy is highlighted in the most recent Economist, “The Goldilocks Recovery.”

Boring Banking System

Jim Flaherty, the finance minister, attributes Canada’s strong performance to its “boring” financial system. Prodded by tight regulation, the banks were much more conservative in their lending than their American counterparts. Those that did dabble in subprime loans were able to withdraw quickly. This prudence kept a lid on house prices while those in America were soaring, but it paid off when the bust hit. The volume and value of home sales in Canada are now at record highs. In some areas the market looks downright frothy: a modest house in Ottawa listed at C$439,000 ($435,000) recently sold for $600,000. “A lot of homes are selling in one day, and often for over the asking price,” says David Cullwick, a local estate agent. Rising prices have bolstered the construction industry and sellers of furniture and building materials.

‘Safe Harbour’ Energy Sector

For the other component of the country’s resilience—resurgent appetites for its exports of oil, gas, and minerals—Canadians have to thank policymakers in Beijing more than those in Ottawa. At their low point, prices for Canada’s commodity exports were still 50% higher than in previous recessions. Since then, they have rallied strongly. The impact is illustrated by the fortunes of Teck Resources, a Vancouver-based mining firm. It staggered into the recession loaded with a $9.8 billion debt taken on to buy the assets of a coal-mining company. For a while its survival was in doubt. Last month Teck not only announced that it had repaid the debt but also that it would pay a dividend.

The energy industry is coming back to life, with new investments planned for in Alberta’s oil sands. Last month Sinopec, a Chinese oil company, announced it would pay $4.65 billion for a 9% stake in Syncrude Canada, the largest operator in the sands. Such investments are controversial because of their environmental impact. But they are welcome in Alberta, where the government posted an unprecedented budget deficit last year.

Manufacturing though, owing to the strong dollar, is at risk, but many companies have apparently adapted to it.

What’s that saying? “He who laughs last, laughs the loudest.”

Boring is good.

Source: The Goldilocks Recovery, The Economist, May 6, 2010

Tags: American Counterparts, Appetites, Banking System, Canadian Market, Chinese Oil, Coal Mining Company, Coming Back To Life, Commodity Exports, Energy Industry, energy sector, Finance Minister, Gold, House Prices, Jim Flaherty, Oil Company, Oil Sands, Recessions, Record Highs, Sinopec, Subprime Loans, Syncrude Canada, Tight Regulation
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Energy and Natural Resources Market Diary (4/5/2010)

Monday, April 5th, 2010

Energy and Natural Resources Market Diary (4/5/2010)

President Obama proposed plans this week to open areas along the coasts of Virginia, the Carolinas, Georgia and northern Alaska for offshore oil and gas exploration.

Offshore drilling has been banned since 1981 for most of the U.S. coastline, but it seems that’s where the deposits are. The outer continental shelf (mostly Gulf of Mexico) now accounts for nearly 30 percent of U.S. oil production, up from 11 percent in 1990.

It will be years before production begins in this area, but the impact may be felt sooner in certain segments of the oil and gas sector. Jack-up drill rigs and offshore platforms — in high demand and short supply less than 18 months ago — may see renewed demand. In addition, new pipelines and other infrastructure would be needed to make production in these new areas economically feasible.

Strengths

• Consistent with historic seasonal patterns for March, crude oil increased 5 percent in the month to nearly $84 a barrel.
• Copper surpassed its January 2010 high to reach its highest level since August 2008 at $3.57 a pound.
• Bloomberg reports that Vale SA, the world’s largest iron ore producer, and BHP Billiton Ltd. ended a 40-year system of setting annual prices. They instead signed short-term contracts with Asian mills, with Vale winning a 90 percent increase.
• The price of natural gas gained over 6 percent this week above $4 per million BTU following a smaller-than-expected inventory build.
• China Petroleum & Chemical Corp., or Sinopec, said it agreed to acquire deep-water oil assets in Angola by buying a 55 percent stake in Sonangol Sinopec International Ltd. for US $2.46 billion.

Weaknesses

• In its Prospective Plantings report, the USDA forecast 2010 wheat, corn and soybean plantings in the U.S. to be lower from a year ago, suggesting weaker demand for fertilizer application this spring.

