S&P Global Platts China Steel Sentiment Index stable in July: steel production seen rising, export outlook recovers

Chinese steel market sentiment is generally unchanged in July from the month before, with domestic orders expected to remain stable, though the outlook for export orders has improved, according to the latest S&P Global Platts China Steel Sentiment Index or CSSI, which showed a headline reading of 27.45 out of a possible 100 points.

The headline CSSI, which measures the combined outlook for new domestic and export steel orders, fell by 1.79 points from 27.45 in June. It was the third consecutive month the index has been below the 50 threshold, with July’s CSSI the weakest since January.

Over the first seven months of the year, the headline index has averaged 43.93 points, compared with 40.02 over January-July 2017.

A reading above 50 indicates expectations of an increase/expansion and a reading below 50 indicates a decrease/contraction.

Expectations for domestic steel orders deteriorated by 3.92 points from the month before to 27.43 in July. The outlook for export orders recovered from last month’s record low, by 22.80 points to reach 27.77 in July.

The outlook for prices of flat steel, which is mainly used for manufacturing purposes, improved for the second month in a row to 48.02, up by 12.60 from June. The outlook for prices of long steel, which is mainly used in construction, rose by 10 points from June to the neutral level of 50 in July.

The sub-index for crude steel production jumped by 25.89 points to 57.14 in July, while inventories held by steel traders were expected to stay at similar levels to last month, edging up 0.37 to 31.52 in July.

S&P Global Platts China Steel Sentiment Index – July 2018
A figure of over 50 indicates expectations of an increase; under 50 indicates a decrease
July (points) Change from June (points)
CSSI (total new orders) 27.45 -1.79
New domestic orders 27.43 -3.92
New export orders 27.77 22.80
Steel production 57.14 25.89
Flat steel prices 48.02 12.60
Long steel prices 50 10
Trader inventories 31.52 0.437

“The July index points to a continuation of the market dynamics seen over the past month, with domestic steel orders remaining fairly stable. With crude steel production already at record levels, the prospect of even higher output is a concern, particularly if Chinese mills and traders are obliged to export more because of slower domestic activity in the hotter summer months,” said Paul Bartholomew, senior managing editor of steel & raw materials for Platts.

“However, prices for long and flat steel are expected to rise, which should deter too big an increase in exports, as steelmakers make better margins from local sales. Steel inventories are set to remain low, and hot rolled coil stocks are already at five-year lows, so this will also support steel prices,” Bartholomew said.

The CSSI is based on a survey of 75 to 90 China-based market participants including traders and steel mills. Data is compiled by Platts Asia steel team.

According to Platts price assessments, separate to the CSSI, the Platts China export hot rolled coil price averaged $592.70/mt FOB China in June, up from $588.31/mt FOB in May.

The Platts China Steel Sentiment Index survey plays no role in Platts’ formal price assessment processes. For more information, download our methodology and specifications guide.

The post S&P Global Platts China Steel Sentiment Index stable in July: steel production seen rising, export outlook recovers appeared first on The Barrel Blog.

Source: http://blogs.platts.com/2018/07/19/china-steel-sentiment-index-production-export-outlook/

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Mexican energy sector’s nervous wait for new president to take office

After Andres Manuel Lopez Obrador won Mexico’s presidential elections on July 2, industry participants and investors have been wondering what the future holds for the energy sector in Mexico.

It is still unclear what the position of Lopez Obrador — known widely as AMLO — will be when once he takes office on December 1, as his campaign was marked by contradictions.

He has long supported a nationalistic outlook on energy and has spent years criticizing Mexico’s reforms in opening up its energy markets to the private sector, liberalizing energy prices and ending the decades-long monopoly of Pemex.

During his campaign, AMLO left the door open to making changes.

Election results gave AMLO’s political coalition a majority in both the  Congress and the Senate, but estimates indicate this will not exceed the two-thirds threshold needed to change the constitution.

