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8 July 2011
COMMODITIES WEEKLY
Sudakshina Unnikrishnan +44 (0) 20 7773 3797 sudakshina.unnikrishnan@barcap.com Kerri Maddock +44 (0) 20 3134 2300 kerri.maddock@barcap.com www.barcap.com
Commodity prices are mostly higher on the week. Oil prices have firmed and the latest weekly EIA data were very constructive on both the inventory and demand front. The surplus of US oil inventories (excluding 'other oils') has now fallen to its lowest level since December 2008 with the sharp reduction in products inventory the main contributing factor. Macro concerns continue to dominate base metals price action, although apparent progress in tackling the Greek debt crisis has offered the basis for a short-term relief rally. Corn prices, which came under significant pressure after last Thursdays USDA Acreage and Quarterly Stocks reports, have posted a modest recovery with recent price declines being met with an uptick in import demand especially from China with a key intent being to replenish domestic reserves.
Cross-commodities
Beijings central commitment to economic prosperity and high employment will continue to drive demand growth for commodities; Indian commodity demand growth is set to ease in the short term as economic activity slows, but supportive structural factors should limit the extent of the slowdown.
Energy
Diversion of drilling rigs to more lucrative oil opportunities is expected to pull gas-directed drilling low enough in late 2012 to cause natural gas supply to first plateau and then slide lower. This would mark a bullish turning point for gas; A carbon pricing scheme is due to be unveiled in Australia this week and could add to the mounting challenges faced by miners; our average annual price forecast for Brent in 2011 is unchanged at $112 per barrel, while our 2012 Brent forecast is increased by $10 to $115 per barrel; In a week when the price of carbon stabilised in a disappointingly low 13-13.50 /t range, the usual chorus of we need a central carbon bank rang through the air; The natural gas-directed rig count has fallen by 118 rigs since the peak of last year; Iraq Attacks on the rise as US departure looms.
Metals
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As miners respond to record levels of global demand, supply-side pressures are building leading to sharp increases in capital and operating costs.
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Commodity review
Commodity prices are mostly higher on the week. Oil prices have firmed and the latest weekly EIA data were very constructive on both the inventory and demand front. The surplus of US oil inventories (excluding 'other oils') has now fallen to its lowest level since December 2008 with the sharp reduction in products inventory the main contributing factor. Macro concerns continue to dominate base metals price action, although apparent progress in tackling the Greek debt crisis has offered the basis for a short-term relief rally. Corn prices, which came under significant pressure after last Thursdays USDA Acreage and Quarterly Stocks reports, have posted a modest recovery with recent price declines being met with an uptick in import demand especially from China with a key intent being to replenish domestic reserves. Our Energy Flash Oil market update: 2012 outlook released this week delineates our oil analysts detailed supply and demand forecasts for 2012 and changes to their oil price forecasts for 2011 and 2012. The 2011 price forecasts were last changed on 24 March, while the 2012 price forecasts have been unaltered since their initiation on 4 October 2010. The 2012 supply and demand forecasts show a continuation of robust emerging market demand. Global oil demand is expected to grow by 1.38 mb/d, with non-OECD demand rising by 1.57 mb/d. The main sources of demand growth in 2012 are expected to be China, India, Saudi Arabia and Brazil. Non-OPEC growth is expected to rise by 0.42 mb/d. Output growth is heavily concentrated in North and South America, and indeed outside the Americas non-OPEC output is set to fall in 2012. In terms of the global price level, our oil analysts leave their Brent forecast for 2011 unchanged at $112/barrel, while the 2012 forecast is increased by $10 to $115/barrel. The increase in the 2012 price forecast is based on a further narrowing of global spare capacity based on the balances, and by their view that the overall geopolitical context of the market is likely to become increasingly uncertain as 2012 progresses. The severe dislocation of WTI prices this year and the decoupling of WTI prices from both global prices and other US benchmarks has made the forecasting of the Brent-WTI differential fraught with difficulties and while our oil analysts still see the current size of differential as being exaggerated, they are now pricing in a far longer period of dislocation and a continuing lack of equilibrium relationships for WTI. As a result, their forecast for the average price of WTI in 2011 falls by $6 to $100/barrel. Those dislocations are also expected to hold back WTI relative to Brent next year, and their 2012 forecast for WTI lags that of Brent in rising by just $4 to $110/barrel. Price forecasts for later years are unchanged. Indeed, a key risk to the oil market remains tied to global geopolitical risks and in the latest Weekly Geopolitical Update we focus on rising violence in Iraq this summer, which is raising new concerns about the ability of local security services to maintain order when US troops depart at the end of the year. June was the deadliest month for civilians this year, with 340 killed while 14 US servicemen were killed in Iraq in June, making it the deadliest month for US troops in three years. A particularly worrying aspect of the latest unrest is that many of the attacks are occurring in Southern Iraq, which had been relatively peaceful in recent years. These incidents in the South have been linked to Shiite militias with ties to Iran. Several senior US officials have recently signaled a willingness to consider allowing some troops to remain if the Iraqi government requests that their stay be extended and even though Maliki reportedly wants to keep some US troops on hand, it will be politically challenging for him to get the approval of the Iraqi parliament. Moqtada al-Sadr has publicly warned that he will reactivate his Mahdi army and commence attacks on US troops if they remain on Iraqi soil next year. The current increase in violence comes at a time when Iraq has actually been experiencing a slow but steady increase in oil output. Having disappointed
