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European steel producers on the offensive, but will price increases stick?

Mounting losses, depressed demand and capacity closures have all been causes of misery for European steel producers, reflected in perennially low finished prices. But recently, surging flat-rolled steel prices hint at a bright spot in an otherwise bleak industrial picture.
So what is exactly causing this upward momentum in spot prices when markets are supposedly at their nadir?
After heavy falls in steel prices in the second half of 2015, European producers started this year determined to avoid a repeat situation. Several mills announced €30/tonne increases to their coil prices in Q1. Despite this, the spot market remained lacklustre and the increases barely registered.
TSI’s North European hot rolled coil (HRC) index averaged €321/t over January-February, marginally lower than its Q4 2015 average, a period which saw two steelmaking behemoths – ArcelorMittal and Tata Steel – record losses of €465 million and €89 million for their European operations respectively.
Luckily for mills strengthening prices in international markets helped European producers push through the increases they deemed necessary.
TSI North European HRC Index
The rally in iron ore and Chinese domestic steel prices triggered a domino effect around the world as producers raised export offers. Turkish mills quickly increased their coil prices by a whopping US$100/t, which in turn encouraged CIS producers to hike their export offers.
Iranian mills, large exporters into Southern Europe, temporarily withdrew from the market, restricting supply. A recent anti-dumping investigation by the European Commission into Chinese HRC exports created further uncertainty for importers, making them wary of possible retroactive duties.
European mills were also well aware of low inventory levels in the supply chain. According to the German Association of Steel Distribution (BDS), at the end of last year flat steel inventories dropped to the lowest level since December 2003. The latest data showed some improvement, but with flat steel stocks at 1.4 million tonnes in February, they remained 7% lower year-on-year.
With imports priced out, buyers had few options other than booking material from domestic suppliers. With both raw material and steel prices rising globally, sentiment in Europe also turned bullish – TSI’s market survey showed that by the end of February close to 70% of European market participants expected prices to increase over the next three months.
And that upward spiral effect has very much kicked into gear, with European steelmakers once again raising list prices for flat-rolled products in early March. However, the pace of this uptrend stalled and failed to replicate the scale of increases seen, for example, in Asia. Despite the tighter supply, growth in European end-user demand has been less than spectacular.
European steel service centers started to voice concerns that they would not be able to pass mills’ increases to their customers. The European Steel Association (Eurofer) estimated that activity in steel using sectors is going to rise this year by a modest 2% y-o-y.
Markit, publisher of Purchasing Managers’ Indices (PMI), noted in one of its latest releases ‘a slight slowing in the pace of economic growth’ in the Eurozone, and commented that ‘stronger growth in coming months is by no means assured’.
Persistent overcapacity in the European distribution sector, according to some estimates at around 30%, is also dampening steel producers’ expectations. Steel service centres and stockholders competing for business in a fractured market have been known to partially absorb mills’ hikes.
As international steel prices continue to boom, the pendulum has swung in favor of European sellers. For how long this remains the case is anybody’s guess. If Asian steel markets get jittery, the dampening effects on Europe as a steelmaking region could be significant.
After a punishing 2015 and with the outlook uncertain, both European HRC sellers and buyers may see value in re-evaluating sales programs to introduce more flexibility, using indexing as some traders have done, derivatives as the iron ore market has done, or perhaps a combination of the two.

Source: http://blogs.platts.com/

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India’s physical gold industry strike could be set to end, alongside long lunches

Could India’s physical gold market, which remained at a near standstill on continued industrial action this week, be set to reopen? That is the understanding of at least some senior level sources this week in the country.

There was a growing belief — or perhaps hope — that the strike action could come to an end April 8 to mark the celebration of Ugadi or New Year for people in the Deccan region including the states of Karnataka, Maharashtra, Andhra Pradesh, Tamil Nadu and Telangana.

The Indian physical gold market is the world’s largest after China.

In a surprise move to an industry seeking tax relief and not burden, the government introduced a 1% jewelry excise tax in its February budget, which came in addition to a 10% import tax already levied.

Since then the industry has been at a standstill. “There’s no business,” said one broker in Mumbai. This was echoed across the country.

The excise duty is another step by the Indian government to flush “black money” out of the system. For now it is having the opposite effect, although most believe that longer term the move will be a success.

A discount of $35 has been heard — against the international dollar price — but that is said to be for smuggled gold and not official sales.

An “official” discount of $15 was suggested by many.

A senior trader said that in the long run the move will be good for the industry as it will increase regulation and put gold smuggling under pressure.

He said the larger jewelry companies will likely come round and spearhead reform in the market.

Sources, ranging from bankers to importers, are requesting that the government steps in to assist the local bullion market as it struggles with an ongoing jewelers strike on the back of a new 1% excise duty.

“Negotiations need to take place, we can see the argument from the governments point of view and the jewelers,” said one senior banking source.

Regulation, regulation, regulation

India’s gold jewelry market is largely unregulated and transacted in cash. Therefore there is no audit trail, something the government wishes to change.

