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Here is our small analysis on iron ore’s price fluctuation.

The forward curve is the same as presented in the market overview, the curve is in contago then in backwardation.

Iron Ore price chart $/MT (over 1 year)

Iron ore price has dropped quite a bit (from $75/ metric ton to $64/metric ton) these last months. Therefore, we tried to analyse why. Are there trends, seasonality or is it due to events happening in the sector?

Iron Ore is transformed into steel which has a huge utility range, car manufacturing, construction and many more. Those sectors don’t have any seasonality, therefore Iron Ore price should be stable throughout the year.

As shown on the graph above, we can notice a drop in the iron ore price for the period of November 2017. This drop in the price is essentially due to the new Chinese legislation to decrease the impact of pollution on the environment from the steel production in regard to the steelmaker’s factory. Indeed several Chinese cities such as Tangshan have been ordered to “deepen” production cuts during the winter season. This decrease in steel production is mainly impacting the demand side of iron ore which is shown with a drop in the price.

Iron Ore price chart $/MT (over 5 years)

If we take a look at the trend of the price over the last 5 years, we clearly see that there is a drop, from $ 140/MT to $64/MT today. This drop is due to the boom in China’s steel production creating a huge surplus in supply of steel, impacting iron ore price.

China has decided to reduce it CO2 emissions to reduce its pollution footprint, therefore a few steel mills were shut down, others had to close production during a “winter pause”, which means that steel production only grew by 0.6% contracting with its 5.7% crude steel production growth in the first 11 months of 2017.

Despite the slowdown in iron ore consumption, China continued importing a lot of iron ore. Now china holds a stock of 158 million metric tons of iron ore across 42 ports.

Moreover, “President Trump’s tariffs on steel and […] the deterioration in trade relations between the U.S. and trading partners including China”[i] lead to a price fall.

Price differential between Iron Ore and Steel.

Iron Ore Price History (USD/MT)

Steel Price History (in Yuan/MT)

“Over the past five years, the price differential between domestic scrap and iron ore imports has averaged $200/mt. However, since scrap prices began to elevate precipitously in October 2017, the differential increased to a high of $332/mt in late December. However we can still notice there is no correlation between the iron ore and steel price through the past years.

The premium is currently above $300/mt despite a moderate price correction recently.”[i]

Sources

http://www.sgx.com/wps/wcm/connect/4125a239-4fc6-4298-9a7d-300db12259f0/18-Apr-2018Iron_Ore_DSP_%28T+1_Volume_and_Open_Interest%29.html?MOD=AJPERES&CONVERT_TO=url&CACHEID=4125a239-4fc6-4298-9a7d-300db12259f0 (forward curve)

http://www.scmp.com/news/china/economy/article/2136807/chinas-slow-reforms-steel-industry-unlikely-satisfy-trumps

[i] https://www.focus-economics.com/commodities/base-metals/iron-ore

[ii] http://blogs.platts.com/2018/03/08/iron-ore-steel-mills-price-diverges-scrap/

Bulletin Cotton N°2

20.04.2018

The Price:

The price of cotton have fluctuate lately and as we can see on the forward curve the price is going down which is contradictory to the rule of supply and demand since the volume announced decreased. The market under MCX cotton is going under a long liquidation because of the lowest interest and the prediction to settle at 5698.

(Price in USD per 50’000 pounds)

The late volatility on the market can be explained than one of the biggest production country is India and the government has announced that measure will be taken in the future. However, no official announcement has been made and speculations of what those measure could be could be one of the reason for the volatility of this commodity that used to be steadier.

https://www.nasdaq.com/markets/cotton.aspx

India:


The spot price is going up and should keep on increasing according to the different sources. One contradictory fact is that a good monsoon is planned to happen. Regardless of the monsoon planned stock of water are available in India to irrigate the field and will lead to a better production level than previous years which should lead to oversupply. But the cultivation in India should decrease by 10-15%[1] because the cultivators are expected to shift to soybean crop. This decrease/dislike towards cotton can be explained by most of the crops being attacked by the bollworm pest that devastated some of the plantation. Also by the fact that soybean is more lucrative and less costly to produce.

http://marketqview.com/forwardcurvechart.php?ID=20&TYPE=Price

http://marketqview.com/forwardcurvechart.php?ID=20&TYPE=Volume

About Geneva:

“Geneva is indeed renowned for being a trading hub for commodities like coffee, sugar, wheat, grains and oil seeds, crude oil and oil products, rice and cotton; and for being the world banking centre for trade finance. To understand why the country has attracted more than 500 trading companies who when grouped together handle 40% to 60% of global transactions, one has to go back in time.

