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Daily Intelligence Briefing - April 12, 2017
Featured Topic: COAL:
The U.S. coal industry has been going through dark times. As the nation increasingly shifts away from coal to other forms of energy -- either because they are cheaper than coal and/or better for the environment -- the industry is experiencing a secular decline. According to the U.S. International Information Agency (EIA), coal production in 2016 fell to its lowest level since 1978, pushing many mining companies into bankruptcy.
But there may be brighter times ahead, at least in the short term. U.S. coals producers stand to benefit from improving market fundamentals in the form of tightening global supplies and rising natural gas prices. Recent supply disruptions in other part of the globe could result in greater demand for U.S. coal exports. Meanwhile, rising natural gas prices is compelling power producers in the U.S. to shift from gas towards coal. Power producers’ consumption of gas has been falling year-on-year since October 2016, while their consumption of coal has been on the rise. This could boost profits for U.S. coal mining companies over the next year, or until gas prices become cheaper.
All of this does not even take into account any positive impact the rollback of environment regulation under the new admnistration -- particularly President Trump's legislation ending a key Obama administration coal mining rule -- would have on the coal industry.
Still, the long term outlook for coal remains shaky as reinforced by this story in The Independent: Kentucky Coal Museum installs solar panels because it will save money
IN THE MEANTIME, here are some articles that highlight recent developments in the industry:
FURTHERMORE, here are some companies with exposure to the industry: AHGP; ARCH; ARLP; BTU; CLD; HCC; HNRG; NRP; TECK; WLB; TECK
A few items in the COMMODITIES section seem to support our bullish stance on GOLD and ENERGY.
Relevant to our theme LONG GOLD and GOLD MINERS (see Joe Mac's report: Gold Shines Even Brighter)
Relevant to our theme LONG U.S. ENERGY launched April 8, 2016 (see Joe Mac' report: Implications of the Coming Shortage of Oil)
Also note in the DATA section the dramatic decline in crude oil inventories and gasoline inventories.
Other Stories Highlighted in Today's DIBs:
MRP Reports:
Current Themes:
About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP's compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics.
| MAJOR DATA POINTS | Top |
| MARKETS | Top |
Bonds - Junk-Bond Investors Can't Make Up Their Mind About Oil Prices
At the start of this year, credit investors undertook a conscious uncoupling from oil prices. At the time, it looked like bonds sold by companies with more fragile balance sheets may finally have broken their ties to oil. But since then, correlation between crude and the iShares iBoxx $ High Yield Corporate Bond ETF has surged back to 72 percent. That isn’t far from a high of 86 percent reached a little over a year ago, when a dramatic dip in oil spread turmoil through credit markets. Deutsche Bank analysts reckon correlation will be closer to 20 percent to 30 percent in the future, helped along by sweeping changes in the U.S. energy industry. A shakeout in shale drillers and a desperate cost-cutting drive by the industry means remaining energy companies should be able to weather lower oil prices with a smaller risk of default. In the meantime, bonds issued by junk-rated energy companies have outperformed the broader high-yield debt market over the past six months, even as the price of oil rose less than $2 a barrel in that span. B
Bonds - Duration bet is back in favour for bond investors
Emboldened by the Fed’s signal last month that it is not primed to speed up the pace of rate rises, money managers have been extending the duration of their portfolios. It is not simply the note of caution from the Fed that is sharpening portfolio managers’ appetite for duration. After surging in November and December, the oil price has been stuck in a range this year, while the failure of Donald Trump and the Republican Congress to repeal Obamacare last month has sown doubts over whether they can deliver a package of economic stimulus powerful enough to quicken growth and lift inflation. This view is reflected in the recent rally in US government bonds. Inflows to long-bond funds have resumed, with the largest two-week haul in eight months. Benchmark 10-year Treasury yields have fallen 25 basis points since mid-March. Longer bonds have far outperformed their shorter-dated counterparts, with sovereign bonds maturing in more than 10 years gaining 3.6 per cent over the past month. One-to-three-year maturing notes have returned 1.3 per cent over the same period. FT
Bonds - Marijuana Companies, Soaring in Stock Market, May Tap Bonds Next
Canadian marijuana companies have tapped capital markets to fund expansion plans amid expectations that Prime Minister Justin Trudeau’s government will unveil a proposed law as early as Thursday to set the stage for legalization in 2018. Shares in companies like Aurora Cannabis, and Canopy Growth -- the first Canadian pot company with a market value of C$1 Bn ($750 M) -- have soared. Aurora announced the sale of C$75 M of 7 percent convertible debentures in a private placement Tuesday, marking its third convertible debt deal. Proceeds from the sale will fund Aurora’s international expansion, which includes acquiring a 19.9 percent stake in the first Australian company to be licensed to research and cultivate medical marijuana. Aurora shares fell 7.6 percent to C$3.04 in Toronto, after rallying 18 percent Monday. The company’s shares have jumped 33 percent this year, for a market value of C$969 million. B