Nevertheless, the results give AMLO a strong mandate for implementing his policy agenda and could make it easier for him to obtain the votes he lacks to change the current laws, a scenario that almost no one had envisioned.

Industry analysts believe AMLO will not halt the reforms; however, he could slow down the pace of new auctions and farmouts.

Mexico’s hydrocarbon regulator CNH has to date awarded 110 blocks to over 70 companies, and two more tenders under a third bidding round are slated for September. Will AMLO allow them to proceed, or will he halt all new auctions?

If he opts for the latter, AMLO will struggle to achieve Mexico’s crude production targets. Pemex’s output has been declining since 2004 amid underinvestment, a lack of technology and infrastructure and natural decline at aging fields. According to Pemex’s year-end financial report, crude production fell 9.2% to 1.90 million b/d in 2017.

AMLO will also need the revenue generated by the energy sector to deliver on his campaign promises.

During his campaign and victory speech, AMLO pledged to review contracts awarded to private oil companies for signs of corruption. CNH has welcomed this and the possibility of finding such indicators is low, given CNH´s processes include transparency measures that make contract details public.

AMLO also pledged to build two refineries to produce oil products for domestic consumption. He estimated the cost of this at $6 billion-$8 billion; such projects typically end up costing more than was budgeted for.

With Mexico currently importing almost 70% of its gasoline from the US and domestic demand forecast to rise further, new refineries makes sense from a national security perspective, but do they make economic sense? Who will pay for these projects? And would it ultimately prove cheaper to upgrade Mexico’s existing refineries or import more from the US?

AMLO also pledged during his campaign to freeze gasoline and diesel prices for the first three years of his term – a retrocession in the newly liberalized fuel retail market. It could undermine all the government’s efforts to gradually remove price controls to boost competition, and would come after the civil unrest of “gasolinazo,” which erupted when gasoline prices surged in early 2017 amid rising global oil prices, a plummeting local currency and the end of gasoline subsidies.

A freeze on gasoline and diesel prices could discourage new entrants and investments after almost 40 brands have opened retail gas stations, and at a time when 50 new storage projects with a combined capacity of 30.7 million barrels are under development. According to Mexico’s energy minister Pedro Joaquin Coldwell, “the current policy of weekly adjustments to a key tax applied to fuel sales is a better way to keep volatile prices swings at bay.”

Since his victory, AMLO has moderated his stance, saying he will not reverse the energy reform process. But uncertainty in the energy market will prevail until he takes office and Mexico sees whether politics or economics will drive the course of energy reform.

The post Mexican energy sector’s nervous wait for new president to take office appeared first on The Barrel Blog.

Source: http://blogs.platts.com/2018/07/18/mexican-energy-sectors-nervous-wait-new-president-take-office/

In the LOOP: US Gulf Coast VLCC exports ramp up amid wider price spreads

Wider price spreads between US crudes and Dubai-based crudes have opened arbitrage opportunities to export US crude to Asia, leading to a recent increase in VLCC exports out of the US Gulf Coast, S&P Global Platts data shows.

The second VLCC to partially load in the Houston Ship Channel was seen docked at the Enterprise Products’ Texas City facility on Monday, according to cFlow, Platts’ trade flow software. The Eagle Victoria, with a capacity of more than 2 million barrels, arrived on Saturday. A cargo was fixed to the vessel for mid-July loading by SK Energy for delivery to South Korea for a lump sum of $4.8 million, according to Platts fixtures report.

A spokesman for Enterprise did not return a request for comment Monday.  The FPMC C MELODY, another VLCC, was recently partially loaded in the Enterprise Products’ Texas City dock on the Houston Ship Channel — marking the first time a VLCC has loaded and sailed from any port in Texas. The vessel was partially loaded at Texas City and then a ship-to-ship transfer completed the loading in deeper water offshore Galveston. The vessel was in the South Atlantic Ocean on Monday and is heading to West Coast India, according to cFlow.