Trading has quite a long history of partnership with Switzerland. Cotton houses such as Paul Reinhart (ex-Geiliger & Blum²) settled in Winterthur in the late 1780s to trade Egyptian and American cotton.”[2]

More information:

“Geneva’s banks offer a large range of trade-financing products: guarantees, loans, pre- and post-financing, country-risk coverage, etc. Trading companies can count on a reliable international network, close relations with international storage companies, and easy access to stock markets and liquidity. Geneva has a very highly qualified workforce in international trading and its know-how is a considerable asset.

Geneva: world trading hub:

  • Second in Europe only to London for international trade
  • Around 400 trading companies, supported by a plethora of insurance companies, law firms, banks, accounting, forwarding, surveillance and security firms, and shipbuilders
  • World leader in trade finance, handling 40% to 60% of global transactions

Some of the commodities traded in the Lake Geneva region:

  • 35% of the world’s cereals and oilseeds
  • 50% of the world’s coffee
  • 50% of the world’s sugar
  • 35% of the world’s rice
  • 35% of the world’s oil
  • as well as natural gas, ethanol, cotton, etc.”[3]

Bibliography:

https://www.nasdaq.com/markets/cotton.aspx
http://marketqview.com/forwardcurvechart.php?ID=20&TYPE=Price

http://marketqview.com/forwardcurvechart.php?ID=20&TYPE=Volume

https://www.gbnews.ch/commodities-trading-the-geneva-hub/

http://www.whygeneva.ch/en/trading-trade-finance

https://economictimes.indiatimes.com/news/economy/agriculture/plan-on-cotton-seed-prices-to-come-next-week/articleshow/63824136.cms

https://www.commodityonline.com/tech-outlook/mcx-cotton-likely-to-trade-in-a-range-of-20577-21017/20150

https://www.dawn.com/news/1402497

https://economictimes.indiatimes.com/news/economy/agriculture/area-under-cotton-may-decline-by-more-than-10-cotton-association-of-india/articleshow/63683589.cms


[1] https://economictimes.indiatimes.com/news/economy/agriculture/area-under-cotton-may-decline-by-more-than-10-cotton-association-of-india/articleshow/63683589.cms

[2] https://www.gbnews.ch/commodities-trading-the-geneva-hub/

[3] http://www.whygeneva.ch/en/trading-trade-finance

PREPAYMENT

Oil producers seek liquidity from prepayment deals

Us sanctions restricted long-term financing to russian oil companies making opportunity of oil deals for loan with Russian oil producers complicated.  This has pushed the industry to rely on other source of financing.

For example in summer 2015, Vitol put in place a plan to raise $2bn from US and European banks and hand it to Rosneft in exchange for future oil supplies. However things have change slightly when Rosneft concluded a deal with Trafigura to prefinance four 100,000-tonne Baltic Sea oil cargoes.

Prepayments deals offer different advantage for producers, traders as well as banks.

For the producers, they provide another source of liquidity and reduce their reliance on external capital markets as well as guaranteeing a buyer for their oil.

The big traders are also keen on prepayment deals because they provide a guaranteed source of supply on a monthly basis for several years. Companies such as Vitol, Trafigura, Glencore and Mercuria like to “lock in” supplies of crude or oil products which they can then move around across their operations. They are also a good way to get close to oil producers.

As for the banks, prepay deals are also attractive. First, they can tap the traders’ local knowledge in territories they might be unfamiliar with. Second, the loans don’t tie up large amounts of capital. The amount of capital needed to back a prepayment deal is much lower than lending directly to the producer.

sources:

https://www.ft.com/content/0c2ccc42-ad57-11e4-a5c1-00144feab7de

https://www.trafigura.com/news/trafigura-signs-usd-billion-prepayment-facility/2116

https://www.reuters.com/article/us-usa-trump-russia-sanctions/despite-new-u-s-sanctions-russian-oil-traders-say-its-business-as-usual-idUSKCN1B9143

PRICE

Oil sets another 3-year high, settling at $67.39 and posting an 8.6% weekly gain on geopolitical tension

  • President Donald Trump’s comments about possible military action in Syria and reports of dwindling global oil stocks boosted oil prices.

  • OPEC and International Energy Agency see oil markets tightening.

  • China’s March crude oil imports were the second-highest on record, data shows

U.S. West Texas Intermediate crude for May delivery ended Friday’s session up 32 cents to $67.39 its best weekly performance since July. The contract earlier touched its highest intraday level since Dec. 4, 2014.

Brent crude was up 58 cents at $72.60 a barrel by 2:26 p.m. ET and also set for a weekly gain of more than 8 percent going back to July.

  • China’s March crude oil imports climbed month second-highest level on record.