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last year, when production remained largely flat y/y, Iraqi output has started 2011 on a reasonably strong footing. Nonetheless, Iraqs continued success depends largely on foreign companies which must operate in what is still a post-war conflict zone, and the lack of basic amenities and continuing militia violence keep the operating environment challenging. This weeks base metals piece highlights how capital and operating costs in the resources sector, and in particular in the metals and mining industry, are rising fast bringing back memories of the double-digit cost increases that characterised 2006-08; the financial crisis offered only a brief respite from structural supply-side pressures. As miners go full steam ahead to bring on new production in response to record levels of global demand these pressures are going to continue building, in our view. Cost drivers are diverse but the biggest effects have come from energy, exchange rate shifts, equipment costs and a shortage of skilled labour. The rising cost of meeting metals demand growth globally has implications for far forward metals prices, which arguably have already been demonstrated this year. Despite gyrations in front-end prices the far forwards have been more robust, with 63-month copper prices up by 8% since the beginning of the year, while 3-month prices are down by 3%. Focusing on emerging market demand implications for commodities, our cross-commodity pieces this week focus on developments in China and India. As Chinas economy continues its sustained advance and its society experiences rapid changes as a result, the social agenda facing policymakers has been in flux. In our view, the strong central commitment to economic prosperity and high employment, exemplified by plans to build massive infrastructural projects and cap unemployment, will continue to drive demand growth for commodities across the board. Here, we identify two elements of the socioeconomic background that impact on commodities: the rural-urban balance and the regional economic balance. In India, commodity demand is on a strong structural growth trend with the combination of urbanisation, industrialisation and rising incomes points to surging energy and industrial needs over the next few decades. Domestic commodity demand has accelerated markedly in recent years and, as India progresses along the path of economic development, this trend is set to continue. In the short term, however, the demand outlook is less unequivocally positive, as slower economic activity risks curbing the strong demand growth momentum. Tighter monetary conditions are beginning to be felt, particularly across ratesensitive segments of the economy such as discretionary consumption (eg, auto, consumer durables) and investments, which are all large commodities end-user sectors, particularly for metals. Yet, so far, there is little evidence in the data of any softening, suggesting structural dynamics might be outweighing cyclical ones. Aluminium consumption is growing at doubledigit rates, while copper demand bounced back in March following a subdued start to the year. In oil, domestic sales hit a new all-time high in April and y/y growth for the year to date is running in line with last years robust pace. Turning to the US natural gas market, our analysts take a detailed look at the current rig count. The natural gas-directed rig count has fallen by 118 rigs since the peak of last year. Although horizontal rigs have made up the majority of losses, on a percentage share basis horizontal rigs dominate the scene of natural gas production. Gas drilling continues to shift from the traditional shale plays to the newer and liquids-rich basins, such as the Eagle Ford and Marcellus. Natural gas supply growth could continue at lower rig count levels as rig efficiency keeps improving. Our US natural gas analysts continue to believe that at the current level (874 rigs), gas directed drilling should grow production incrementally. The turning point in North American natural gas supply, by their projection, is not expected to occur until Q4 12.
8 July 2011
US natural gas
Natural gas prices gained moderately over the past week supported by a warmer-thannormal weather outlook. This weeks EIA storage report showed a surprisingly high injection of 95 Bcf, much larger than the 78 Bcf consensus. The storage deficit to last year continues to narrow even with above-normal heat, a sign that North American natural gas production is still growing incrementally, adding downward pressure to the curve.
Coal
European coal prices were buoyed over the week, albeit trading in a narrow range, with API2 prices increasing by $1/t and API4 prices following suit though paring most of its gains by the end of the week. We believe planned strikes at South Africa's coal mines will not create any supply disruptions from RBCT as stocks are plenty. Supply issues are, however, seen developing in the Pacific Basin, with rainfall related production losses at Hunter Valley coal mines in June now resulting in longer vessel queues at Newcastle waiting to ship coal. On the demand front, Chinese stockpiles are ample and Chinese buyers will show greater resistance to higher prices. Rhine river levels are now closing in on seasonal averages and we expect German barges to pull coal from the ARA stocks more fluently if the river levels continue to improve at the current rate. We expect coal prices to be rangebound for most part of Q3 and to rebound in Q4.