Opportunities

• PetroChina plans to spend at least US $60 billion in the next decade on overseas acquisitions, challenging Exxon Mobil Corp and BP Plc in the race to control oil and gas fields.
• U.S. coal stockpiles at power plants were 2.6 percent smaller than this time last year according to Genscape. U.S. generators now have 58 days of coal on hand, up two days relative to last week but two days less than the same period last year.
• China, the largest iron ore buyer, may import 610 million metric tons of the steelmaking material this year, near the 2009 record, as mills continue to expand on the government’s stimulus spending, Shougang Corp. said. Steel demand may grow by between 8 percent and 10 percent this year, Shougang’s chairman said. The Beijing-based steelmaker is the country’s seventh-biggest by output in 2009.
• Saudi Arabia plans to spend $170 billion over the next five years on energy and oil refining projects. Of that total, $90 billion is to come directly from Saudi Aramco, while current and future capital investment will account for the remaining $80bn of joint refining and marketing projects.
• China’s coal-fired power stations may need an additional 35 million metric tons of the fuel to compensate for a 15 percent drop in capacity utilization at hydropower plants, Dave Dai, a Hong Kong-based analyst at CLSA Research Ltd., said in a report.

Threats

Aluminum Corp. of China Ltd. (Chalco) management has indicated that it believes that the aluminum market is in oversupply and that this will restrain upward pricing pressure, with management expecting that aluminum prices will average $0.91 – $1.09 per pound in 2010.

Tags: Advertisement Opportunities, Barrel Copper, Bhp Billiton, Bhp Billiton Ltd, China Petroleum, Commodities, commodities update, Drill Rigs, energy, Fertilizer Application, Iron Ore Producer, Market Diary, Natural Gas, Natural Resources, Northern Alaska, Offshore Drilling, Offshore Platforms, Oil And Gas Exploration, Oil Assets, Outer Continental Shelf, Price Of Natural Gas, Prospective Plantings, Sinopec, Sinopec International, Sonangol, Soybean Plantings
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Emerging Markets on Buying Spree

Saturday, March 20th, 2010

By Frank Holmes CEO and Chief Investment Officer

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It’s getting to be common news for a Chinese company (usually with links to the government) to buy a foreign commodities producer to secure supplies of coal, oil, iron ore and other assets to fulfill the country’s ambitious growth plans.

China is not alone on this shopping spree. We came across some new data, for example, that shows a clear trend of emerging-market countries increasing their ownership stakes of companies in the developed world.

This is yet another indicator of the shifting balance in global wealth from the developed toward the emerging economies.

China, the Middle East and India led a rebound in the number of emerging-market entities acquiring developed-world companies (E2D), according to *KPMG’s Emerging Markets International Acquisition Tracker (EMIAT).

EMIAT showed that 102 E2D transactions were completed in the second half of 2009, compared to 78 such deals in the first six months of the year. The chart above shows the trend for both E2D deals and developed-market companies buying assets in emerging nations (D2E), which have trailed off since the start of the Great Recession.

A little more detail on the EMIAT: it covers 12 developed economies and 11 select emerging economies, and for a deal to count, the buyer must buy at least 10 percent of the overseas company.

In 2009, Chinese companies made 50 acquisitions in the developed markets (which include Hong Kong), the highest number since EMIAT began in 2003. There were 86 deals going in the opposite direction, the lowest figure recorded by KPMG.

China’s outbound deals last year included Sinopec’s purchase of Addax Petroleum for $7.3 billion, Yanzhou Coal’s $2.9 billion deal for Felix Resources and PetroChina’s outlay of $1.7 billion for a stake in Athabasca, the Canadian oil sands producer.

PriceWaterhouseCoopers estimates that China’s overseas deals may grow 40 percent this year—already its national oil company is aiming to buy half of a major producer in Argentina for some $3 billion, and it has its eye on a number of other targets.

For India, last year’s numbers were 25 and 73, respectively. India is the leading E2D dealmaker since 2003, with more than 400 completed transactions. Brazil was a laggard in this trend in 2009: just two E2D deals and 20 D2E deals.

KPMG says it noticed an especially strong trend involving commodity and other resource-related acquisitions in the second half of 2009. It also predicted that oil-fueled Middle East sovereign wealth funds (Abu Dhabi’s alone is estimated at $600+ billion) will soon get busier. Once this occurs, KPMG says, expect the spread between D2E and E2D to narrow dramatically.

The major emerging markets are growing much faster than the developed markets. Companies in these developing countries have used this leverage to build a stronger supply chain of natural resources that will allow them to maintain this brisk pace when the competition for scarce resources heats up.

This is just one of the ways that China and other emerging markets are tilting the global economy so more of the world’s wealth flows their way.

Tags: Brazil, Canadian Oil Sands, Chief Investment Officer, Chinese Companies, Chinese Company, Coal Oil, Commodities, D2e, Emerging Economies China, Emerging Market Countries, Emerging Markets, energy, Felix Resources, Frank Holmes, Global Wealth, India, International Acquisition, Iron Ore, Kpmg, Months Of The Year, National Oil Company, Natural Resources, Oil Sands, Outlay, Petrochina, Shopping Spree, Sinopec, Yanzhou Coal
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