“When more than 70% of trade is non-transparent and not regulated, the government wants to regulate it with some harsh steps,” a dealer said.

Gold represents about a quarter of India’s current account deficit, with annual consumption of around 800-900 mt met almost entirely by imports.

However, so far in 2016 imports have hit record lows on back of an elevated dollar price and low demand owing to the industrial action. Some are now forecasting imports as low as 400 mt in 2016.

“I think they’ll be at least 600 mt,” argued one senior source, although that figure is still a long way below historic data.

The government has attempted to limit the huge import demand through taxation and schemes promoting recycling of available stock in the country, as well as the purchase of paper gold over physical.

One mechanism, the ‘gold monetization scheme’ — a means of pulling local stock, held by individuals in the form of jewelry etc., into the official system — has so far not seen “one gram” enter its vaults, according to one source with direct knowledge of the situation.

Imports continue to decline

Imports of gold bars into India totaled 18.6 mt in March, down 22% on the previous month to the lowest monthly inflow on record, Indian customs data recently showed. The total is down from February’s previous record low of 23.8 mt.

One importer said that overall the government was doing the right thing, to stop illegal activity and smuggling of gold but that current legislation needs tweaking.

The big problem for the smaller jewelers is the fact that they don’t have the infrastructure to manage inventory and accounts, according to sources.

A large jeweler said that he is hoping for a compromise by the government, but is skeptical. He said that even if he wanted to open his showrooms the smaller union members would likely cause a headache and mess up the shops in a show of force.

Hope of return to trade

However, one refiner said that he is starting to see some signs of trading activity at a low level. “Hopefully the market should reopen next week,” he said.

He said that April 6 he sold 20 kg after 50 days of zero sales. There was talk that some banks had also started shifting limited stock that was imported earlier in the year at lower duty levels.

The Indian market is a complex beast, with bullion imports hit with a 10% customs duty and then every two weeks further tweaks to the domestic duty.

Once a fortnight a local duty is pegged either against the dollar/rupee exchange rate or the morning London Bullion Market Association Gold Price.

Therefore it is possible for those that have bought at lower levels to sell at a discount as the price rises.

The local price was quoted around 82,000 rupees/troy oz April 7; or roughly 28,500/10 grams, a standard measurement in India.

Buyers are said to be looking for a price of 26,000 rupees/10 grams to spur demand. In dollar terms traders suggested a price of $1,150-1,180/tr oz as a signal to buy.

The LBMA Gold Price settled April 6 afternoon at $1,221.40/tr oz.

“The current strikes are in one way good for the government, as it is limiting gold imports. However, it is also losing revenue as the market remains at deadlock. Something needs to budge,” said one importer.

The jewelry industry is India’s third largest employer after agriculture and textiles, and a similar three-week strike in 2012 forced the previous government to reverse plans for a 1% tax on non-branded gold.

The Platts India Gold Premium, a differential paid locally to the international price, was assessed at a discount of $35/oz April 6, unchanged on day.

Without Indian demand the international community is becoming increasingly doubtful that the recent solid rally in the gold price — with Q1 the best performance in almost 30 years — will continue much longer.

Luckily for Platts, with the industry on hold, there has been plenty of time for contacts to take time to showcase the country’s true gem: its cuisine.

Source: http://blogs.platts.com/

US biodiesel off to a good start in 2016, but is it enough?

US biodiesel production got off to a strong start in January.

The US Energy Information Agency released its first domestic biodiesel production numbers on April 4. According to the agency’s data, US producers churned out 105 million gallons of B100 biodiesel in the first month of 2016.

That was the best first month of production in the last five years. Biodiesel refineries produced 73 million gallons in January of 2014 and 2015 each, so the 2016 data shows represents a 44% increase year on year.

Why the difference? Two factors could be in play here.

First, for the first time since 2013 producers entered the new year knowing how much biodiesel they need to produce under the Renewable Fuel Standard. After waiting for what seemed like an eternity, the US Environmental Protection Agency approved the 2014, 2015 and 2016 Renewable Volume Obligations in late November. The federal requirements require that 1.90 billion gallons of biodiesel be blended into US diesel fuel transportation stocks in 2016.

Also, the $1/gal blenders tax credit is already in place, the first time in several years that the credit won’t have to be passed retroactively.

Last year, without the 2015 RVO in place, producers started the year slowly, generating only 151 gallons of fuel in the first two months of the year. Now, it appears, domestic biodiesel producers – aided by certainty about demand and the tax credit – are ramping up production.

But will this good start be enough to satisfy the mandate?

Domestic biodiesel production peaked in 2013 with 1.339 billion gallons of B100, the last year the industry entered the year with a clear mandate. In 2015, domestic producers created 1.268 billion gallons, according to the EIA.

Data from 2011 onward shows a distinct pattern in domestic biodiesel production. The first three months of the year are tepid and usually comprise the lowest quarter of production for the year. Production generally peaks in the summer, coinciding with the peak driving season, before sliding a bit toward the end of the year.As you can see, production typically peaks in August, representing 9.62% of the year’s production. If the trend holds true, then the 105 million gallons of biodiesel generated in January would extrapolate to 1.909 billion gallons of biodiesel for 2016, fulfilling the mandate.