| ECONOMICS AND TRADE | Top |
Inflation - China Producer Inflation Cools for First Time in Seven Months
China's producer price inflation (PPI) cooled for the first time in seven months, as iron ore and coal prices tumbled, pressured by fears that Chinese steel production is outweighing demand and threatening a glut of the metal later this year. China's PPI rose 7.6 percent in March from a year earlier, still at an elevated pace but easing from a gain of 7.8 percent in February, which was a 9-year high. Economists polled by Reuters had forecast a softer reading as China's commodity markets showed signs of correcting, and on expectations that measures to cool the country's overheated housing market would eventually slow demand for steel and other building materials. Consumer inflation picked up in March as costs for health care services, housing, transportation and communication surged, suggesting stronger demand from an increasingly wealthy and rapidly aging population, and that stronger producer inflation in the past months may have started passing through to downstream consumers. Food prices, the biggest component of CPI, fell by 4.4 percent in March after a 4.3 percent drop in February. WSJ
| COMMODITIES | Top |
Coal - China rejects North Korean coal shipments, opts for US supplies instead
China has sent a flotilla of North Korean freighters loaded with coking coal back to their home ports. The move reflects China’s public commitment to join other nations in punishing North Korea for its continued nuclear weapons and ballistic missile development program. China said in February it was suspending North Korean imports for the rest of this year. China is North Korea's largest source of trade and aid and targeting coal imports are meant to deprive Pyongyang of an important source of foreign currency. Meanwhile, China has placed massive orders for the steel-making commodity from U.S. producers, which marks a U-turn for China: No U.S. coking coal was exported to China between late 2014 and 2016. Fox
Coal - Coking Coal Prices Soar Due to Supply Disruptions
Coking coal prices are surging, as Cyclone Debbie caused massive supply disruptions to Australia’s coal industry. The Cyclone caused serious damage to rail lines serving mines in the state of Queensland and also disrupted mining activities. Roughly 12–13 M tons of Australian met coal cargoes destined for China, India, and Japan could be delayed. Spot premium coking coal prices are nearly double what they were two weeks ago, and they have more than tripled from one year ago. Meanwhile, China just turned back a fleet of North Korean cargo ships carrying coal as the country enforces a trading ban on North Korea due to its missile tests. China’s demand for imported coal increased after the country forced domestic producers to reduce production, so its need for coal imports is particularly high right now due to the disruptions in Australia. Economic Calendar
Coal - Met Coal Surges Past $300 Toward Record on Australia Outages
Spot metallurgical coal is heading for a record after surging above $300 a metric ton amid supply curbs from Australia, the world’s biggest exporter of the commodity used to make steel. Morgan Stanley says “panic buying” has helped double the price of premium hard coking coal over the past eight sessions after rain from the remnants of cyclone Debbie flooded rail lines and halted deliveries to export ports. Prices are near a record $308.80, reached in November after China cut production to reduce overcapacity. While three of the four closed rail networks are scheduled to reopen this week, the major Goonyella line that feeds the export terminals of Hay Point and Dalrymple Bay is forecast to remain closed until about May 8. Exports from Queensland account for 58 percent of the global seaborne market. Contracts, which are typically finalized the month before the start of a new quarter, may be settled at as high as $250 for the three months starting April, according to AME Group. Morgan Stanley predicts a second-quarter price of $180, compared with $285 the previous quarter. B
Coal - Kemp: U.S. coal set for an upturn in 2017/18
After a terrible 2015 and start to 2016, U.S. coal producers have good reasons to expect the worst of the industry's recession is over. Natural gas production has been falling year-on-year since May 2016 and gas prices have been on an upward trend since March 2016. Gas has become steadily more expensive than coal: The delivered cost of gas moved above coal in July 2016, and by January 2017, gas was almost twice as expensive. Power producers have responded by switching back from gas toward coal. Power producers' gas consumption has been declining year-on-year since October 2016 while coal consumption has been rising. Critically, the overhang of coal stocks at power plants is clearing, with inventories back down to 157 million tons by the end of January and 30 million tons below a year earlier. U.S. coal exports also jumped in the fourth quarter to 19.3 million tons up from 12.6 million tons in the third quarter, the highest level since April-June 2015.