  • Russia shipments 1.32 mln bpd, No.1 supplier for 2nd month

  • BEIJING, March 26 (Reuters) – Russia is still the  largest crude oil supplier to China in February, 2018, data showed on Friday, since  January and for the past two years on an annual basis.

  • Russia supplied 5.052 million tonnes, or 1.32 million barrels per day (bpd) last month, up 17.8 percent from a year earlier, data from the Chinese General Administration of Customs.

* Saudi Arabia regained No.2 ranking, Feb supplies 1.21 mln bpd

* Jan-Feb supplies from Russia up 20 pct on yr

U.S. drillers added seven oil rigs in the week to April 13, 2018, bringing the total count to 815, the highest since March 2015, General Electric Co’s Baker Hughes energy services firm said in its closely followed report on Friday.

Source: https://oilprice.com/Energy/Energy-General/Russia-Gets-415-Billion-Boost-From-OPEC-Deal.html

https://www.reuters.com/article/us-china-economy-trade-crude/russia-remains-chinas-top-oil-supplier-as-pipeline-expands-idUSKCN1G808M

NEWS

After fears that a U.S.-China trade spat could hurt demand fizzled, heated geopolitical stress kept investors on their toes. U.S. President Donald Trump warned America was preparing to strike Syria, and top oil exporter Saudi Arabia intercepted ballistic missiles fired by Yemeni rebels. OPEC Secretary-General Mohammad Barkindo said he was concerned about the “geopolitical premium re-emerging in the price” of oil.

“It’s showing there is life in general in this sector that’s worth coming into,” Petersen said. “You combine that with the fact that, yes there is volatility, but also the outlook is generally bullish, it makes the sector more attractive for some long positioning and for some risk.

Bets on Brent

Net-long position reached 632,454 contracts in week ended April 10, most in ICE Futures Europe data going back to January 2011.

Longs rose 3.5 percent to 665,130

Shorts rose 5.9 percent to 32,676

Video: https://www.cnbc.com/2018/04/12/oil-markets-us-crude-brent-set-for-highest-weekly-gain-since-july.html

Russia to find solutions to maintain its share of the western crude market

We mentioned in our previous bulletin that the quality of the Urals crude Oil traded in western and European countries had been decreasing since the end of 2017/beginning of 2018. The Urals blend has seen a gradual sulfur content increase with blends hitting 1.8% sulfur content in some baltic ports such as Ust-Luga or Druzhba, the maximum content allowed for the blend.  while European refiners are complaining about the decreasing quality of the Urals blend, Russia has to find solutions to maintain its share of the western market while continuing to increase its exports to the east.

Urals Sulfur Content from Baltic Sea Ports Exports

Source:https://www.platts.com/latest-news/oil/moscow/russia-to-target-fading-urals-crude-oil-quality-26903690

One of the solution proposed by Transneft, in order to solve the quality problem of Urals western flows would be to implement a new oil quality concept for a 2018-2020 horizon in conjunction with the Russian ministry and oil companies.

Transneft  also proposes the redistribution of sour crude production growth between the export flows and therefore adapt the sulfur allowance threshold of different baltic ports

  • Primorsk Port: from 1.41% to 1.63%. Normal content: 1.55%

  • Druzhba + Ust Luga: from 1.61% to 1.8%. Normal content:1.75%

  • Novorossiysk: from 1.34% to 1.55%. Normal content: 1.5%

as well as to increase the sulfur content for Russia’s refineries receiving crude oil from export flows.

Transneft  planned on increasing its supply of low sulfur crude oil to China by 10 million tonne in 2018. This increase in supply of low sulfur oil will be ensured by redirecting resources used for western flows as well as central russia refineries.

Sources: https://www.platts.com/latest-news/oil/moscow/russia-to-target-fading-urals-crude-oil-quality-2690369

http://www.en.transneft.ru/news/view/id/14742

Vitol chairman: Opec will need to extend cuts into 2019 at  the FT Commodities Global Summit in Lausanne


The oil surplus caused by an increase in US shale oil production, has forced Russia and OPEC to make alliance to cut oil production in 2016 till end of 2018. The strategy has paid off moving oil price from $30 a barrel in early 2016 to above $65 a barrel this year.

However, it said that US shale industry, will overtake both Opec Kingpin Saudi Arabia and Russia as the largest crude producer this year. During the FT Commodities Global Summit in Lausanne in march, Vitol chairman call opec and Russia to keep oil production cut into 2019.