It’s important to note that, of course, one month does not a trend make. Biodiesel production could crater in February and March and throw the entire projection off. We’ll have a better idea about the rest of the year in July when we have a full quarter of numbers and can tell if production is indeed following the trend.

But to play devil’s advocate, let’s play this out. Why is this important? Well, the EIA also released the last biodiesel import data for January, and 2016 is off to anything but a whiz-bang start on that front. Imports of biodiesel slipped 80% month on month to 211,000 barrels – 8.862 million gallons – and reached their lowest level since May 2014.

It’s hard to extrapolate any type of trend on imports because the data is so varied, as you can see:

About the only things we can say conclusively about imports is that in 2015, the US imported 7.957 million barrels, or 334.19 million gallons of biodiesel, according to the federal government. That’s an average of 27 million gallons a month. So far, the US is about two-thirds behind the pace.

Part of the problem has been a lack of interest in biodiesel blending. High feedstock prices and low diesel prices have kept blenders from mixing biodiesel with diesel stocks outside the required levels. (There are some places where that doesn’t hold true: California seems to be a booming market for biodiesel because of its value under that state’s Low Carbon Fuel Standard.)

That could change, of course, but biodiesel production costs have been above diesel costs since late 2014. Even if you factor in the blenders tax credit, blenders would still lose nearly 40 cents/gal according to the March 6 boho factor.

Meanwhile, outside factors may also impact imports. Argentina, the source of most of the US biodiesel imports last year at 4.377 million barrels (183.83 million gallons) of biodiesel in 2015, sent only 49,000 barrels (2.058 million gallons) in January. Platts analyst attribute the drop to a lack of seasonal demand.

But the Argentinian government recently doubled the biodiesel export tax, and we haven’t yet seen the impact that tax scheme will have on the flow of biodiesel to the US.

So domestic producers will have to continue the torrid pace if imports continue to slide this year.

And regardless of imports, biodiesel producers may keep churning out at a high clip. A projected shortfall in ethanol consumption has led some to speculate that D4 biodiesel RINs could be especially valuable when it comes time to settle up with the EPA. So production could remain high just to take advantage of the prices from the associated RINs.

A caveat, however. To reach 1.909 billion gallons of B100, US producers would have to utilize 92.5% of the production capacity. In the past five years, utilization has peaked at 62%, in 2014.

It appears that domestic biodiesel producers may have a record-breaking year if the past trends repeat themselves this year.

Source: http://blogs.platts.com/

Tightening US storage capacity could quickly become a glut: Fuel for Thought

Demand for storage is reaching a fever pitch with tank capacity and utilization at all-time highs, but the storage market is volatile and at the same time could be barreling toward oversupply.
The US crude market is in contango, meaning crude is worth less for delivery now than later. That dynamic encourages storage, but it could reverse as the contango narrows and production shrinks while tank capacity continues to expand.
There is an easy comparison between the take-or-pay contracts on pipelines and storage tanks, which might give a hint of things to come if the market structure reverses. Under both kinds of contracts, the counterparty has to either use the committed space on the asset or pay a penalty, often as much as the price to use the space in the first place.
In the case of pipelines, that pushed Midland WTI into a premium over its counterpart in Cushing as demand for crude to meet shipping commitments stacked up at the pipelines’ origin terminals. Not only that, but the existence of the contracts helped drive investment in infrastructure, which contributed to the explosive growth in pipeline capacity since the turn of the decade.
If the contracts have a similar effect on the storage market, it would likely manifest in stronger prompt prices, with weaker prices further down the curve — especially if production declines, leaving marketers who expected growth holding contracts to store barrels that don’t exist. For now, at least, imports have been able to keep driving storage demand, but how long might that last as the contango flattens out?
A capacity oversupply would lend strength to the crude prompt market by creating demand simply to meet the contractual commitments that underpin current and upcoming projects’ volume agreements. It could also apply downward pressure to the back end of the contango structure, because cheaper storage lets marketers work slimmer time spreads, Bentek Energy Analysis Manager Anthony Starkey said.
“It doesn’t really ‘solve’ anything, but [an overbuild] could provide that kind of support for oil,” Starkey said.
Though March and April so far have seen a relatively wide contango, with the front-month WTI contract in Midland averaging $1.48/b less than the second-month contract, it is still lower than February, which averaged $1.94/b.
The sustained contango has buoyed crude stocks in the US to an unusually-high 529.9 million barrels. Those stocks are especially concentrated in Cushing, Oklahoma, with 66.32 million barrels and the Gulf Coast, which holds 277.54 million barrels.
What happens when contango becomes backwardation?
“If the market is in contango, there’s never enough storage, and if it’s in backwardation, there’s too much,” said Andy Lipow, president of Lipow Oil Associates.
The issue of having too much or too little storage capacity ultimately boils down to market structure at any given time, Lipow said.
This principle plays out in the available storage capacity versus crude oil inventory levels at Cushing terminals over the last couple of years. With crude stocks are roughly 89% of working capacity utilized, demand is high at the Oklahoma storage hub.
While the current contango structure has lent support to demand for storage, it probably hasn’t been particularly influential in the decision to build new infrastructure, CEO Ernie Barsamian of The Tank Tiger said.
Especially now that the contango is far from a fresh dynamic on the market, building new infrastructure on that basis is “fool’s gold,” Barsamian said.
“We’re kind of moving to the end of that period,” Barsamian said. “It’s kind of like building a new hotel in Vegas.”
In fact, the rate of greenfield expansions, wherein a company builds a completely new facility, haven’t accelerated at all, Barsamian said. Most of the growth is coming in the form of expansions to existing facilities.
Right now, for instance, Phillips 66 is planning incremental expansions to its 7.1 million-barrel crude and refined product storage facility in Nederland, Texas. The company plans to add 2.3 million barrels over the next two or three years, with an eventual maximum potential of more than 16 million barrels, spokeswoman Lara Burhenn said.
If supply overshoots demand, the older storage terminals will likely lose business to their better-connected, fresher counterparts, Barsamian said.
“That’s always going to happen,” he said. “You get these new facilities built, but they’re not going to end up empty.” — Joshua Mann in Houston
Mary Hogan, a Platts reporter in Houston, also contributed to the research and writing in this post.

