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More money, more problems: Oil prices, M&A activity and competition

As the US oil market plunges toward the end of 2015 — and the end of the incredibly profitable hedges many large producers held throughout the year — investment capital is assembling on the sidelines, ready to pick off those who can’t make sub-$60/b work without those hedges.

And it’s not just the producers. Though many midstream companies will pointedly say that they have volumes fixed to term contracts and therefore aren’t exposed to fluctuations in price or production, most have at least some spot volume on their pipelines. And if a business is distressed, several analysts have said there’s plenty of capital waiting to snatch up those companies.

“Everyone is looking to buy, thinking that oil prices a couple years down the road will recover,” Lipow Oil President Andy Lipow said.

But all that money might actually negate the buyer’s advantage the oil downturn would otherwise offer.

“Hedges are about to roll off here, and people are very lightly hedged in 2016,” EnCap Flatrock Managing Director Morriss Hurt said at Hart Energy’s Midstream Texas conference late last month. “I think you might see some distressed sellers, but I don’t know if you’re going to see distressed prices, because there’s so much capital available.”

On top of that, many midstream companies are funded through private equity, which means they don’t face pressure from public stockholders. Those companies may be equipped to hold out for a better market, Lipow said.

Plains All American CEO Greg Armstrong said in the company’s second-quarter earnings call that while his company had bid on upwards of 20 acquisitions, it was being outbid by as much as 50% because of capital readily available in light of “irrational optimism.”

“If they can raise money cheaply, then they can, they push that issue out for a couple of years.” Armstrong said. “If the answer is that has come to a halt, well, I think we’re in great position to take advantage of our strong balance sheet and operating synergies that are fundamental to our business and give us a competitive advantage.”

Armstrong expects that Plains will be more active in the acquisitions market in the next two years than it was in the last two, he said.

Executives at Enterprise Products Partners, another midstream company, said that while there are plenty of acquisition opportunities, Enterprise probably wouldn’t win deals when there’s a lot of buy-side competition.

“If there is a crowded field with a lot of people that don’t have other alternatives, they are probably going to get the deal,” CEO Michael Creel said.

Enterprise made two acquisitions earlier this year, buying assets from Pioneer in the Eagle Ford and getting Gulf Coast terminal infrastructure through an Oiltanking Partners merger, but Creel said he doesn’t think Enterprise will replicate that activity in 2016.

“Those were assets that don’t come around every day. If you look at our acquisitions over the last 15 years, they tend to be very lumpy. They’re when assets that are very attractive to us come around at prices that make sense. I wouldn’t place high odds on that happening again in 2016,” Enterprise CEO Michael Creel said. “We don’t just buy things to get big.”

And other market participants share that view — that acquisitions are going to be a special case. When predictions for a recovery fluctuate every other week, when the view of the market is so volatile, capital will be raised “on the condition of ‘it’s a good deal,’” said Tudor, Pickering, Holt Managing Director Brandon Blossman at the Hart conference.

“It sounds counterintuitive, but when price volatility comes to the market, M&A activity comes to a standstill,” Blossman said.

ource: http://blogs.platts.com/

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A US ethanol rally to be thankful for?

November is the month of Thanksgiving in the US, and if historical trends hold up, we’re about to see a price recovery that producers will appreciate.

Before I dive into the evidence, I would first like to apologize for being wrong in September. I guess my crystal ball was a little fuzzy when I suggested that we were about to see a downturn in prices. US ethanol prices for four consecutive years had lowered in September, but thanks to crop concerns and rallying corn prices, that streak was broken. Similarly, we saw another minimal gain in October.

So let’s try this again.

Across the last four years, the Platts Chicago Argo benchmark ethanol assessment has averaged a 37.5-cent rise in November.

Before you get too excited about that, understand that the bulk of those gains were made in the past two years. In 2014, the assessment rallied 98 cents from $1.82/gal on Halloween to close out November at $2.80/gal. In a spooky, scary coincidence, the assessment was also $1.82/gal on Halloween 2013 before gaining 59 cents to finish November at $2.41/gal.

The previous two years, however, we saw minimal declines of 2 and 5 cents, finishing at $2.41/gal in 2012 (another coincidence) and $2.72/gal in 2011.

Considering the Argo assessment finished this October at $1.6050/gal, what kind of trend should we expect to see in November 2015?