It is unknown what crude grade was loaded on the VLCCs in Texas City. However, West Texas Intermediate Midland crude in Houston, with an API of around 41 degrees, as well as Eagle Ford crude with an API of 45 is known to have been offered for loading in July at WTI in Houston (MEH) plus 75 cents/b.

The Texas-loading VLCCs join another two that have loaded at the Louisiana Offshore Oil Port (LOOP) within the past month — bringing the total of four to be loaded at LOOP so far this year.

The Anne, a VLCC with a capacity of 2.02 million barrels of crude, sailed on July 4 to the Dutch Antilles island of St. Eustatius, where it was in port for two days before sailing again, this time with a destination of the Huizhou Mabianzou Terminal in China.

Another VLCC, Eagle Vancouver, loaded and then sailed from LOOP on June 20. The vessel has two destinations listed on cFlow Qingdao, China, and Cochin, India.

Widening WTI-Dubai and LOOP Sour-Dubai spreads could be behind the increased exports out of the US Gulf Coast. A wider spread between WTI-based crudes and more expensive Dubai-based grades makes US crudes more competitive with Middle East regional grades.

The LOOP Sour-Dubai spread has been mostly widening since the spring. The 10-day moving average was $4.13/b on Friday compared with $3.90/b one month ago and $2.88/b two months ago.

The WTI MEH-Dubai spread has been more volatile in recent months. It reached a wide point of $5.93/b on June 22 but has narrowed back in in July, with WTI at a 20 cents/b premium to Dubai on Friday. The 10-day moving average was about 33 cents/b on Friday.

The narrowing of the WTI MEH-Dubai spread may be an indication that there may be fewer VLCC exports of light sweet US crudes to Asia in August.

China also may curb their buying of US crudes in light of recently imposed tariffs.

The post In the LOOP: US Gulf Coast VLCC exports ramp up amid wider price spreads appeared first on The Barrel Blog.

Source: http://blogs.platts.com/2018/07/17/loop-usgc-exports-price-spreads/

Great time sharing @USSynthetic problem solving methods with the @GraniteSchools student government for their leadership summit.pic.twitter.com/5a2tN7d8nY

Great time sharing problem solving methods with the student government for their leadership summit.

source https://twitter.com/LandenGarner/status/1016829444726538240
Source: https://ulterra.blogspot.com/2018/07/great-time-sharing-ussynthetic-problem.html

Argentina’s currency crash hits shale development

When Argentina’s currency plummeted by 50% this year, the oil sector started to worry about a slowdown in the development of Vaca Muerta, the country’s biggest shale play.

The peso’s crash led the central bank to hike the benchmark interest rate to 40% from 27.25%, pushing up corporate borrowing rates to as much as 70%.

The result? The 2,000 small and midsize services companies in Vaca Muerta are facing hard times.

“There are not many companies that can handle such a high financing cost,” said Federico Mac Dougall, a director at First Corporate Finance Advisors.

The currency crisis, fueled largely by capital flight from emerging markets after a hike in US interest rates in April, comes as field operators seek to ramp up the development of Vaca Muerta. Argentina’s Pampa Energia recently said it will lead a $520 million, five-year pilot project in the play with ExxonMobil and Total.

“There are a ton of opportunities for services companies because the operators are demanding more and more all the time,” Mac Dougall said. “But the service companies don’t have the capital and they are worried about losing their current contracts and those that are to come.”

Many of these companies borrowed in 2016 as conditions improved in Argentina. The right-of-center administration of President Mauricio Macri removed the capital, currency and trade controls of its populist predecessors of 2003 to 2015. Interest rates fell, funding became abundant and the economy revived.

Now many of these companies must refinance their debts at higher rates after running down their working capital. Some may be able to access capital at 29% from state banks, but most will have to pay 50%, some even 70%, Mac Dougall said.

This means companies will be resistant to cut fees because financing costs have “tripled,” he said.