Source: http://blogs.platts.com/

Tackling the tracking of trade cases and what it says about the steel industry

When US steelmakers and other producers around the globe embarked on the long and tangled journey of unfair trade case litigation last year, we joked in this space that “You need a scorecard” to keep track of things. Now we have one.
Four Platts trade publications – Global Market Outlook, Steel Markets Daily, World Steel Review and the Steel Price Report – are now carrying a homegrown chart of recent steel trade case actions from around the world. The list of dumping and subsidy allegations is impressive, or depressive, depending on which side of the trade fence you sit on.
The chart lists 72 global trade case developments or determinations of recent vintage, including 20 complaints from North America, mainly the US. Asia is next with 19, followed by the EU (9), Australia (9), South America (8), Africa (3), Turkey (3) and the Middle East (1).
Not surprisingly, 40 of the recent cases are against China, which itself has just one steel import complaint in the works – a dumping case against grain-oriented electrical sheet from the EU, South Korea and Japan. Provisional antidumping duties of roughly 15-46% have been levied, the chart informs us, pending final determinations.
By product, the most global steel trade complaints – 25 out of 72 – are against flat-rolled steel imports, mostly sheet steel. Pipe & tube is next at 15, followed by basic construction steels rebar and wire rod at 14 combined.
This country and product breakdown provides a little insight into who is engaged in what unfair trade litigation these days. But the chart itself comes closer to telling the whole story. For example, some cases involve multiple products and multiple producers, and some are against one country and one product.
Furthermore, not all trade cases are the same. The bulk of the 72 listed by Platts are antidumping and countervailing duty cases, the latter as a remedy to offset government subsidies. But there are also safeguard actions and tariffs listed. These are intended to provide blanket coverage whereby all exporters to a particular country face the same levies or restrictions.
And true to the “scorecard” motif, many of the cases charted are in a state of flux. Listings include recent trade case petitions, the launching of government investigations, preliminary duty and injury determinations, duty extensions, redeterminations and, in one instance, case preparation.
The steely resolve of the complainants as they pursue duties thru the labyrinth of government unfair trade protocols is evident as well. It is perhaps matched by the irony of the multitude of outcomes and complications for what many consider to be a basic product.
Finally, it should be noted that in the global steel boxing match this list of 72 current unfair trade cases is a mere welterweight – the tip of the iceberg that is the weighty welter of past steel trade litigation outcomes, going back to the 1980s – many of which are still on the books.

Source: http://blogs.platts.com/

Melting Margins: Widening scrap to iron ore ratio spells trouble for EAF steelmakers

The price relationship between iron ore and steel scrap delivered into the key import markets of China and Turkey is keenly watched in the ferrous market.

The ratio is seen as a barometer of the health of the two predominant steelmaking routes, the blast furnace and electric arc furnace, and can suggest which route may have the upper hand in terms of competitiveness.

The ratio between HMS I/II 80:20 scrap CFR Turkey — represented here by Platts’ assessment of this grade, and 62% Fe content fines into North China, represented in this post by the Platts IODEX — has been above the long-term average for some time now.

As a result, any statement suggesting we are in for a longer period of above-average ratios may not seem that insightful. However, given recent developments in China, the US and elsewhere, we could be in for a phase of above-average ratios, even in the ‘new normal’ phase that developed in the last two years of oversupply and over-utilization.

In the first six years of the decade, the simple ratio between the price for Turkey’s scrap imports and China’s iron ore imports was 3.37:1. However, since the iron ore price began to drop precipitously in around December 2013, the ratio has shot up.

Fueled by the dual pressures of vastly increased iron ore production and slowing Chinese domestic steel demand, the red metal’s price spiraled down almost uninterrupted to reach a recent nadir of $38.50/mt on December 15, 2015.