First off, just as a Midwest trader told me after I published the September blog, “We’re in uncharted territory right now, bro.” So there’s that grain of salt you have to take with this analysis.

But more importantly, what’s the climate like out there in the market? Is a rally even sustainable right now?

What’s been driving US ethanol prices for the past few weeks? Have the steady exports, the seasonably strong gasoline blending demand or the tumbling supplies sparked the recent uptick in prices? Or are the all-time high production rates seen in October keeping prices under the thumb?

Based on the evidence, the answer is far more simple — it’s none of them. It’s corn.

Of the 22 trading sessions in October, the Argo ethanol assessment followed the nearby corn futures settlement on the Chicago Board of Trade 19 times. The other three times occurred within a day of the weekly release of the US Energy Information Administration’s weekly ethanol data update.

In other words, if the supplies, production or demand data were having an effect on ethanol prices, it wasn’t sustainable in October.

The Argo assessment hasn’t touched $1.70/gal since last December, something that hasn’t happened since 2003. 2015 has been the least volatile year in the relatively short history of US ethanol prices, but there’s two months left for the markets to lose their minds.

Will we see a different trend in November or will ethanol prices continue to be bound to the price of their feedstock?

ource: http://blogs.platts.com/

Costs bear down on venerable Shetland oil industry

The North Sea oil industry, particularly the Shetland region at its core, is showing the strain of low oil prices, raising questions about its viability.

The demise of the four-decade old UK industry has been predicted many times, with recent concerns centered on taxation and possible independence for Scotland.

After oil prices collapsed last year, lobby group Oil and Gas UK predicted 20% of UK oil production could be shut down this year. Instead, only a few fields have been shut and oil production is booming, rising 14% year on year to a million barrels per day in the second quarter. Investment reached a record GBP14.8 billion ($23 billion) last year, Oil and Gas UK now says.

But the reality of oil prices halving, and staying that way, is hurting. That companies have hesitated to decommission aging facilities is perhaps unsurprising. Dismantling the offshore structures of a past era, when output reached three times today’s levels, is complex, costly work, as Shell is experiencing at the region’s best-known field, Brent.

But a decision by private equity-backed Fairfield Energy to decommission the Dunlin fields, northeast of the Shetland Islands, has sounded alarm bells, partly because the fields still hold significant reserves, but also because of the impact on the viability of the Brent pipeline system, which links fields east of the Shetlands and the islands’ Sullom Voe terminal. The pipeline carries about 10% of UK production.

Adding to concerns, BP said last month it and its partners no longer plan to use Sullom Voe for processing and loading oil from the giant Schiehallion field. Schiehallion lies in Atlantic waters west of the Shetlands and has been shut down since 2013 for refurbishment. When it starts up again next year the Shetlands will be bypassed in favor of Rotterdam.

The announcements increase pressure on one of the industry’s highest costing and most remote provinces. Industry chiefs have spoken of a ‘domino’ scenario in which the shutdown of one or two fields might render the Brent pipeline unviable for the remaining partners, leading to a wave of decommissioning.

The pipeline’s owners “are looking at the future of Sullom Voe and looking at the absolute operating costs and the cost allocation model, so that we can try and sustain the site and support the fields on all sides — east and west,” BP North Sea regional president Trevor Garlick said in September. “For the east in particular it is very critical that we maintain the reliability of that plant and the commercial offer.”

A BP spokesman said last week that bypassing Sullom Voe for Schiehallion crude would “lower production costs over the long term.” But that is not how everyone sees it; the Shetland Islands Council responded to the announcement by threatening to raise its harbor charges.

The challenges for the industry are different east and west of the Shetlands. To the east, operating costs are double those in some other parts of the North Sea due to “aging infrastructure, redundant facilities and a shortage of fuel gas” used to run facilities, Oil and Gas UK says. It has forecast east of Shetland operating costs to fall just 80 pence/b ($1.20/b) this year, to GBP17.00/b.

West of Shetland, companies have been beset by cost overruns and delays at projects such as Total’s multi-billion dollar Laggan-Tormore gas fields and Premier Oil’s Solan oil field. The latter, expected to start producing soon, has cost around $1.7 billion to develop, for a modest projected output of 20,000-25,000 b/d.

Extreme weather has caused both projects to grind to a halt at times.