The short-term outlook for the coal sector remains positive with gas prices for the summer of 2017 rising strongly. Gas stocks have ended the winter looking much tighter than at this point in 2016 and the futures market has moved into a big backwardation between 2017 and 2018. Higher gas prices will encourage power producers to limit gas consumption as much as possible this summer and run coal-fired power plants for more hours which should support a significant increase in coal demand. PW
Coal - How Asian Politics Could Affect U.S. Coal
With Australia coping with the aftermath of Cyclone Debbie and China turning back imports of coal from North Korea, U.S. coal exports could take up some slack. But analysts aren’t predicting a coal comeback. Reuters reports that millions of tons of coal were sent back to North Korea, but largely, these were shipments of anthracite coal, typically used in steel production. “[Anthracite coal] is a really small part of our market and not produced that many places in the United States outside of Pennsylvania,” Kuykendall said.
Many U.S. companies bet big on metallurgical coal in 2010 and 2011 expecting the Chinese steel industry it supports to continue to surge. But instead, demand tapered off at home and abroad, leading to a wave of bankruptcies. Regional companies including Patriot Coal, Arch Coal, Peabody Energy, and Alpha Natural Resources all filed for bankruptcy protection. Production data from the U.S. Mine Safety and Health Administration indicates that both coal production and employment have increased so far this year. Some mines report production increases of 20 percent compared to this time last year - and a 6 percent increase in employment. But Kuykendall says the overall downward trend in the coal industry is still likely to continue. “Coal production and employment has been rising for the last nine months or so, but I think we’re going to see that level off and maybe even start declining again unless there’s a significant change in natural gas prices.” WVPB
Gold -Gold settles at a 5-month high as investors focus on geopolitics
Gold rallied on Tuesday to its highest level in about five months, as investors grew jittery over the impending French presidential election as well as U.S. relations with Russia and North Korea. June gold gained $20.30, or 1.6%, to settle at $1,274.20 an ounce. Prices are also ended above their 200-day moving average of $1,260.65, suggesting positive momentum building in the yellow metal. The market has been shaken by the French presidential elections ahead of first-round voting on April 23. The probability is growing that far-right anti-euro candidate Marine Le Pen could face leftist candidate Jean-Luc Mélenchon in the second round on May 7. It is feared that both candidates could lead to the destabilization of the European Union and the euro. Growing tensions in Asia centered on North Korea’s recent missile tests and the Middle East also have investors on edge, a factor supportive to gold prices rising. Meanwhile, Fed Chairwoman Janet Yellen, at a Q&A session on Monday, said the central bank has ceased trying to stimulate the U.S. economy and is instead allowing it “to kind of coast and remain on an even keel.” Precious metals are benefiting from a dollar that has softened somewhat and government bonds yields trading near the low end of their recent range. MW
Gold - Gold miners jump as jitters prompt haven buying
Gold miners rallied on Tuesday as jitters from geopolitical risks whipped up investor demand for haven assets, pushing the price of the yellow metal higher. The NYSE Arca gold miners index climbed 2.5 per cent for its biggest one-day gain since mid-March. Tuesday’s advance came as the precious metal rose 1.6 per cent to $1,274.57 a troy ounce. Weakness in the US dollar, the currency in which gold is denominated, helped improve sentiment as it makes gold cheaper to foreign buyers. Federal Reserve chair Janet Yellen’s remarks on Monday signalling a gradual pace in interest rate rises also helped lift gold, which offers no yield. But it was concerns about geopolitics that bolstered the so-called fear trade with investors seeking the safety of the haven asset. Money managers are continuing to keep an eye on the upcoming French elections and watch the US stance towards Russia and North Korea. Looking at the equities market more broadly, investors shifted away from sectors that are considered to be riskier and into perceived havens. FT
Gold -CME Group is launching a gold-trading platform inspired by bitcoin