Carbon
Carbon prices remain subdued after their hillside two weeks ago, with prices trading flat over the week around 13.50 /t. While we see little downside to prices at this point, there is also limited capacity for a significantly move up in carbon prices this year, in our view. With the key reason for the sell-off being the expected buoyant buy-side failing to materialise, it will be a big ask of prices to revert to the price levels seen in the past three months. With the market remaining structurally long, prices are likely to stand for some time at the bottom of the recent cliff wondering how to climb back up.
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Base metals
Macro concerns continue to dominate price action, although apparent progress in tackling the Greek debt crisis has offered the basis for a short-term relief rally across the complex. In terms of fundamentals, the supply side is shaping a more diverse picture across the base metals, and we expect this to lead to increasingly divergent price performances. We remain positive on copper and tin, and we expect these metals to recover strongly in H2 11. In the case of copper, we forecast weak mine supply growth this year with a risk of contraction due to an array of challenges reinforced by recent widespread disruptions at facilities. A pick-up in Chinese imports is the catalyst needed to take prices significantly higher and the draws in bonded warehouse stocks suggest to us this is an imminent effect. Aluminium prices remain well supported from strong global demand growth, energy-led cost inflation as well as from expectations of tightening long-term energy availability. In addition, the threat to Chinese production growth from power rationing offers a further upside risk. For lead, we expect the indefinite closure again of the worlds largest lead mine, Magellan, to provide support and for Chinese conditions to firm once battery manufacturing plants are reopened. We are neutral on nickel with the view that recent price weakness is overdone, but that recovering production will ease market tightness and lead to a moderate build in LME stocks. Zinc remains our least favoured metal, with continued deterioration in the fundamentals with big stock builds, a growing market surplus and sustained production growth.
Precious metals
Prices have extended their gains amid interest rate hikes, heightening in uncertainty surrounding European sovereign debt risks as well as weaker macro data. The external environment remains favourable for gold, and prices have sidelined the seasonal weakness in demand. If investor interest wanes, prices could be subject to a temporary correction before finding support from physical demand. Silver prices have struggled to retain upward momentum as weak underlying supply and demand dynamics coupled with hefty ETP outflows have trumped healthy coins demand from the retail sector. The PGMs are caught between potentially weaker supply and weaker demand. The biennial wage negotiations in South Africa and transfer of ownership highlight the potential for disruptions to mine supply and, in turn, pose an upside risk to prices; however, this is likely to be tempered by concerns over a slowdown in demand in Asia.
Agriculture
Corn prices came under significant pressure following the release of the 30 June USDA Acreage and Quarterly Stocks reports which were bearish, with 2011 US plantings estimated at 92.3mn acres, up from March's Prospective Plantings report and above market expectations while Q2 US corn stocks at 3.67bn bushels imply a very significant shrinking in feed demand. However, the recent correction in corn prices has been met with a slew of import demand especially from China with a key intent being to replenish domestic reserves. Further, scepticism has been growing over data findings in the USDA reports and the potential for downgrades in addition to strong import demand is providing prices with underlying support. The Acreage report was supportive for soybean, with acres pegged at 75.2mn acres - below both the 76.6mn acres in March's Prospective Plantings report and market expectations, and bodes well for new crop prices, in our view. ICE sugar prices have risen to four-month highs, with gains underpinned by production downgrades in Brazil and the long ship line-up there. In the short term, we expect sugar prices to gain further as while the market is still expecting a return to a surplus, recent concerns over the Brazilian crop on ageing cane and low sucrose content has seen continued mark-downs in supply estimates.
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CROSS COMMODITIES
Beijings central commitment to economic prosperity and high employment will continue to drive demand growth for commodities
This article is an excerpt from the Commodity Daily Briefing, 6 July 2011. As Chinas economy continues its sustained advance and its society experiences rapid changes as a result, the social agenda facing policymakers has been in flux. In our view, the strong central commitment to economic prosperity and high employment, exemplified by plans to build massive infrastructural projects and cap unemployment, will continue to drive demand growth for commodities across the board. Here, we identify two elements of the socioeconomic background that impact on commodities: the rural-urban balance and the regional economic balance. A key part of the socioeconomic agenda is the differing social and income dynamics between urban and the rural populations. The industrialisation occurring in major urban centers has long been drawing in surplus rural labour. However, there is regulation of that flow, mainly through the household registration system, which constrains the ability of rural migrant workers to permanently settle in urban areas. The flow of labour supply from rural areas has been capped as older migrant workers found they had to return to the countryside and some younger and better educated potential migrant workers have been less willing to move given their aspiration to better terms than were applied to previous generations of migrants. China is therefore experiencing shortages of younger and more educated migrant workers in some cases, for example for work on assembly lines in the eastern coastal cities. However, a structural shortage in specific locales does not imply an end to the labour surplus in rural areas. Since a significant proportion of the rural labour surplus is formed by middle-aged to elderly labourers who cannot fill the type of positions that require a slightly more educated workforce, the rural unemployment situation may not be fully flexible. According to a spokesperson for the Ministry of Human Resources and Social Security, last October, about 100mn surplus rural workers were waiting to be employed (Reuters). Beijing is set to resolve this dilemma, as well as remove any potential for rural concerns, by creating more training and employment opportunities, providing more benefits and reforming the household registration system. Another factor is the current position of the regional economic balance between the western and eastern regions of the country. As a result of the export-focused economic model, the more landlocked western regions, which account for roughly 70% of the land and 29% of the population, are significantly less developed than the coastal cities in the east. The authorities have therefore taken several initiatives to develop the west to resolve and alleviate some of the rural labour surplus by attracting more migrant workers into the western cities. As highlighted by Chinas 12th five-year plan, Beijing plans to continue to drive the development of the region through policies such as lower taxes, land credit and subsidies to attract manufacturers to relocate away from the coastal regions. Previous five-year plans have also shown that Beijing is set to increase government spending to build massive infrastructure projects and create more employment opportunities. All these endeavours will require huge inputs of commodities, and as a result we remain positive on the outlook for China as the key demand growth.