“All operators have found that drilling [west of the Shetlands] is significantly more challenging than was forecast,” a senior industry executive said, going on to complain of difficulty attracting skilled labor, and accommodating workers when they do come to the Shetlands.

Shetland Islands consultant Andrew Blackadder, managing director of AB Associates, is confident the industry will continue to play a role in the region, but sees oil companies becoming a more transitory presence, symbolized in reduced numbers of resident workers and a growing tendency to fly staff in on a shift basis, as needed.

“What [companies] have been saying now is it is impossible for us to get the workers to come and live here. It is treating Shetland as an offshore installation,” he said.

Cost competitiveness

If the Shetlands are a particular challenge for the industry, not everyone makes much of a differentiation.

“I do not think the cost of [the UK] basin has reduced to the point where it is economically viable going forward. Our costs in Asia in our businesses there are incredibly much lower on every aspect,” Premier Oil’s North Sea and exploration director Robin Allan told the Offshore Europe conference in September. He highlighted red tape in the industry and attacked the majors’ “aggressive” treatment of struggling independents.

Efforts to galvanize the industry are gathering pace, not least as North Sea tax receipts have fallen close to zero in recent months, far off the nearly GBP11 billion ($17 billion) raised in 2011-12.

BP CEO Bob Dudley has pointed to major improvements in efficiency and costs in the company’s North Sea operations. Andy Samuel, chief executive of the Oil and Gas Authority, said in September the industry was starting to work more coherently and highlighted ongoing opportunities, such as 300 pools of hydrocarbons that have been discovered but lie undeveloped.

Some in the industry seem philosophical. The North Sea still attracts new investors, perhaps lured by the technical challenge and learning opportunities, by apparent political stability, or more nebulous criteria; Southeast Asian independents Ping Petroleum and Hibiscus Petroleum became the latest companies to buy up assets, from Shell and ExxonMobil, in August.

Stephen Kew, chief operating officer of Xcite Energy, is convinced a decision will eventually be made to develop his company’s Bentley field, which was discovered in 1977 and is thought to contain several hundred million barrels of heavy oil. The North Sea may be a far cry from the nimble, manufacturing approach of North America’s shale boom, but he says new methods and technology will make Bentley viable at oil prices as low as $35/b. Xcite even has a plan for Bentley’s eventual decommissioning, which should be far easier than anything now underway.

“Bentley and Xcite is a long game. There’s a 35-year field life at least, and it could be much more than that,” he said. “But there are issues out there. We can’t hide from the issues.”