Pretty soon, pension funds and other institutional traders will be able to buy and sell gold on a platform inspired by the digital currency bitcoin. U.S. futures and options exchange CME Group announced on Tuesday that it is in the final stages of testing a venue for trading spot gold that’s based on the blockchain, the pioneering distributed-ledger technology that powers the bitcoin network. CME built the platform in partnership with the U.K. Royal Mint, which has helped supply $1 billion in gold bullion to back transactions executed on the network. Blockchain companies AlphaPoint and BitGo helped develop the software and trading platform. The platform isn’t expected to launch until later this year. Physical gold will be represented on the platform by tokens called RMGs—short for Royal Mint Gold. The platform is the first digital gold product targeted at institutional investors, and it’s also the first to work with a government entity, according to the releases. MW
Oil - OPEC oil output cuts surpass pledge in March
OPEC states cut oil output in March by more than they pledged under supply curbs. The 11 OPEC members with output targets had pledged to reduce output to 29.804 M bpd. Production from these members has averaged 29.757 M bpd, which amounts to 104 percent adherence to the supply cut regime. The supply cut is supporting oil prices which are trading around $56 a barrel, up from $42 a year ago. But crude is still half the level it was at in mid-2014, with high inventories and rising US production limiting gains. Including Nigeria and Libya, the two members exempt from the deal to cut supply, output by all 13 OPEC members in March fell to 31.939 M bpd. That would be down 19,000 bpd from OPEC's published February figure. The 11 non-OPEC producers that joined the deal have not cut as much production, but compliance by OPEC and non-OPEC together is expected to rise in March from February's level of 94 percent, Kuwaiti Oil Minister Essam al-Marzouq said on Monday. pressTV
OPEC's war on oil overhang starts to bear fruit
OPEC appears to be slowly winning the battle against a global overhang of crude and oil products as inventories in onshore and floating storage decline. The price of oil may not reflect this just yet, as Brent crude futures are struggling to break above $55 a barrel, but there is no doubt that stocks are falling around the world, from Saldanha Bay in South Africa, to the Caribbean. A persistent glut of Nigerian oil is easing and even Iran has liquidated the amount of crude held in floating storage. Nordic bank SEB said global oil inventories in weekly data have dropped by 42 M barrels in the last four weeks. Stocks of oil products are also steadily drawing down. According to consultants FGE, total main product stocks levels in the U.S., Amsterdam-Rotterdam-Antwerp independent storage and Singapore and Japan have declined by 6.5 M barrels, in the week to March 13 to 631 M barrels. The weekly data hit an all-time high of just over 679 M barrels in February 2016, FGE said. If the declines continue, FGE said global product stocks could hit the top of the 10-year range, or 611 M barrels, in just three weeks. R
Oil - Saudi Arabia Wants OPEC to Extend Production Cuts
Saudi Arabia has told OPEC officials that it wants to extend the cartel’s agreement to cut crude-oil production for another six months. Saudi support is essential for OPEC to renew the agreement at its next meeting, in Vienna on May 25. The group’s initial commitment to cut about 1.2 million barrels of oil a day, and the pledge by Russia and 10 other non-OPEC producers to trim another 558K barrels a day, helped raise oil prices about 20% after November 30. Saudi Arabia has shouldered the cartel’s largest burden, slashing as much as 700,000 barrels a day in some months to make up for shortfalls from other members. But prices have stalled at about $56 a barrel. That’s because, while global inventories in storage have fallen by about 20M barrels since implementation of the cartel’s agreement, they remain about 260M barrels above where OPEC wants them. Resurgent U.S. shale producers are only partly to blame; U.S. refiners shut down in January and February, reducing crude demand by about 1 million barrels a day. WSJ
Refiners - Diversify or die: China's independent oil refiners adapt to new challenges
Cut off from lucrative fuel export markets and seeing their margins squeezed by new taxes, China's independent oil refiners are branching out into new sectors from clean energy and lumber as well as expanding their trading to overcome the challenges. These independents, known as "teapots" since they are smaller companies than their state-owned rivals, are scrambling to survive shifting government policies at the same time domestic oil demand growth is slowing, undermining their ability to expand by just serving their home market. In 2016, China's annual fuel demand growth was at a three-year low.