8 July 2011
CROSS COMMODITIES
Indian commodity demand growth is set to ease in the short term as economic activity slows, but supportive structural factors should limit the extent of the slowdown
This article is an excerpt from the Commodity Daily Briefing, 7 July 2011. Indias commodity demand is on a strong structural growth trend. As highlighted in our report, India: the next commodity power house, the combination of urbanisation, industrialisation and rising incomes points to surging energy and industrial needs over the next few decades. Domestic commodity demand has accelerated markedly in recent years (see chart) and, as India progresses along the path of economic development, this trend is set to continue. In the short term, however, the demand outlook is less unequivocally positive, as slower economic activity risks curbing the strong demand growth momentum. Tighter monetary conditions are beginning to be felt, particularly across rate-sensitive segments of the economy such as discretionary consumption (eg, auto, consumer durables) and investments, which are all large commodities end-user sectors, particularly for metals. Fixed capital formation grew by a mere 0.4% in Q1 11 compared with an increase of over 14% in 2010. Auto sales are also slowing and credit growth is projected to decelerate markedly in FY 11-12, according to our economists (for more details see The Emerging Markets Quarterly: Summer storms). In this context, commodity demand growth should start easing somewhat. Yet, so far, there is little evidence in the data of any softening, suggesting that structural dynamics might be outweighing cyclical ones. Aluminium consumption is growing at double-digit rates, while copper demand bounced back in March following a subdued start to the year. In oil, domestic sales hit a new all-time high in April and y/y growth for the year to date is running in line with last years robust pace. Indian coal imports remain well supported and beyond the summer when weather-related volatility tends to be high they should stay on a strong growth path, underpinned by robust demand growth in the power sector, partly on the back of capacity additions. Ahead, we expect softer economic activity to start chipping away at the recent strength in commodity demand, but in the absence of a pronounced economic pull-back, the magnitude of the impact will likely prove limited, in our view, as supportive structural factors should keep providing a strong basis for growth.
8 July 2011
ENERGY
The diversion of drilling rigs to more lucrative oil opportunities is expected to pull gas-directed drilling low enough in late 2012 to cause natural gas supply to first plateau and then slide lower. This would mark a bullish turning point for gas
This article is an excerpt from the Commodity Daily Briefing, 1 July 2011. Do oil prices matter for North American natural gas? They do when the attraction of higher returns from oil pulls enough of the finite number of on-shore drilling rigs away from gasdirected service. To match the return opportunity from unconventional oil drilling, producers would need to receive $12-15/MMBtu for their gas, nearly triple current price levels. Given the wide disparity between oil and gas prices, one might wonder why E&P companies would drill for gas at all. But there are insufficient North American oil prospects to divert enough activity away from gas. Producers must still deliver the production growth their investors demand, and if that growth comes mainly from gains in gas supply, so be it. But by late 2012 we expect enough rigs to be directed toward oil service and away from gas to change the trajectory of gas supply. Indeed, this diversion has already begun, as shown in the figure below. A bigger diversion will require more good oil opportunities to exploit, and of course oil prices matter. Our view is that oil prices move higher than todays level, and that gas prices remain stagnant this year, which should provide the motivation for producers to continue searching for oil in North America. We expect that when the gas market realizes supply is no longer growing, it will mark a watershed event, causing gas prices to move higher, most likely for 2013 and beyond. We forecast this to occur at the very end of 2012. Aggregate North American supply is expected to grow 1.7 Bcf/d in 2011, led by 2.9 Bcf/d of growth in the U.S. that is somewhat offset by declines in Canadian production and LNG. In 2012, declining Canadian production, along with lower LNG imports, offset a smaller pace of U.S. supply growth, allowing for demand growth to outpace supply gains for the first time in some years. This is hardly a tight market, but does represent a shift to receding over-supply. Thus, we see a two-part market environment ahead: over-supply and a bearish sentiment in 2011 and for most of 2012, then a change in gas supply trajectory, and mood, toward the end of 2012.