Argentina oil and gas consumption and production

CUTTING COSTS

On the other hand, operators have been trimming their well costs. YPF, the busiest player in Vaca Muerta, has slashed its development costs per horizontal well to below $12 million from nearly $30 million in 2015.

Most of the operators are large locals or multinationals with easier access to capital, meaning that, despite the financial problems, they can still borrow in the single digits.

With the hike in financing costs for services suppliers, however, the progress in bringing down overall costs to a target of US levels may take longer.

How long? The government has suggested the first signs of economic recovery will be seen in the fourth quarter, but Mac Dougall said it could stretch well into 2019, a presidential election year when investment traditionally is put on hold.

CUT BACK IN PUBLIC WORKS

Another concern is a reduction in public spending on infrastructure for Vaca Muerta.

During the peso’s plunge, the government asked the International Monetary Fund for help and got a $50 billion credit line. As a condition, it vowed to slash public spending by some 80% over the next three years.

Luciano Fucello, the country manager for Houston-based services company NCS Multistage, said 120,000 people were hired in the first quarter of this year to work in Vaca Muerta, and this is putting strain on the road between Neuquen and Anelo, a town at the heart of the play’s activity.

“We need investments in roads because this is going to make it safer and decrease costs,” he said.

The pressure for expanding infrastructure is only going to grow as activity increases, including for a proposed cargo train to take frac sand and other inputs to Anelo.

To do the railway project in spite of the spending cuts, the government will seek a private developer at an upcoming tender.

Will companies bid?

Diego Solis, senior manager of unconventional reservoirs at Argentinian oil producer Pluspetrol, said the financing problems could slow the railway project, a key for cutting “huge” logistics costs.

FOCUSED ON THE LONG TERM

In the long term, there is more optimism about Vaca Muerta. The Energy Ministry estimates its development could boost the country’s overall oil production to 750,000 b/d in 2030 from 478,000 b/d this year, and take gas to as much as 200 million cu m/d from 125 million cu m/d over the same period.

Vaca Muerta is producing 50,000 b/d oil and 13.5 million cu m/d, according to Fucello.

“The forecast for this year is that production will increase,” he said, noting that projects are coming online like Tecpetrol’s Fortin de Piedra.

Another encouragement is a pricing incentive for gas, which pays out on incremental gains in production, said Solis. If companies don’t meet the growth targets, they don’t get the incentive, which is $7.50/MMBtu this year, gradually falling to $6/MMBtu in 2021 before market pricing takes effect across the industry.

The post Argentina’s currency crash hits shale development appeared first on The Barrel Blog.

Source: http://blogs.platts.com/2018/07/16/argentina-shale-development/

Digital Oil and Gas is Getting a Makeover

Digital Oil and Gas is getting a much-needed makeover. Read on to see what’s in store. First of all, thank you very much for subscribing to this article and podcast series. From the feedback I’ve received, along with the many comments, I’ve concluded that my…

The post Digital Oil and Gas is Getting a Makeover appeared first on Digital Oil and Gas.

Source: http://digitaloilgas.com/digital-oil-and-gas-is-getting-a-makeover/

US jet fuel output soars amid record-breaking summer travel

This summer has seen oil prices at their highest levels in four years, but you would never guess that by looking at the statistics for US travel or jet fuel market fundamentals data. As Americans have taken to the skies in unprecedented numbers this summer, the US oil complex has churned out record-breaking amounts of jet fuel, supported by favorable production margins.

In the first week of July, the S&P Global Platts assessment for the US Gulf Coast Brent crude to jet fuel cracking margin averaged $11.34/b, the highest that average has been since 2013 and about 31% above the previous four-year average of $8.63/b.

Platts data shows that cracking margins in New York Harbor, Chicago and Los Angeles have followed similar patterns this year, which has helped lift US output to record levels. Nationwide jet production rose to 1.944 million b/d in the week that ended June 29, the highest that figure has ever been since the US Energy Information Administration began tracking it in 1982. This broke the previous all-time high set just a week earlier.