Post-December 2013, the average scrap-to-iron ore ratio reads 4.04:1. Pre-December 2013, the mean tallied at just 2.89:1.

This made Turkish steel, and any EAF-based production, relatively uncompetitive compared to the integrated production route. In outright terms, the scrap price topped five times that of iron ore on 17 days: all of these were in 2015, and nearly all of these occurred in the first half of last year. During H1 2015, the ratio averaged 4.56:1.

It is a significant statistic. Turkey’s steelmakers did their best to adapt to the newly-competitive environment by reducing furnace capacity utilization. If their arc furnaces were not competitive, they would have to act nimbly in the intermediate market; this entailed buying large quantities of ‘square bar’ from China, as well as billet and slab from the CIS and elsewhere.

China’s exports of semi-finished products soared ten times year-on-year in 2015 to Turkey, reaching 1.5 million mt. Turkey’s adaptive steelmakers produced less crude steel but more finished steel last year.

This strategy continued into Q1 2016: Turkey’s imports of semi-finished products from China soared 770% year-on-year in January & February this year, hitting 260,000 mt.

Currently, China’s steel exports are looking somewhat less competitive than in 2015 due to a surge in local prices caused in part by a newfound preference for foliage over construction. The International Horticultural Exposition in Tangshan could cause capacity utilization to drop in this vital steelmaking region.

This threat, and a looser lending regime in China, prompted two things: a jump in finished steel prices and a leap in iron ore. Mills increased output in the run-up to the Expo, and needed to refill iron ore stocks as a result.

A large-scale rebalancing in steel prices globally followed, with depleted stock levels being filled and domestic mills the world over wrestling some pricing power back. Take European HRC as an example: the product ended February 2016 at Eur330/mt ($376.10) EXW Ruhr, and has started April at Eur370/mt.

Movement in China pushed the scrap-to-iron ore ratio down considerably. In the year-to-date the ratio averaged just 4.09:1. It dipped to a low of 3.22:1 on March 7, when iron ore leapt nearly 20% in a day.

Since then the ratio has crept up: iron ore’s rebound had hit a resistance level. Port stocks top 100 million mt in China and the acute restocking needs in Tangshan have waned given capacity utilization could now start to fall.

Additionally, US domestic scrap prices have surged on the back of buoyant price moves in the local HRC market and rising semis costs. Thanks in part to the market being cocooned from international spot developments by a raft of anti-dumping and countervailing duties, US HRC has climbed to $470/st EXW Indiana from $387.50/st this year.

Such a development is doubly-bad news for Turkey’s mills: faced with higher US scrap prices, slipping iron ore but stronger semi-finished product offers from China and elsewhere, EAF steelmakers could be facing a sustained period of relatively higher feedstock prices. Who could be the regional beneficiary of such a development?

Most likely it would be Russia’s mills: semis exports to Turkey from Russia soared 88% to reach 2.2 million mt; were Turkey’s steelmakers to revert to idling furnace capacity and running re-rollers flat-out, it is to the Black Sea they may have to turn.

Source: http://blogs.platts.com/

Biodiesel exports to the US: Can everyone in Asia get a piece of the pie?

Whither Asian biodiesel exports?” seems to be the most asked question in the Asian palm methyl ester (PME) market these days.

With rapidly escalating palm oil prices pushing the PO-GO spread, between Bursa Malaysia palm oil futures and ICE gasoil futures, rapidly north (it hit a record $380.68/mt on April 5) and Indonesian PME producers suffering from European anti-dumping duties, Asian PME producers have not been able to sell much palm methyl ester to Europe in 2016.

Expensive palm oil translates into expensive PME, and European blenders are currently veering toward used cooking oil or UCO to convert into UCOME, or used cooking oil methyl ester, which is double counted in most European countries and acts as a cheaper blending feedstock.

This is where the US market becomes relevant.

In December 2015, a two-year extension of the $1/gal biodiesel and renewable diesel “blender’s credit” was passed by both chambers of the US Congress and subsequently signed into law by the US president.

The credit was applied retroactively from January 1, 2015 to last until December 31, 2016. This translates into a subsidy of around $300/mt to be applied to each mt of biodiesel.

With such as substantial subsidy available in the US, Malaysian and Indonesian PME producers should have been rushing to sell into the US.

However, constraints in the export process have held back the tide of Asian sales.

There are currently only two Asian palm oil companies that have the ability to export PME to the US: Wilmar and Musim Mas.

Another Singapore-based plant that actively exports fuel to the US is Neste Oil, but while Neste uses palm oil derivatives among other feedstock to produce bio-based diesel, its product is considered similar to straight-run gasoil and does not need any further blending.

The first roadblock to US export is that Asian producers need to be registered with the EPA. Currently, the EPA registration list includes only a handful of Malaysian and Indonesian producers.

To qualify for EPA registration, producers must have a “grandfathered plant,” construction of which started prior to December 19, 2007.

A market source states that in Indonesia, there are five companies owning grandfathered plants that qualify for registration under the EPA program.