ource: http://blogs.platts.com/

Look to Mexico for some of the best oil market story lines through 2020

“Reform” is one of those words that means anything you want it to mean. It’s been deployed in so many political fights, it has really lost its meaning in most contexts. I suppose some people still say a teen car thief is sent off to “reform school,” but I doubt it.
Here in Mexico City, that word is loaded. I’m writing this 12 floors up from the Paseo de la Reforma, the grand boulevard named for the civil war between liberals and conservatives here in the 1850s and 1860s.
“Reform” today in Mexico means the multi-billion dollar undertaking by the government in education, telecommunications, labor and, most importantly to me, energy. Like anyone trying to get anywhere through traffic in the capital, the makeover is running late. Right now it’s about a year late.
Traffic circle outside the Mexico City energy conference. Investors will need the craftiness of Diana (the goddess of the hunt and the fountain statue) to stalk opportunities in a newly deregulated market.
Traffic circle outside the Mexico City energy conference. Investors will need the craftiness of Diana (the goddess of the hunt and the fountain statue) to stalk opportunities in a newly deregulated market.
I got the update on how reform is going this week both from oil executives in the capital and at a Platts conference, Mexican Energy: Energy Reform for Electricity, Oil and Gas — Fueling Economic Growth, held at the St. Regis Hotel.
My education started on the plane. I met a few Gazprom executives who were flying in to explore opportunities in natural gas. It’s no secret that European and North American players are leaving footprints in Mexico as government control of hydrocarbons is loosened.
“We have vast resources in our subsoil. There will be great opportunities,” Mario Gabriel Budebo, chief executive officer of a new fund investing in Mexico, said Friday at the Platts conference through a translator.
Budebo leads EXI, a fund that is part of Mexico Infrastructure Partners, and until 2012 was undersecretary for energy in Mexico. He told a crowd of about 75 people that national oil company Pemex is now required to partner with outsiders in oil ventures. Its budget has been trimmed from $26.7 billion in 2014 to an expected $17.9 billion in 2016.
Pemex has been hurt by an unfavorable exchange rate for the peso and sagging crude. At the same time, demand for diesel and gasoline in Mexico is outstripping what Pemex can produce. In June, Mexico for the first time had a shortfall of about 100,000 b/d in gasoline and diesel, and it’s remained in deficit since.
That has Mexico looking to the open market. I learned outside the conference that Mexico oil regulators soon will announce regional pricing for diesel and gasoline as differentials to Platts US assessments. The news is expected to break before the end of November.
“Within two to three years, we hope to have a pricing system that will transmit the right signs and signals,” Budebo said through a translator.
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Conference emcee Raúl Carral, business development manager for electricity company Wärtsilä North America, said at the conference that spot market scenarios for Mexico energy are being tested and could be put through a dry run on New Year’s Eve and put to use as soon as January 1. (Wärtsilä is part of the Finnish energy giant with the same name.)
“We need to have in place a flexible system to create markets that can ensure that energy is available to all,” Carral said through a translator.
I also learned outside the conference that Pemex sometime toward the start of 2017 will begin buying naphtha and other blendstocks and feedstocks from sources not limited to PMI, the trading arm of Pemex. Pemex is exploring US pricing and specifications for naphtha, which is exported off the Gulf Coast not only to Mexico but also to Colombia, Ecuador and other Latin American countries.
The move could open Mexico further to the half-dozen trading houses that move naphtha out of Houston, and possibly to US refiners. Hurdles will spring up. For example, the widely traded “cactus naphtha” in Mexico is regarded to have an API around 67. Platts assesses standard naphtha at 63 API. The Platts assesssment is for standard naphtha that boils at 110 degrees Fahrenheit. Pemex buys naphtha that boils at 113 degrees Fahrenheit.
The diablo will be in the details in the bid to get naphtha to the Mexican ports. Pemex has been depending on PMI for information about US naphtha and is likely to attempt to broaden that input.
The word “reform” implies there is a problem to be solved, but EXI’s Budebo said there is reason to be optimistic. For one, Mexico has trailed countries such as Norway in depleting oil reserves. In 100 years of Mexican oil production, it has only removed about one-fourth of reserves, Budebo said. EXI estimates that Mexico ranks 10th among world companies in reserves, with Russia first.
It should be fun times in Mexico energy in the next five years or so, and fascinating to see what turns up.
Now about that traffic. I can see why demand for on-road fuels is up, as cited by Budebo in Friday’s presentation. There are a lot of cars idling out there on the street.

ource: http://blogs.platts.com/

Indonesia energy reforms look like a lost cause: Fuel for Thought

ndonesia’s president Joko Widodo came with a lot of promise and Indonesia’s embattled oil industry was filled with hope. But one year on, progress has been erratic to say the least.

The retail fuel price reform has slipped off course, policies to kickstart exploration and production have been sporadic, and the country is yet to get an oil and gas law.

Jokowi, as the president is commonly known, earlier this year took an unprecedented decision when he announced the removal of subsidies on gasoline and a fixed subsidy for gasoil. The move was worthy of the applause it got given that the country had spent close to $16 billion on fuel subsidies in the previous year — three-and-a-half times more than what it had spent on healthcare.

It also showcased Jokowi’s resolve to bite the bullet and tackle the tough issues. But politics eventually played a heavier hand.

The president in mid-2015 succumbed to pressure and agreed that fuel prices be adjusted every three to six months and not on a monthly basis as had been originally decided.

Despite volatility in the global oil markets, Indonesia has adjusted pump prices only twice so far this year.

According to a senior minister in the energy ministry, the government realizes that prices have not been adjusted often enough but Jakarta “does not want to hike the price to maintain economic stability.”

This backtracking on policy has left state-owned company Pertamina saddled with losses on fuel sales. Pertamina is getting squeezed as it is not allowed to adjust pump prices in line with market movements, but is also not eligible for subsidy payouts since subsidies have officially been removed.

A senior Pertamina official told Platts in September that the company has suffered losses to the tune of Rupiah 15 trillion ($1.1 billion) on fuel sales over January-August this year — money that could have otherwise gone towards boosting oil and gas production. Pertamina also posted a 50% drop in net profit to $570 million in the first half of 2015 due to losses suffered on fuel sales.