The US Transportation and Security Administration said the Friday before Independence Day, June 29, was the second-busiest day in the history of the agency, with more than 2.67 million individuals screened at checkpoints nationwide, according to a July 3 notice. The week that ended June 30 was also the single busiest week for TSA screenings, and, combined with the two previous weeks, this amounted to the busiest consecutive 21 days on record, the TSA said.

Apart from stoking US jet output, this has led to some nasty waits at the airport. Zach Honig, an editor for travel blog The Points Guy, wrote that he had “never seen a security-line situation anywhere close to what I and countless other frustrated travelers experienced” on July 5 at Newark Airport in New Jersey.

Looking ahead to later in the year, it is possible that security lines could get even worse during the holiday season. EIA data shows that US jet fuel demand – measured as product supplied – hit an all-time high in the week that ended December 15, 2017, as US markets prepared for the busy Christmas and New Year travel period.

Since US jet production also hit a high for the year in December 2017, it is possible that the market may have spare capacity for jet production to a set more records this winter.

NOT THE ROAD LESS TRAVELED

Automotive club AAA forecast that a record-breaking 46.9 million Americans would travel away for the Fourth of July holiday, which would equate to the highest travel volume seen in 18 years since AAA first started tracking this data, the company said on June 21.

But of those 46.9 million travelers, AAA estimated that a strong majority would take their cars and trucks.

Indeed, Americans still appear to love traveling in their automobiles. According to polling in early June completed by Morning Consult, Americans overwhelmingly prefer to take vacations in their cars, as compared with planes, trains and buses. Despite gasoline breaching $3/gal in some areas of the country, 82% of the poll’s respondents said they thought automotive travel was “appropriately priced” compared with just 49% for airplanes.

Perhaps this preference helps explain why US gasoline demand — measured as product supplied – hit a new all-time high of 9.879 million b/d in the first week of June, according to the EIA.

It’s unclear whether there is capacity for the US gasoline demand record to be broken again this year, but any way you slice it, this is shaping up to be one hot American summer for travel.

The post US jet fuel output soars amid record-breaking summer travel appeared first on The Barrel Blog.

Source: http://blogs.platts.com/2018/07/13/us-jet-fuel-output-soars-record-summer-travel/

Has an Australia-to-Europe iron ore arbitrage opened?

China has long been the epicenter of the iron ore market. Australian miners’ medium grade iron ore fines are the foundation of China’s sinter feed, with other regions having to compete for space in the mix.

Radical changes in procurement preferences in China this year, though, have pushed down the price of Australia-origin ores compared to Brazil’s, potentially opening up an arbitrage opportunity for Australian material to other regions.

Australia’s supply of higher alumina-content iron ore has increased this year at a time when supply of competing Brazilian (low alumina) ore has eased. This has caused a change in the price steelmakers are placing on alumina content in iron ore.

Compounding this has been a reduction in China-produced iron ore, which typically has low alumina content.

These changes have made Australia-origin medium grade fines appear economic to some European steelmakers, procurement representatives said at a recent industry conference.

The penalty for higher alumina content, or the premium for lower alumina content ores, has shot upward.

 

Having started the year at $1.8 per 1% of alumina, Platts’ assessment for this impurity has spiraled upwards, hitting a record high of $8.5 per 1% at the end of Q2.

EUROPEAN PIVOT

In this context, an arbitrage for Australia-origin ores may have opened to Europe.

While occasional spot cargoes of Australia-origin ore have been sold into Europe on an opportunistic basis, a regular flow hasn’t really existed. Europe, due to Brazil’s freight advantages – and historical usage of Brazil-origin ores – has been consistent in its procurement.

However, today’s market conditions could change this.

Data from Platts trade flow software cFlow indicates that iron ore shipments from Australia to Europe have increased this year on an annualized basis, albeit from a very low base. Only seven Capesize vessels were seen going from Australia to Europe in 2017, five in 2018 year-to-date.