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ENERGY
A carbon pricing scheme is due to be unveiled in Australia this week and could add to the mounting challenges faced by miners
This article is an excerpt from the Commodity Daily Briefing, 4 July 2011. A carbon pricing scheme is due to be unveiled in Australia this week, roughly two years after the plan was shelved in the face of Senate opposition from the Greens Party. Legislation is expected to be brought into the lower House of Representatives in August, with a vote in the Senate expected two or three months later. The scheme is likely to start with a tax on carbon emissions from mid-2012, before transitioning into a carbon trading scheme around 2015. If approved, this will be the worlds second national emissions scheme outside Europe, and will inevitably bring about increased costs for the mining industry. A recent report commissioned by the Australian Coal Association painted a worrying picture for the coal mining industry. Two surveys were carried out on existing mines (accounting for over 85% of total coal production) and potential new mines, with an emissions pricing framework based on a targeted emissions reduction of 5% relative to 2000 level emissions by 2020 (with an initial price of A$20/t), and assumptions that no concessions would be given to any coal mining projects. As a result of the carbon scheme, the survey found that a cumulative 262mt of coal production could be lost by 2020 from existing mines (vs. Australias coal production of 424mt in 2010), while almost 380mt of production from potential mines could be lost over the same time period. Already, costs in Australia are among the highest in the world and have appreciated much faster than the global trend. Since 2000, average cash costs of copper production in Australia have surged by over 200%, compared with a 120% rise globally. Now, mines in Australia account for 20% of production in the top 10 percentile of costs, up from 4% in 2000. Anecdotal stories such as mining truck tyres costing more than a Mercedes in Australia and wages of mining workers exceeding that of Bernankes, all point to higher cost pressures. Added to that is the strength of AUD, which means that although copper prices are now 5% higher than the 2008 peaks in USD terms, they are around 7% lower in AUD terms. Because of the fast rising costs, the EBITDA/revenue ratio of major mining firms with a large Australian presence were lower in 2010 vs. 2006, even though revenues have increased. The carbon scheme will only add to the mounting challenges miners in Australia are grappling with.
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ENERGY
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ENERGY
Central problem
This article is an excerpt from the Weekly Carbon and Energy Matters, 4 July 2011. In a week when the price of carbon stabilised in a disappointingly low 13-13.50 /t range, the usual chorus of we need a central carbon bank rang through the air (see Bloomberg for instance). Now, we will admit the last few weeks were a bit painful for the market, but let us not get carried away. The point of an emissions trading scheme is very simple. It is to keep the emissions of the sectors covered by the scheme within a given cap, and we would argue, it is very effective at doing this all on its own. Now, the environmental effectiveness of the EU ETS is purely a function of the cap and the resulting carbon price is just a reflection of the ambition of that cap. In a cap and trade scheme, the cap is everything while trade is there to allow greater efficiency in meeting that cap. Any attempt by a governmentbased body to intervene in the market will only introduce inefficiencies and will be ultimately doomed, in our view. If it maintains a high price when emissions are falling, all it will do is make the market longer allowances by encouraging greater emissions reductions. With a given cap, all this means is that future price reductions will have to be even greater for the market to balance. Furthermore, if anyone thinks direct intervention in markets is a good thing, the history of foreign exchange markets tells a different story (if anyone can provide us with a good example of when fixing a currency has had a utility maximising outcome, please let us know). What proponents of a carbon central bank actually want is a non-political body to have the power to change the cap to safeguard their investments. Why? Well, one, why pay for price protection (a forward) when the governments can give you a price floor for free. Two, and more pertinently, because democracy is proving to be an obstacle to actually increasing the ambition of the current cap (or even having a cap given policy failure in the US and Australia). Even in Europe, the phase 3 cap at the moment is not being changed because our elected officials are not in a mind to do so and hence the discussion about the set-aside that would allow a cap adjustment in the future. While the political economy of deriving targets are a lengthy discussion, to introduce a body just to deepen the cap whenever prices looked low, would remove price risk but only at the price of making the EU ETS both inefficient and undemocratic. Figure 4: EUA and CER prices (/t)
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ENERGY
US marketed lower-48 onshore gas production, Bcf/d total gas-directed rig count (RHS)
Source: EIA, Smiths S.T.A.T.S, Barclays Capital
In our view, the true turning point in natural gas balances can accurately be characterized as the moment production turns downward. Currently, the rig count is moving mostly sideways with a slight downward bias, as rigs are redirected toward oil drilling. Gas-directed drilling activity peaked last August near 1,000 rigs and currently stands at 874. We estimate that 825 rigs approximately keeps production flat that is, growth from new drilling offsets declines from existing wells. Still, production shows few signs of turning lower indeed, April EIA-914 data showed another sequential monthly increase. To fully understand the growth trajectory of US natural gas supply, we take another look at the Smith S.T.A.T.S. rig count data. The aggregate rig count is of critical importance to figuring out supply trends, but just as important are trends in drilling, in particular who is drilling, where they are drilling, and by what method. We attempt to answer these questions through a detailed analysis of the Smith data and shed light on trends in drilling efficiency.