Jokowi also came with the promise of massive reforms to spur exploration and production work. Some measures have been taken, but the overall pace of reforms has been slow and with no sign of a new oil and gas law getting passed soon, the country is unlikely to see an uptick in investment anytime soon.

Upstream activity hindered by permit paralysis

This is underscored by the level of upstream activity, or lack thereof, in the first half of 2015.

According to data from upstream regulator SKK Migas, only 26 wells were drilled in the first half of 2015, representing 17% of the original target of 157. There were only 12 new seismic surveys carried out, down from a plan of 46.

This could partly be due to low oil prices, but SKK Migas communications chief Elan Biantoro attributes it to permits and land acquisition problems — issues that have long plagued the upstream industry.

“The government’s efforts to simplify the permit process has not been effective yet. Oil companies are still finding it difficult to carry out exploration work,” he said in July.

The Jokowi government in mid-2015 announced that it had cut the number of permits needed from the Ministry of Energy and Mines from 52 to 42. But that still leaves 289 more permits that need to be taken from other ministries such as transport, forestry, environment and from regional governments where the asset is located. Progress on streamlining these has been close to nil.

Biantoro warned that if the situation does not improve, Indonesia will soon run out of oil.

The failure of the government to speed up passing the oil and gas law — the last one was annulled in November 2012 — has been another drag on upstream investment in the country.

Other initiatives to spur E&P have been taken such as bringing oil and gas investments under the purview of the investment coordinating board to remove unnecessary delays and setting up a national exploration team with the sole purpose of identifying the problems plaguing the upstream industry and tackling them.

But according to Lukman Mahfoedz, the chairman of Indonesia’s largest private upstream firm Medco Energi Internasional, these initiatives are not enough.

“The main problem is how to make the energy and mines ministry the focal point of the industry,” he said. “We [would like] the energy and mines ministry to be the focal point. Currently energy and mines sectors are every ministries’ business including finance, forestry, transportation and trade … It’s complicated.” — Mriganka Jaipuriyar

ource: http://blogs.platts.com/

Rainy days and airlines — there’s probably a song here

Jet fuel may be half the price it was a year ago, but airlines used to so many sad-song years aren’t taking anything for granted. Just look at the semi-annual jet fuel forum held in always-sunny Cancun last week.
Where it was raining.
kohlman-cancun-rainingAttendance is booming, past 500 people, but many were suppliers of various sorts. Organizers said a fewer airlines were present, possibly because it’s harder for management to sanction travel to a resort hot spot like Cancun. (Where it rained a lot, keeping everybody indoors and working hard. I swear.)
But perhaps it’s because they’re still very budget conscious. I had two airline members say they wouldn’t have come if their own airline didn’t fly into Cancun and have space for them to fly free. Others said just like in recent years, their airlines have fewer people attending and they are required to stay in cheaper hotels near the International Air Transport Association industry event. They worry about $10 meals being too high for their expense reports.
It seems these remain trying times for airlines, despite record quarterly and yearly profits in the billions of dollars for the biggest airlines.
kohlman-airline-share-prices
This is also despite their No. 1 cost dropping in half on the spot market — US Gulf Coast jet fuel fell to a 5 1/2-year low of $1.25/gal on Aug. 24, 2015, compared with $2.88/gal a year earlier, according to Platts data. Prices have been hovering just above that low since.
kohlman-jet-fuel-prices-differentials
Scratch that. Jet fuel is no longer their biggest cost. It was one-third of expenses a year ago, but now is down to a quarter or a fifth for many of them. Labor has retaken the top spot.
In one of the more interesting presentations, Delta’s senior VP of fuel optimization told the industry group that his company was on track to make a $300 million profit this year on an East Coast refinery they bought in 2012. A refining arm of an airline — once considered a historically risky financial venture — is making more money than most airlines in the US did three to 10 years ago. Perhaps even in total.
Another presentation talked about an XML-based standardized jet fuel tender process they’re trying to create for the industry, rather than individualized paper methods today. They estimate it will save airlines $15 million a year. It’s another example of how they’re looking under every seat cushion for savings and efficiencies.
IATA chief economist Brian Pearce showed a slide highlighting higher load factors and lower breakeven points that airlines need for their load factors. Basically, the number of people filling seats is much higher, but the number of people needed to fill seats for a profit is much lower.
Pearce said this is the first year ever that returns on invested capital will be above expectations for the global airline industry — considered a normal trend in other industries.
The word “efficiency” is heard so much that it’s easy to see airlines are not comfortable in betting that lower jet fuel prices are here to stay.