Late last year, Beijing suspended fuel export quotas for the independents, handing control of diesel and gasoline exports to the dominant state refiners. Other government moves may also squeeze the independent's margins. Executives at some of China's top independent refiners plan to diversify to endure these changes. Dongming, for example, plans to extend its business from transportation fuels to higher value plastics and synthetic rubber as well as fine chemicals, said Zhang. The 260,000 barrels-per-day (bpd) refiner is also looking to invest in small-scale onshore fields, and aims to boost trading operations by combining physical oil and gas trading with financial services such as offering credit facilities for fellow teapots at better rates than banks. R
Grain Storage - Grains piled on runways, parking lots, fields amid global glut
World stockpiles of corn and wheat are at record highs. From Iowa to China, years of bumper crops and low prices have overwhelmed storage capacity for basic foodstuffs. Global stocks of corn, wheat, rice and soybeans combined will hit a record 671 M tonnes going into the next harvest - the third straight year of historically high surplus, according to the USDA. In the U.S., farmers facing a fourth straight year of declining incomes and rising debts are hanging on to grain in the hope of higher prices later. Russia, too, is looking at exporting from state-held stockpiles, with storage stuffed after a record harvest in 2016. In Australia, demand for the storage bags has exploded after farmers produced record crops of wheat and barley.
The overflow in the U.S. has prompted a rush for temporary storage. The USDA has approved permits for more than 1.2 billion bushels of temporary and emergency grain storage - such as tarp-covered piles and open-air mounds. That's a record amount, according to the USDA. Permanent storage capacity in the U.S. has grown 26 percent in the past decade, but booming grain stocks are raising demand for temporary and emergency storage, with capacity up 13 percent from 2015. The USDA forecasts net farm income will fall 8.7 percent this year to $62.3 billion - the lowest level since 2009. R
Ags - Rotten Tomatoes: Turkish Farmers Suffer Putin's Wrath Over Syria
Along a fertile stretch of the northeastern Mediterranean, row after row of once-plump tomatoes are rotting on the vine. The fallout from the war in Syria is creeping further into Turkey, where the sanctions Vladimir Putin imposed after President Recep Tayyip Erdogan’s forces downed a Russian jet 16 months ago are pushing farmers toward ruin. Erdogan’s efforts at rapprochement with Putin have led to the lifting of the most punishing of the penalties, on Turkey’s key tourism industry. But with the two leaders pursuing conflicting agendas in Syria, Putin is refusing to budge on the tomato ban, keeping a lid on a market that had accounted for 70 percent of all Turkish exports of the fruit. While some shipments are being redirected, the Russian hole, worth a quarter of a billion dollars a year, is just too big to fill. Putin’s squeeze is adding to a surge in unemployment and a widening trade deficit, turning the plight of tomato growers and sellers into a campaign issue for Erdogan, who’s asking voters to grant him vast new powers in an April 16 referendum. B
| ENDNOTE | Top |
United bumps more passengers than any other large American airline
Federal data show that a viral video is representative of a broad pattern of aggressive overbooking E
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