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ENERGY
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METALS
As miners respond to record levels of global demand, supply-side pressures are building leading to sharp increases in capital and operating costs
This article is an excerpt from the Commodity Daily Briefing, 5 July 2011. Higher energy and agricultural prices have been the driving forces behind the kind of global inflationary pressures that have got central bankers worried, but cost pressures are also building in other areas of the global economy. Capital and operating costs in the resources sector, and in particular in the metals and mining industry, are rising fast. This brings back memories of the double-digit cost increases that characterised 2006-08; the financial crisis offered only a brief respite from structural supply-side pressures. As miners go full steam ahead to bring on new production in response to record levels of global demand these pressures are going to continue building, in our view. BHP Billiton recently announced a major capex increase at its Worsley Alumina operation in Australia with project costs having risen by 58% to US$3bn. Cost drivers are diverse but the biggest effects have come from energy, exchange rate shifts, equipment costs and a shortage skilled labour (Commodity Daily Briefing 18 April 2011). Resource companies in Australia in particular have faced significant increases in costs (Commodity Daily Briefing 4 July 2011) with labour playing a key part. There is now even evidence that skilled labour shortages are beginning to cause delays to bringing production to market with Woodside Petroleum, Australia's largest energy firm, partly blaming labour shortages for delays to its Pluto liquefied natural gas project, which is six months behind schedule and $1bn over budget. Iron ore miner Cliffs Natural Resources has highlighted that "If you add up all of the projects people want to bring online, there are not enough qualified workers to make it happen. In Australia, resource companies plan to increase investment spending by a massive 63% y/y this year, but that may prove challenging given the scarcity of key inputs. The rising cost of meeting metals demand growth globally has implications for far forward metals prices, which arguably has already been demonstrated this year. Despite the gyrations in front end prices the far forwards have been more robust, with 63-month copper prices up by 8% since the beginning of the year, while 3-month prices are down by 3%.
Figure 7: Capital costs for metals and mining projects are escalating rapidly
80% 70% 60% 50% 40% 30% 20% 10% 0% Constancia Ambatovy Sierra (Cu) (Ni) Gorda (Cu)
Source: Brook Hunt, Barclays Capital
Capital cost escalation announced in 2011 (nominal US$ cost increase from previous estimate)
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Price Change (%, Thurs/Thurs) CBOT CBOT LME ICE NYMEX OTC ICE Tocom CME ICE NYMEX CBOT LME NYMEX CBOT CME NYMEX LME KBOT CBOT LME LME OTC CME LME NYMEX ICE EEX ICE ICE WCE ICE ICE TGE ICE CME LME APX ECX ECX NYMEX ICE $/bushel $/bushel $/tonne $/barrel $/gallon $/oz $/tonne Y/kg $/lb $/lb $/oz $/bushel $/tonne $/barrel $/bushel $/lb $/gallon $/tonne $/bushel $/bushel $/tonne $/tonne $/oz $/lb $/tonne $/oz $/lb Euro/MWh $/tonne $/tonne C$/tonne /therm $/tonne JPY/30kg $/tonne $/1000 ft $/tonne $/tonne Euro/MWh Euro/tonne Euro/tonne $/mmbtu $/lb 9.8% 6.8% 5.7% 5.5% 5.3% 4.9% 4.7% 4.5% 4.2% 4.1% 3.4% 3.3% 3.3% 3.2% 3.0% 2.9% 2.8% 2.3% 2.1% 2.1% 2.0% 2.0% 1.9% 1.8% 1.4% 1.0% 0.9% 0.8% 0.8% 0.5% 0.0% -0.3% -0.5% -0.8% -0.9% -1.2% -1.8% -2.4% -2.6% -2.9% -3.9% -5.5% -14.8%