They’re still in the early to mid-innings of a big fleet replacement likely to make planes burn on 10-20% less fuel. One technical person — the conference has as many technical sessions as commercial ones — said the new planes have new engines with some of the outside gear box fitted inside the engine instead to deliver up to 10% better fuel economy.

They’re also looking at replacing bigger planes on routes instead of adding planes, routing into more fuel-efficient flight paths, economic tankering to fly full into a high-cost airport, and removing any extraneous weight from planes.

One speaker said planes are just like people — they slowly pack on the pounds every year without realizing it. He said airlines now often go through airplanes and remove unnecessary weight. A participant later joked that they should add reward miles to travelers who agree to lose weight before their flights.

It won’t go that far (I think), but the basic gist is airlines are doing everything they can to keep costs down, run more efficiently and do more with less after more than a decade of bankruptcies, mergers, recession-tinged travel declines, exploding jet fuel bills and much more. One year of declining jet fuel prices — no matter how sharp — seems unlikely to change that equation.

There were a couple of sunny days in Cancun, by the way. But the rains that followed reminded participants that they always have to keep an eye on the weather.

ource: http://blogs.platts.com/

Company scandals: First diesel engine emissions, now aluminum extrusions strength

With the Volkswagen emissions scandal still fresh in the memory, and with the repercussions of it likely to unfold for several months to come, the aluminium business could now be rocked by a scandal much closer to home.

Late on Monday came the astonishing admission from US extruder Sapa Profiles that test results over a period of 19 years for mechanical properties of some aluminum extrusions manufactured at SPI facilities in Portland, Oregon, were altered to show they passed when, in fact, they failed.

“Specifically, we have learned that some test results for mechanical properties — ultimate tensile strength, yield strength, and elongation — have been altered to change failing test results to passing test results between 1996 and 2015,” Sapa said in a statement on its website, dated November 9.

It further describes this as an “unsanctioned practice” which is “completely unacceptable.” And, it says, the employees concerned have been terminated. For SPI, the investigation relates to aluminum extrusions manufactured in 2000 and 2002 and delivered to a supplier to NASA.

The US Department of Justice Civil Division is now investigating some government suppliers, including SPI’s Technical Dynamics Aluminum division, based in Vancouver, Washington. SPI has been temporarily suspended as a US federal government contractor since September 30 as a result of these investigations.

These scandals are salutary reminders to not get sucked into companies’ claims that their products are cleaner, safer, stronger, better and more rigorously tested than anything else out there on the market.

Unfortunately, for the public and governments that depend on the products of such companies, these scandals prove that we live in a world today where no statement, written or verbal, from any commercial organization, can be taken at face value.

That is a real problem when a consumer is buying a product made of parts and materials they might depend on to save their lives one day.

Sapa Extrusions North America is undergoing audits, with support from a third-party expert, to verify all its “testing labs meet both industry standards as well as our customers’ requirements,” the company’s statement said.

The VW and Sapa scandals should serve as big wake-up calls to the CEOs of every manufacturing company and government contractor to the very real possibility that such scandals could exist within their own organizations.

CEOs who spend more time sweet-talking Wall Street or catering to stakeholders rather than understanding the inner workings and practices of their factory floors will run afoul of governments if it means more planes crash, more ships sink, more carnage on the roads, compromised defense equipment, or devastating environmental consequences.

ource: http://blogs.platts.com/

Recent news paints global picture of doom and gloom for steel

The steel industry doesn’t have much to cheer about these days. Some recent news items tell the tale:

Essar Steel Algoma, a Canadian flat steel producer, filed for creditor protection for the second time in 18 months.
Ferrous scrap prices fell again this month, erasing any hope that an end to the five-month swoon in the key steelmaking raw material would boost finished steel prices by extension. Scrap prices have declined about 40% since June and are roughly half the price they were at the beginning of the year.
In the UK, the steel downturn has reached crisis levels resulting in the closure of SSI’s Teesside slab mill, the announcement by Tata Steel that it will close plate mills in Scotland and Scunthorpe and the announcement that 16 Caparo group companies, including steel strip and tube makers, appointed administrators after suffering financial problems. The administrators have announced more than 450 job losses. To make matters worse, Caparo CEO Angad Paul was found dead Sunday after apparently falling from his eighth floor residence in central London.
Roughly all the steel mills in the Western Hemisphere have joined together to protest China’s assumption of market economy status when it gains membership to the World Trade Organization late next year because the designation will make it harder for them to battle the dumped Chinese steel they feel certain will proliferate. The coalition of steelmakers in North and South America and Europe noted that the OECD Steel Committee has indicated there is almost 700 million metric tons of excess steel capacity globally, with China holding the lion’s share with about 380 million mt, a total that could grow. “This situation, together with a declining steel consumption, has resulted in record levels of steel exports from China to the rest of the world in 2014 — and which are on track to exceed 100 million metric tons this year,” the coalition stated.
US raw steel production capability utilization has come in below 70% in each of the last few weeks, signaling the likelihood of more red ink for American integrated mills in the current quarter.
A study commissioned by North American mills revealed that granting market economy status to China next year would cause the value of NAFTA steel industry output to shrink by $31.5 billion and NAFTA economic welfare to decrease by $42.5 billion – $68.5 billion and cause job losses of 400,000-600,000 workers in the US and near-term job losses in Canada of up to 60,000.
Prices for US hot-rolled coils — a bellwether steel product — have fallen to their lowest levels since May 2009 — down by about 40% from a year ago — and are in danger of falling to price levels not seen since January 2004.
Labor issues at two major US integrated steelmakers, US Steel and ArcelorMittal, remain unresolved more than two months after the September 1 expiration of their contracts with the United Steelworkers union.
US Steel, which lost $173 million in the third quarter and $509 million so far this year, asked its outside sheet processors for an immediate 15% reduction in their fees to help USS reach its cost-cutting goals. Tata Steel’s European long products division is in dialogue with its suppliers to cut costs by 10% with further reductions possible. Both US Steel and Tata have already closed or are closing some of their operations.
Global steel giant ArcelorMittal lost $700 million in Q3 alone and expects “unsustainably low” Chinese steel export prices to continue in 2016.
On the bright side, US minimills Nucor and Steel Dynamics reported Q3 net profits of $227 million and $61 million, respectively — but that may only make it more difficult for US mills to prove injury in critical unfair trade cases against sheet imports.
ource: http://blogs.platts.com/
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Prophetic words from the world of metals in 2008

Painful as an office move can be, it’s not as bad as moving house, and it gives one an opportunity to have a good clear out, or send stuff off to the archive for long-term storage.

In finishing packing up my desk this morning, I came across some very prophetic words in my notes from a US ferroalloys trader from March 12, 2008. He said: “The fourth quarter will be the real litmus test in terms of recession, especially if the US is in a bit of a slump.”

And that was a full six months before Lehman Brothers was allowed to go bust.

Looking at my notes, I see that everyone else I spoke to that day was predicting things would move in one direction only: up.

I wonder what this source is thinking today.

ource: http://blogs.platts.com/

The Oil Big Five: Already looking at changes for 2016 and beyond

We’re speeding toward the end of 2015, which means that our monthly oil feature, The Oil Big Five, is increasingly focused on topics that could shape the global oil industry into 2016 and beyond.

This is the November version of our list, which highlights some of the most important and intriguing trends, issues and news in the oil industry, as nominated by our oil analysts and editors in offices around the world. Be sure to leave us your comments, either here on The Barrel or on Twitter with the hashtag #oilbig5. We’re curious what you’re thinking about as the year closes, and what you’re focused on moving into the new year.

1. Nigerian crude

Nigeria is continuing to cast around for new markets for its light sweet crude, which used to be in high demand from the US but has been usurped by domestic production there. Nigeria has the capacity to produce about 3.2 million b/d, but output has remained below 2 million b/d due to a combination of large-scale theft and sabotage of production facilities. One solution was piling more crude onto long-term regular buyers like India and Europe, but the recent government changes in Nigeria and its request for so-called letters of comfort from shipowners who load at its oil terminals seems to have spooked buyers in India and European refiners are shifting to a heavier, more sour barrel. A lack of policy continuity could be devastating to the country’s oil industry, and some have said the plans of President Muhammadu Buhari, who also appointed himself the country’s oil minister, seem more aspirational than certain. As of November 6, there were 10 million-14 million unsold barrels in the Nigerian November program, mostly light sweet grades such as Qua Iboe, Bonny Light and Bonga. Will the overhang continue through the rest of the year, or is there anything the government can do to encourage buying