 

A structural issue for Australia’s iron ore miners is their higher freight costs to Europe. On an indicative basis, however, this has narrowed to only a $2/wmt disadvantage versus Brazilian competitors now from around $4/wmt at the start of Q2.

And, given that today Vale’s Brazilian Blend Fines (BRBF) is achieving $6/dmt more than Rio Tinto’s Pilbara Blend Fines delivered into China, diverting material to Europe may be attractive.

The barrier may be on the buyers’ side though. Europe’s blast furnace steel mills have typically preferred stable blends of sinter, most of which is procured from Brazil. While Australia-origin fines could be blended with lower-alumina Brazilian ore to achieve a similar mix, Australia’s route in to Europe may be stymied by buyers’ reticence to change.

However, some Europe’s steelmakers are considering purchasing more Australia-origin ore to broaden their supply base. At a recent industry conference in Europe, several local steelmakers stated they were considering increasing their exposure to Australia-origin material.

The post Has an Australia-to-Europe iron ore arbitrage opened? appeared first on The Barrel Blog.

Source: http://blogs.platts.com/2018/07/12/australia-europe-iron-ore-arbitrage/

The magic of the IRR: Are high returns prompting the return of investment funds in shipping?

The internal rate of return, or simply the IRR, is the magic figure that private equity fund managers, shipping-focused investors and affluent shipowners alike employ to determine if an investment makes sense.

The investment firm recently launched by the prominent Greek shipowner George Livanos and two bankers, as well as the launch of Schulte Group’s shipping fund, has prompted me to explore the power of IRR and engage in some simple number crunching.

Take a five-year-old, 9,000 TEU containership costing $48 million that can be chartered out for three years at $34,000/d. A fund manager with a five-year plan might be able to secure a charter at $32,000/d over the five-year investment period. This may be below market rate but an all-equity purchase of the vessel can achieve a 15% IRR if the vessel is sold, come mid-2023, for $35 million. A leveraged investment could have an even higher IRR.

Might such returns trigger a flurry of newbuilding orders, or will purchases be limited largely to the secondhand market? Newbuilding and secondhand prices usually go hand in hand, and while an investment in a secondhand vessel can produce immediate revenue for the investor, opportunities might arise in the newbuilding market. Is this an industrywide phenomenon or are these returns confined to specific market segments?

On the dry bulk side assumptions are more complicated, with asset play on the rise. Recent sale and purchase reports suggest that a number of owners are cashing in on vessels purchased during the lows of 2015 and 2016. And while those owners are profiting handsomely on the vessels, some dry bulk vessel prices are still seen as being at a discount relative to their earnings potential.

Take a five-year-old 76,000 dwt Panamax vessel purchased all-equity for $19 million, chartered out on an average daily rate of $15,500. If sold at $13 million in 2023, such a vessel could achieve a 10% IRR. A similar return can be achieved with a $9,000/d bareboat charter.

Meanwhile, the downtrend in tanker rates might present opportunities for some, or avoidance reasons for others. Scorpio Tankers, a large tanker owner, has secured a number of such deals, proving that parts of the tanker sector are active.

Does the instability in freight rates discourage fund managers from entering the sector, or do vessel prices override other assumptions?

Although some returns can appear as an invitation for cash-rich fund managers and shipowners, speculation based on the expectation of such impressive returns results could hinder the recovery in some sectors.

On the other hand, shipowners looking to reduce debt could approach investors with sale-and-leaseback deals. Such deals allow owners to clear debt off their balance sheets and replace it with stable monthly payments, while taking advantage of their perceived ability to secure higher earnings on the vessels’ operations.

Might this recent spur of funding availability lead to a credit risk overexposure all over again? I am hopeful that both fund managers and shipowners do their math and keep in mind the industry’s long history of costly financial missteps.

The post The magic of the IRR: Are high returns prompting the return of investment funds in shipping? appeared first on The Barrel Blog.

Source: http://blogs.platts.com/2018/07/11/magic-irr-high-returns-investment-funds-shipping/