7-Jul-11 15.3 6.25 27,540 118.57 3.09 36.53 969.6 389.3 1.44 0.30 786.0 6.50 9,740 98.52 13.46 0.97 3.12 2,588 7.04 3.4 23,899 2,412 1,530.3 1.15 2,726 1,740 2.68 50.4 3,194 123.8 207.0 0.6 23.71 11,940 118.7 242.0 2,350 10.1 48.4 10.7 13.0 4.13 1.36
WeekPrice Change Month AgoPrice Change Ago Price (%, M/M) Price (%, Y/Y) 13.89 5.85 26,050 112.40 2.94 34.82 926.3 372.40 1.38 0.28 760.1 6.29 9,430 95.46 13.06 0.94 3.04 2,531 6.89 3.34 23,427 2,365 1,502.4 1.13 2,688 1,723 2.65 50.00 3,170 123.20 207.00 0.63 23.83 12,040 119.80 244.90 2,394 10.30 49.71 10.98 13.53 4.37 1.60 3.2% -14.9% 6.6% 1.5% 0.6% -1.4% 0.7% -7.7% 15.0% 21.2% -3.0% -11.7% 6.6% -0.6% -3.5% 8.4% 4.5% -3.5% -19.6% -8.1% 5.6% 6.2% -0.8% 28.9% 6.9% -4.8% 1.8% -11.7% 10.5% -1.6% 1.0% -3.2% 11.0% -2.9% -3.0% 5.9% -1.5% 1.5% -5.6% -14.9% -21.9% -14.3% -8.4% 14.8 7.34 25,825 116.85 3.08 37.06 962.8 422.0 1.25 0.24 810.5 7.37 9,140 99.15 13.94 0.90 2.99 2,683 8.75 3.7 22,621 2,272 1,543.1 0.89 2,549 1,829 2.63 57.1 2,891 125.8 205.0 0.7 21.36 12,300 122.4 228.5 2,385 9.9 51.3 12.5 16.7 4.82 1.49 53.7% 21.1% 56.0% 61.3% 56.4% 103.1% 53.5% 11.0% 26.7% 73.0% 77.7% 75.3% 46.6% 33.0% 35.5% 23.2% 54.2% 30.7% 30.9% 34.4% 24.9% 30.2% 27.7% 27% 52.2% 14.3% 66.7% 11.3% 8.6% 33.1% 20.3% 8.5% 32.0% 8.3% 30.8% 19.2% 22.1% -4.3% 10.5% -14.7% -12.5% -9.4% 64.7%
Year Ago Price 9.9 5.16 17,650 73.53 1.98 17.98 631.7 350.8 1.14 0.17 442.3 3.71 6,645 74.05 9.93 0.79 2.03 1,980 5.37 2.5 19,141 1,853 1,198.6 0.91 1,791 1,522 1.61 45.3 2,941 93.0 172.0 0.6 17.97 11,020 90.8 203.0 1,925 10.5 43.8 12.5 14.9 4.56 0.83
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Trade recommendations
Figure 8: Key recommendations
Contract Entry Date Entry price Current price (July-05-2011) Unit $ Gain/Loss % Open trades Rationale: Whilst we are wary of tighter US liquidity eventually bringing and end to the gold price rally we continue to see further price upside in the short-term. Long Comex gold Dec-11 26/11/2010 1376 1515 $/oz 277 21.3% Rationale: The market is pricing in a tighter medium-term outlook for crude and with our 2015 forecast for Brent pegged at $135/bbl we expect this trend to continue.Recent IEA stock release is also putting pressure on the back-end of the curve. Long Brent crude oil Dec-15 27/01/2011 98.2 104.4 $/bbl 6.3 6.4% Rationale: The reassessment of long-term energy market dynamics as a result of Japan's nuclear crisis supports a period of concerted strength at the back end of the aluminium curve. Moreover, China's rising capital and enegy costs suggest a production slowdown ahead. Long LME aluminium Dec-15 29/03/2011 2884 2791 $/t -93.5 -3.2% Rationale: We expect further corn price gains supported by weather concerns which have seen lagging US corn plantings compared to five year averages and concerns on acreage and yields; elevated US ethanol production, strong US export sales and extremely low US inventory levels. Long CBOT corn Dec-11 20/04/2011 656 613 c/Bsh -43.0 -6.6% Rationale: Stocks are declining and physical indicators point to a pick up in buying, especially in China. The picture for raw materials is further tightening, with a narrowing in scrap discounts and worse than expected mine output in Q1. Long LME copper Dec-11 26/05/2011 9035 9551 $/t 516.0 5.7%
Note: The long position on COMEX gold was originally opened on 11/05/2010 and includes losses/gains from the previous trade (Dec-2010) Source: Reuters, Barclays Capital
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Note: Weights used for real GDP are based on IMF PPP-based GDP (2008-2010 average). Weights used for consumer prices are based on IMF nominal GDP (2008-2010 average). Source: Barclays Capital