Secondly, Asian producers must be able to trans-esterify and distill the PME before it can be exported to the US. The biodiesel generally has to be ASTM D6751 compliant.

Most Asian producers need to upgrade their plants to ensure compliance to the US specifications for PME.

The registration process, which involves US EPA approved consultants, is complex, expensive and time consuming.

Some Asian producers have decided not to pursue the process due to the expense and length of time involved.

However, other producers, still keen to pursue US opportunities, are actively pursuing registration.

Only one additional Asian PME producer currently claims to be in the final stages of registration with the EPA.

The EPA created the Renewable Identification Number (RIN system) within the Renewable Fuel Standard (RFS) to set annual targets for renewable transport fuels in the US.

A RIN number is attached to each gallon of renewable fuel produced inside the US or imported into the US.

Once the biofuel is blended into transportation fuel, the RIN is detached from the biofuel and this can then be traded.

If the blender is an obligated party, the blender would submit the RINs to the EPA to exhibit compliance with the blending mandate.

However, if the blender is not the obligated party, then the blender can trade the RINs on the market.

Therefore, biofuel that is imported into the US must have RINs attached for the blender to be able to trade within the US. PME generates the D6 code RIN, or “ethanol RIN.”

Meanwhile, a limitation in the use (and therefore import potential) of PME is that within the US market, PME is described as a “warmer weather product” by a North American biofuels broker.

Since PME has a higher cloud point, which is the temperature at which the biowax in biodiesel begins to form a cloudy appearance and such wax clogs fuel filters, than SME or soy methyl ester, it cannot be used for blending in the North American winter, he adds, therefore PME is imported into the US from Asia from April until September.

PME has a cloud point of 15 Deg Cel versus 0-2 Deg Cel for SME.

The regular flow of Asian PME is going into the US Gulf region, and is primarily supplied into the US market by a large Asian producer, the broker said.

There are multiple shipments during the summer months, but some PME may also be shipped in October, during a season of lower demand, and stored for the next year, he added.

The flow has been quite lucrative for the two Asian producers currently involved, in the absence of other competitors.

However, with at least one more producer due to complete its EPA registration within 2016 and another additional producer also upgrading its facilities for registration compliance, competition is looming on the horizon.

Turkish steel shifts gears and futures contracts appear to draft off market uptick

US ferrous scrap market players take a gamble on April’s prices

Every other April, ferrous scrap dealers descend upon Las Vegas for the annual Institute of Scrap Recycling Industries (ISRI) convention, held there every two years.

With the event held at Mandalay Bay Resort and Casino this year, there were numerous nearby opportunities for convention-goers to gamble. Roulette wheels, blackjack tables and sports books where the NCAA Basketball and Master’s Golf Tournament broadcasts were being shown, were all within earshot of the convention hall.

Before even touching down at McCarran International Airport, five miles south of the glittering Vegas strip, many scrap dealers had already placed their first bets.

Those scrap dealers were betting on the market, which lately would be the equivalent of betting on the forsaken Cleveland Browns in American football or the woeful Aston Villa team in European football — which is to say, your chances are not very good.

However, the US scrap buy week, typically the first week of each month, was shaping up differently for April. The US scrap supply chain had been recently beaten down from consistently low prices, to the point where the volume flow had become a trickle.

And suddenly, mills had healthy April scrap wish lists, bolstered by higher finished steel prices in the wake of import-limiting unfair trade cases and improving order books.

The convention was scheduled to begin April 2. Not the best timing for ferrous scrap buyers or sellers who traditionally transact all their monthly scrap sales during a frantic few-day period within the first week of the month (a unique quirk of the industry and perhaps worthy of a blog post for another day).

With the possibility looming of having to transact scrap deals in their hotel rooms in Las Vegas, missing out on presentations and meetings, working on Eastern Standard Time while in Pacific Standard Time, combating the three-hour time difference and everything else that comes with an extended stay in Las Vegas, the prospect of finalizing sales the week before the convention was enticing.

Mill scrap buyers may have sensed as much. During the week of March 28, several days before most would depart for Las Vegas, buyers were making inquiries about early deals.

Some floated offers with prices attached — up around $30/lt from March levels. Some sought April scrap commitments on a pricing-to-be-determined (TBD) basis, a very common occurrence in the market (and perhaps worthy of yet another blog post for another day).

Dealers wanted larger increases, $40, $50, maybe $60 more than March. Dealers did not want to begin shipping scrap on a pricing TBD basis, losing most of their leverage against scrap-starved mills.

So many dealers made a slight gamble. They left the $30/lt on the table, made no TBD commitments, turned their cell phones off and left the office on Friday, April 1.

Some dealers stayed home, others went ahead to the ISRI convention. By Tuesday afternoon of the convention-week-turned-buy-week, the market was up $50/lt almost uniformly throughout the US.

The waiting game had paid off and dealers had their long sought-after price bump.

Of course, this is 2016, and all good news is met with a certain skepticism. Dealers were asking, “What is the catch? When will the other shoe drop? Was up-$50 too much?” as any significant market rally brings with it the concern of an immediate correction.

