Material Matters: Oil, Nickel And Coal

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Oil supply outlook; Philippines mining audit developments; and China's policies on coal.

-If OPEC does not control output over-supply of oil likely in 2017
-Mine suspension in Philippines potentially affecting 11.4% of global nickel supply
-China stands firm on coking coal but loosens thermal coal policy
 

By Eva Brocklehurst

Oil

OPEC and Russia are set to have informal talks about limiting oil output but, with Iran, Iraq, Nigeria and Libya potentially adding around 1.05m barrels per day of oil in coming months a deal to freeze production looks difficult to Commonwealth Bank analysts. [At the time of writing, OPEC had not yet announced its intention to limit production from November – Ed]

If OPEC does nothing to control output next year the cartel will likely be over supplying around 2.25mb/d in 2017. The analysts do not expect a deal immediately but there is the chance a successful agreement will be reached on November 30 when OPEC officially meets.

From the latest data in China, Barclays calculates crude stock levels built to 1.1mb/d for August as a result of refinery maintenance, completion of storage facilities as well as the low oil price. The analysts envisage crude oil stocking rates averaging at least 400,000 b/d over the December quarter and in 2017.

Moreover, the analysis suggests the pace of China's inventory build will be linked to the price of oil rather than the completion dates for its strategic petroleum reserve sites. Barclays notes private companies have emerged to offer storage on lease, which enables China to stock more oil before market balances tighten and prices head higher.

The Philippines

The mining sector audit report from the Philippines government recommends suspending 20 mines, 15 of which are nickel producers. The total volume is calculated to be 41% of the country's annual mine production and 9% of global nickel mine supply. Miners have seven days to show cause for why the suspension should not be enacted before action is taken.

This report adds to the eight nickel mines already suspended and would bring the total reduction to 11.4% of global supply. Morgan Stanley considers this development a short-term event driving the price of nickel, particularly since much of the tonnage slated for suspension is in the money. London Metal Exchange nickel gained 1.8% in initial trading on news of the suspensions.

Mitigating factors include China's raising of ferronickel imports and refined nickel and Morgan Stanley suspects growth in Indonesia's nickel pig iron output and fledgling stainless steel sector will go some way to offset falling Filipino supply. The broker forecasts a balanced metal market for the remainder of 2016.

UBS observes the suspensions appear much greater than the market expected. In addition, the impact will be felt most acutely by China's nickel pig iron industry as a large proportion of non-suspended production is contracted to Filipino and Japanese smelters.

The impact widens the broker's estimated 2017 nickel market deficit to 225,000 tonnes from 125,000t which is large in a market of just 2mpta. The buffers are sizeable for the short term, UBS suspects, as there is 474,000tpa of nickel metal on the London and Shanghai exchanges and also 150,000t of nickel within ore stockpiles in China.

Physical tightness is some months away yet but financial speculators may add to positions which could lift the LME spot price materially in the short term. UBS forecasts the spot price to average US$5/lb in 2016 and US$6/lb in 2017. The broker considers Norilsk well positioned as the lowest cost producer and also likes Independence Group ((IGO)) for its Nova project while Western Areas ((WSA)) and Vale Indonesia offer the most earnings leverage.

Coal

Macquarie observes the latest meeting between China's government and coal producers seems to have offered little for steel makers' hopes of an increase in domestic coking (metallurgical) coal supply.

Seaborne coking coal prices turned lower at the end of last week and the ongoing negotiations may have encouraged a few buyers to hold back for the present out of a fear of driving prices higher, the broker observes.

The government has reportedly stood firm, believing high coking coal prices will encourage faster reforms in the steel industry. Credit Suisse describes the call by the government for a meeting and then rejecting the China Iron and Steel Association's request for an increase in coking coal output as “strange”.

Chinese steel makers are in panic mode, the broker believes, having to capitulate and buy pricey seaborne coking coal. At the same time of maximum tightness, authorities decided to crack down on overloaded coal trucks, and smaller loads promptly meant raised coal costs with the truck services ceasing in protest at the regulation.

The broker suggests the Chinese steel mills are now losing money, with rebar and billet prices having fallen by RMB100/t while coking coal prices have increased and lifted mill costs.

Meanwhile, the Chinese government instead signalled its intent to loosen thermal coal supply. The price accelerated in September and Macquarie notes coal port inventory is in a declining trend which appears to have finally triggered central government intervention.

Also, Credit Suisse notes, China's main coal railway, the Daquin line, will undergo maintenance for three weeks in October which will halt operations for four hours per day.

Credit Suisse believes Indian state-owned steel mills could also face a shortage of coking coal in the December quarter after agreeing to lower quarterly volumes from Australian contract suppliers determined to capitalise on resurgent sellers market.

The offered cargoes were consistent with long-term agreements but fewer than what was sought. As a result Credit Suisse suspects Indian steel makers may be forced to make up any lost tonnage with purchases on the spot market.
 

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