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FX forecasts
FX forecasts Spot G7 countries EUR JPY GBP CHF CAD AUD NZD Emerging Asia CNY HKD INR IDR KRW LKR MYR PHP SGD THB TWD VND Latin America ARS BRL CLP MXN COP PEN EEMEA EUR/CZK EUR/HUF EUR/PLN EUR/RON USD/RUB BSK/RUB USD/TRY USD/ZAR USD/ILS USD/EGP USD/UAH 24.32 266 3.98 4.23 27.85 33.53 1.62 6.76 3.40 5.96 7.98 23.95 265 3.90 4.25 28.0 34.0 1.60 6.74 3.36 5.96 7.97 23.50 265 3.85 4.20 27.9 34.2 1.60 7.03 3.36 5.98 7.98 23.75 265 3.85 4.15 28.5 34.7 1.60 7.13 3.35 6.00 7.97 23.60 265 3.80 4.10 28.5 34.1 1.60 7.23 3.35 6.15 8.09 -1.4% -0.5% -2.2% 0.3% 0.2% 1.2% -2.0% -0.7% -1.2% -0.6% -0.6% -3.1% -1.0% -3.8% -1.2% -0.8% 0.8% -3.1% 2.7% -1.5% -1.4% -2.1% -1.9% -1.7% -4.4% -3.1% 0.3% 1.4% -4.8% 2.7% -2.3% -2.9% -4.2% -2.2% -2.7% -6.5% -5.8% -1.7% -1.5% -8.2% 1.2% -3.1% -5.5% -6.7% 4.11 1.56 468 11.72 1,771 2.76 4.1 1.54 460 11.65 1,763 2.75 4.15 1.5 450 11.5 1,750 2.75 4.15 1.55 450 11.6 1,750 2.76 4.65 1.55 450 11.8 1,750 2.78 -0.7% -3.9% -3.5% -2.1% -1.6% -0.5% -1.1% -7.7% -6.3% -4.0% -2.5% -0.8% -3.9% -6.5% -7.2% -4.0% -2.8% -0.8% 0.6% -10.3% -9.1% -4.2% -3.7% -0.9% 6.46 7.78 44.70 8579 1068 109.5 3.02 43.39 1.23 30.71 28.72 20585 6.42 7.77 44.75 8500 1075 109.5 3.00 43.50 1.220 30.35 28.85 20600 6.36 7.77 45.25 8600 1050 109.0 2.94 42.80 1.210 30.00 28.20 20500 6.28 7.77 44.50 8700 1025 108.5 2.90 42.00 1.190 30.00 27.75 20500 6.11 7.77 44.00 8500 1025 107.8 2.84 41.50 1.190 29.50 27.00 20000 -0.7% -0.1% -0.2% -1.1% 0.4% -0.2% -0.8% 0.2% -0.7% -1.6% 0.7% -0.2% -1.4% -0.1% 0.0% -0.6% -2.3% -1.0% -3.1% -1.7% -1.5% -3.1% -1.1% -3.1% -2.3% 0.0% -3.0% -0.5% -5.1% -2.1% -4.7% -3.7% -3.1% -3.7% -2.1% -6.2% -4.3% 0.1% -6.4% -5.1% -5.7% -2.8% -7.3% -5.2% -3.0% -6.0% -3.4% -13.2% 1.45 80.7 1.61 0.84 0.96 1.07 0.83 1.48 80 1.66 0.91 0.93 1.07 0.78 1.50 82 1.72 0.90 0.93 1.04 0.76 1.48 83 1.74 0.95 0.93 1.00 0.74 1.44 85 1.76 0.98 0.97 0.95 0.72 2.1% -0.8% 3.4% 8.2% -3.6% 0.1% -5.6% 3.6% 1.7% 7.2% 7.1% -3.7% -1.9% -7.7% 2.5% 3.1% 8.6% 13.1% -3.9% -4.6% -9.5% 0.4% 5.9% 10.1% 16.9% -0.3% -7.3% -10.8% 1m 3m 6m 1y 1m Forecast vs outright forward 3m 6m 1y
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Wednesday 06 Jul US ISM Services Index euro area GDP German manuf. orders
Thursday 07 Jul EIA Weekly Natural Gas Storage Dept of Energy Weekly Oil Data German IP ECB Rate Announcement 14 Jul EIA Weekly Natural Gas Storage USDA Feed Outlook USDA Wheat Outlook OECD Leading Economic Indicator euro area HICP US retail sales 21 Jul
Friday 08 Jul CFTC Data SHFE Aluminium, Copper and Zinc Inventory Data US employment report
11 Jul Preliminary (June) China commodity data out this week (National Bureau of Statistics) OECD Main Economic Indicators
12 Jul USDA WASDE Report OPEC Monthly Oil Report EIA Short-Term Energy Outlook US Trade
13 Jul Dept of Energy Weekly Oil Data IEA Oil Market Report USDA Oil Crops Outlook USDA Cotton and Wool Outlook euro area IP 20 Jul
15 Jul CFTC Data SHFE Aluminium, Copper and Zinc Inventory Data euro area trade US CPI US IP US consumer sentiment 22 Jul CFTC Data SHFE Aluminium, Copper and Zinc Inventory Data
Dept of Energy Weekly Oil EIA Weekly Natural Gas Data Storage US Existing Home Sales US FHFA housing price index US leading indicators US Philly Fed Index
25 Jul Detailed (June) China commodity data out this week (National Bureau of Statistics) US Chicago Fed Index
27 Jul
28 Jul
29 Jul CFTC Data SHFE Aluminium, Copper and Zinc Inventory Data Euro area HICP flash US GDP US Chicago PMI US consumer sentiment
Dept of Energy Weekly Oil EIA Weekly Natural Gas Data Storage US durable goods orders US pending home sales
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