And there were the usual concerns about the sustainability of the strong scrap price increases as well: Can the recent success of US finished steel price increases be sustained? Will China’s steelmaking overcapacity crush hopes for US mill pricing once again? Are recently surging US scrap export volumes and prices sustainable?

However, the up-$50/lt scrap price boost is not causing material to flood the market immediately. Scrap flows have the ability to be shut off like a faucet but rarely, if ever, do they turn on like a faucet.

The strong US dollar, the bane of US scrap dealers for the better part of 2015 and 2016, has softened. The weakening dollar has allowed exports to recover and has helped mute steel imports.

Chinese billet prices have gone up and availability has gone down, leaving a void for international steel mills who will seek to fill their input needs with scrap.

Prime scrap grades are tight in the US and steel mills are issuing more and more price increases.

Now might not be the time for scrap dealers to double-down on black, but it also does not look like the time to run from the table.

Source: http://blogs.platts.com/

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Central Asian oil: destined to disappoint?

The stagnation pervading Central Asia’s oil industry could be alleviated by a couple of big announcements in the coming months, on the Kashagan and Tengiz fields.

But industry veterans are more heedful of the numerous obstacles presented by the region, from the geological to the bureaucratic, and an unpromising global context.

Home to some of the world’s largest oil and gas fields, ex-Soviet Central Asia and particularly Kazakhstan was once an exciting frontier for the industry. But of late Kazakh oil production has stagnated at around 1.7 million barrels per day, partly because of a decade of delay starting output from the giant Kashagan project.

A consortium led by Chevron has also delayed plans to increase output at Tengiz from around 600,000 b/d to nearly 900,000 b/d, a project that could cost tens of billions of dollars.

In neighboring Turkmenistan, planned gas exports to Europe have made little headway due the cost of building a trans-Caspian pipeline, doubts about European demand, and difficult regional politics.

Turkmenistan’s gas exports have increased — the International Energy Agency expects it to have pipeline capacity for 80 billion cubic meters/year of exports to China by the early 2020s — and it has hopes of eventually building another pipeline across Afghanistan to South Asia.

But for now Turkmenistan is increasingly reliant on China as a sole client. More marginal projects, in Tajikistan and Uzbekistan, are languishing.

Kazakhstan might have thought it need not worry, until oil prices collapsed. But its economy is at a standstill and state finances suffering.

State producer KazMunaiGaz has been at daggers drawn with its upstream subsidiary, a semi-independent entity listed in London.

A row over the parent company’s under-payment for crude appears to be resolved on April 4, but the subsidiary’s scrapping of dividends for 2015 disappointed investors.

Confidence could get a boost if Kashagan starts producing. Foreign executives and Kazakh officials involved in the project have said it will start toward the end of this year.

The project has been dubbed a “failure of the industry” by a top official from France’s Total, chief financial officer Patrick de la Chevardiere, after leaking pipes forced the Kashagan consortium to abort an attempted startup in 2013.

The World Bank has warned that low oil prices increase the chances of further delay.

Whether Kashagan will be trouble-free once it starts producing is also unclear. The field is still at the frontier of what the industry can handle, due to high sulfur levels, which led to the leaks, and intense pressures below the Permian salt layer.

Estimates of how much Kashagan will produce following startup vary. Theoretically it will have a capacity of 370,000 b/d, but Platts has been told the “real” level will be 300,000 b/d annually, reflecting the fact that staff will be barred from the main artificial island used for operations when well intervention work is under way, due to the risk of hydrogen sulfide poisoning.

Once the field starts up, President Nursultan Nazarbayev’s leadership is likely to need additional projects to absorb Kazakh labor and materials. But Kazakhstan’s reputation as a place to invest has been tarnished by sluggish administration, the lack of an independent judiciary and use of strong-arm tactics.

In the latest dispute with investors, the state is demanding $1.6 billion from the consortium that runs the giant Karachaganak oil and gas field. Operated by Shell and Italy’s Eni, Karachaganak produced 390,000 b/d of oil equivalent last year, about 60% being liquids, and is also due for expansion.

The parties “are determined to find a consensual solution and to peacefully resolve the issue,” Kazakhstan’s energy ministry has said.

Above-ground difficulty

Paradoxically, some executives argue in private that the tightening of international anti-bribery regulations has made it more difficult to operate in Central Asia.

The story of the former Soviet Union’s oil sector has long been tainted by claims of corruption, ranging from the mundane giving of fax machines to, in the case of Kazakhstan, transfers of fur coats, speedboats and payments for Swiss boarding schools.

Some reasons for disillusion are less controversial. Geologically, the north Caspian and Kazakhstan’s coast have been thoroughly explored and where resources might still be abundant, corruption is not the only issue.

Tajikistan has hopes of uncovering subsalt resources near the Afghan border perhaps akin to the Galkynysh gas field in Turkmenistan, thought to be the world’s second largest.

But in impoverished Tajikistan even basic letter writing skills are lacking among younger officials, let alone industry or economic competence, a foreign oil executive told Platts, requesting anonymity.