2. Urals market

The percentage of Urals CFD trading concentrated in the prompt market has increased dramatically over several months, reflecting fewer regular players in the market and a lack of certainty for the future of sour crude supply in Europe. One of our oil gurus in London said this is a topic that, “like a pinhole camera, gives a surprising degree of insight on several issues that are normally only visible as through a glass, darkly.” An in-depth Platts analysis of CFD data blocked into IntercontinentalExchange showed the proportion of total volume traded has skewed increasingly toward the balance-month and front-month CFD contracts, both in Northwest Europe and the Mediterranean. As a bit of background, the Urals CFD market acts as a hedging tool for physical Urals cargoes in Europe and is most heavily traded by participants with exposure in the physical Urals market and reflects expectations about Urals differentials independent of Dated Brent. Some factors adding pressure to the market include the fact that Rosneft has been offering up less and less Urals volume each tendering cycle and the concern that an end to sanctions against Iran could add volatility to the European Urals market. Does this shift act as a canary in the coal mine and signal even further changes coming to the Urals CFD, and Urals physical markets, and to the sour crude market as a whole?

3. Colonial Pipeline shippers and space

Colonial Pipeline, the US’ largest refined product pipeline, is of perennial interest to gasoline, diesel and jet shippers and the like. The system transports more than 100 million gallons of fuel each day, stretching from Houston, Texas, to Linden, New Jersey. Finding space on the pipeline can sometimes be difficult, but at the end of October the company announced plans to reduce its minimum tender batch size to 15,000 barrels from 25,000 barrels, which will let more market players secure capacity. The proposal still requires federal approval, and could squash the transfers of small stakes of line space shipper history on portions of the system, but the new rules are expected to come into effect in December. There are also preliminary proposals to increase the minimum delivery size to 5,000 barrels on spur lines, which could squeeze out smaller suppliers who deliver small batches to multiple Colonial Pipeline spur lines. On a semi-related note, on November 5 line space on Colonial Pipeline’s distillate Line 2 was assessed by Platts at a 2015 low on a tighter spread for US Gulf Coast/Atlantic Coast ULSD. It will be worth watching how shippers could change as new size requirements go into effect, as well as what could happen to the value of space on the pipeline giant.

4. China’s gasoil exports

China’s gasoil exports hit a monthly record of 1.11 million mt, or roughly 275,650 b/d, in September, nearly five times higher than exports a year earlier and up a staggering 54% from the previous record of 722,520 mt in August. It appears the exports are in a position to remain elevated through the rest of the year, in part due to weak domestic demand, overflowing inventories and rising output. While demand for gasoil may be weak in China, demand for gasoline and jet fuel is increasing there, and gasoil output rose 3.3% during the first nine months of the year as a side effect of the higher production of the more refined products. China’s exports are also up despite some sources claiming Chinese refiners are losing money on them and would be better off selling domestically. But new buyers are emerging for the product — while traditional Southeast Asian countries are still importing, China also made its first substantial gasoil exports to Guatemala earlier this year, and Papua New Guinea, Togo, Taiwan and Australia have also picked up more product. How long will the gasoil exports continue at such a pace, and what new buyers could emerge in the near future?

5. Jet fuel and Mexico

The aviation industry had its semiannual IATA Fuel Forum in Cancun recently, which was apt as there was discussion about how Mexico’s energy-sector reforms could increase competition in the jet fuel market and improve supply chain services. The jet fuel supply chain is currently largely divided between Mexican state-owned companies, but allowing additional competitors and retailers to bring in and distribute jet fuel could reduce supply chain problems, such as difficulties meeting airlines’ fuel quality standards and a lack of measures to limit fuel contamination. Opening the market should also make more jet fuel available to Mexico as its airline industry grows; a planned new international airport in Mexico City has a targeted start of commercial operations in 2020. And what of prices? A significant portion of Mexico’s jet fuel is imported, and domestic refining capacity is not expected to grow to fill increased demand, so considerable investment in infrastructure for new distribution would likely be necessary, keeping prices from falling too much. But now that some of the world is poised to enter winter, what’s nicer than envisioning more flights to beautiful destinations in Mexico?

ource: http://blogs.platts.com/