The joint venture conducting a 2D seismic survey across a swathe of Tajikistan has found it hard going. The survey has involved drilling deep holes for the laying of explosives in order to get clear seismic images from beneath the salt layer, adding to costs “significantly,” Julian Hammond, the chief executive of Tethys Petroleum, said.

Tethys, which set up the joint exploration venture with Total and China’s CNPC in 2013, is now under pressure to withdraw due to its inability to meet its share of costs.

While a vibrant mix of large and small companies might revive Central Asia’s oil sector, in reality smaller companies, lacking connections, financial weight or expertise, have struggled.

Reports from London-listed Roxi Petroleum outline numerous difficulties involving the need to pump vast amounts of drilling fluid into its deep, high pressure wells in Kazakhstan to keep them under control, resulting in them becoming clogged, as well as various objects getting stuck thousands of meters below ground.

Others have been overwhelmed by a licensing system that stipulates long periods of “trial” production when oil must be sold domestically at controlled prices.

Getting permission to export typically involves building facilities for eliminating flaring, but this can be difficult when the state forbids the raising of additional funds on stock exchanges without its permission.

The pricing issue was a major reason why Australian independent Jupiter Energy shut down its production in February. It says it could be producing 2,500 b/d of oil from its existing wells, but would fetch just $3-6/b.

“The company continues to endure a frustrating operating environment,” Jupiter said last month.

Source: http://blogs.platts.com/

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Acquisition set to increase Alaska’s jet fuel buying, but still outpaced by majors

The last decade of consolidation in the US airline industry has created some of the world’s largest airlines but the most recent move, the purchase of Virgin America by Alaska Air Group, makes a smaller splash from a jet fuel buying perspective.

The $2.6 billion price tag will give Alaska more of a foothold on the East Coast and help solidify its role on the US West Coast by giving it a larger share of the California market with Virgin America’s slots in San Francisco and Los Angeles. The move has the added benefit of keeping JetBlue, which Alaska says it has now surpassed, from buying Virgin America and adding to its West Coast portfolio.

But even as Alaska says that it is poised to become the fifth largest US airline, it still has a ways to go before it starts to rival the big four, American, Delta, Southwest and United — at least in terms of jet fuel buying.

In terms of fuel consumption and management, the addition of Virgin America’s fleet and routes represents 21% of Alaska’s total fuel usage. In 2015, Alaska used 508 million gallons of jet fuel, paying $1.88/gal, according to the company’s financial reports. Virgin America, on the other hand, used 169 million gal and paid $2.07/gal. Independently, Alaska had been increasing its own fuel consumption, adding 8.3% to its annual fuel buying in 2015.

Despite the addition of Virgin America, Alaska’s fuel consumption still tracks slightly behind JetBlue and significantly behind the other major US carriers. Even if the buyout results in further growth and not slight consolidation of routes, there is a wide gulf between fourth and fifth place. Southwest Airlines was the fourth largest airline in terms of fuel use in 2015, consuming 1.901 billion gallons, according to its financial reports. In total, US carriers used 16.73 billion gallons of jet fuel in 2015 for scheduled service, according to the Bureau of Transportation Statistics.

Rank	Airline	2015 Fuel Consumption (gal)	Average Cost ($/gal)	% of Expenses
1	Delta	3.988 billion	$1.90	23.0%
2	United	3.886 billion	$1.94	23.0%
3	American	3.611 billion	$1.72	21.6%
4	Southwest	1.901 billion	$1.90	23.0%
5	JetBlue	700 million	$1.93	25.9%
6	Alaska	508 million	$1.88	22.0%
7	Spirit	255 million	$1.82	28.3%
8	Hawaiian	234 million	$1.78	22.1%
9	Virgin America	169 million	$2.07	25.7%

Source: Airline Form 10-K annual reports

International routes obviously help the top four airlines with their extra billions of gallons of fuel consumption. Alaska’s international routes currently only include Canada, Mexico and, as of last year, Costa Rica.

Of course, airline mergers can take a significant amount of time to impact trends. It was only last October that US Airways flew its last route, nearly two years after the merger first occurred. Virgin America reportedly already issued a tender for its 2016-17 jet fuel supply. Considering the often-lengthy process of airline mergers and acquisitions, market sources believed that each company’s respective fuel management policy would continue for now, likely delaying any potential and significant changes to the airline’s fuel buying and management strategy.

“So far they [Virgin America] will stick with their own process of bidding alone,” one industry source said. “[They will need] time for the merger to be validated and so on. We have time.”

While Virgin America issues tenders to supply fuel, it outsources its fuel management to World Fuel Services. Alaska manages its fuel in-house, according to market sources.

“Tough to tell which way management goes,” a trader said.

Despite consolidation and some overlap in routes, some in the jet fuel market did not think that there would be a large change in overall industry jet fuel consumption because of the merger.

“Overall the aviation market is growing anyway despite of merging,” added the industry source who said Virgin America is sticking to its bidding process. “I don’t really see real impact here.”

Source: http://blogs.platts.com/

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