Despite the excess in supply, commodity firms such as Vitol, Glencore and Trafigura did perform well by putting on profitable storage trades and financing cash-strapped producers. According to other trading executives at the conference, the oil market is more and dominated by big firms with size and scale critical to maintaining profitability in a market characterised low margin. According to Mercuria chief executive, Marco Dunand, the industry might see more mergers and deal activity. Trafigura chief executive added that only large oil traders are likely to expand in order to adapt to markets. Therefore, the big company will get bigger and bigger.

source: https://www.ft.com/content/df14fca2-2c51-11e8-9b4b-bc4b9f08f381

Sugar price fluctuations

As we can see, prices are still very low for example the N°11 futures contract representing the world benchmark for the raw sugar market.

As we can observe, the spot price is the lowest since September 2015. Sugar is clearly in a bearish market. Since the beginning of 2017, the end of quotas in Europe is one of the reasons on why the price has dropped. As it is an agricultural commodity, sugar is also subject to seasonable and cyclical factor combined with the oversupply prices have drown down. The oversupply is said to be the result of good weather conditions and favorable government policies.

PS: Price is in USD per LBS

The curve shows a carry and prices increases over time due to the rational price assumption e.g. carrying cost. The curve shows very little impact on seasonality.

Bunge is struggling to leave the sugar industry

Bunge is one of the top producers of sugar and ethanol in Brazil. Their 8 sugarcane mills offer a combined 20 millions metric tons production capacity (ethanol and sugar). After a loss in the fourth quarter of 69$ million, Bunge’s move to exit sugar trading is harder than expected as they are struggling to sell their sugar trading operations. The lack of buyers illustrates the current situation of the sugar market where the supply glut has driven down prices.

What is the reaction of ABCD?

Archer Daniels Midland (ADM), Bunge, Cargill and Louis Dreyfus have all reacted differently to the actual situation. As said previously, Bunge wants to leave its sugar trading operations to focus on agribusiness, foods, grains and oilseeds. As for the others, ADM did it earlier and wound down its global trading unit in 2015 while Cargill did the opposite by doing a joint venture with Copersucar (Alvean) to become the largest sugar trader. Finally, Dreyfus is experiencing years of losses after restructuring with its sugar subsidiary in Brazil. However, all three companies have been investing in higher-margin businesses such as food ingredients.

Sources:

https://www.investing.com/commodities/us-sugar-no11

https://www.reuters.com/article/us-bunge-sugar-sale/pressure-builds-on-bunge-with-struggle-to-give-up-sugar-idUSKBN1H527S

https://tradingeconomics.com/commodity/sugar

https://economictimes.indiatimes.com/news/economy/foreign-trade/sugar-mills-unlikely-to-get-export-subsidy/articleshow/63777471.cms
https://economictimes.indiatimes.com/news/economy/agriculture/sugar-production-at-299-80-lakh-tonne-as-of-april-15-isma/articleshow/63798632.cms
http://marketqview.com/forwardcurvechart.php?ID=77&TYPE=Price

Cocoa Price in GBP/MT as of April 18th 2018

The price

The price as of 18th April 2018 was at 1,790 GPB/MT.
The graph shows a price fall after the 26th March due to the “Abidjan Declaration” (see below), but it is also due to the decrease of demand after Easter. Then on the 16th the price rose again because the Citigroup announced that the grind in Europe rose by 5.5% more than expected during the first quarter. The processing was higher than chocolate confectionary demand meaning that the cocoa consumption is bigger than forecasted and could lead to a shortage of supply. Traders are still waiting to see if the trend of Europe is followed by North America and Asia to have a better picture of the world demand which would lead to a higher rise in the price of cocoa.

The Abidjan Declaration

On the 26th March 2018, Ghana and Ivory coast which represent 60% of cocoa world supply have signed a pact to control the cocoa sector. “The Abidjan Declaration” purpose is the control of prices which have fallen by 40 %, and has strongly impacted the income of millions of cocoa producers. This strategic partnership addresses challenges of cocoa sector and put an end to smuggling. The declaration includes eight commitments, amongst them this one could highly impact the market in the coming years:

“N°6: The commitment by the two countries to process a major part of cocoa, and the invitation of the private sector,
notably the African private sector, to invest massively in cocoa processing in Africa.”


London Cocoa Futures in USD/MT as of April 17th 2018

http://www.marketqview.com/forwardcurvechart.php?ID=14&TYPE=Price

Info: Ivory Coast
Main crop : October-March => harvest: starts in March
Mid crop : May- August => harvest:
starts in August/September

The first part of the forward curve is inverse. The reason is the fear of cocoa shortage due to Citigroup’s announcement, which puts upward pressure on demand and on the spot price. Then, from July to September the curve is a carry due to the above-average rainfalls in April in Ivory Coast that will boost cocoa mid-crop with a higher quality than usual and secure supply. From September the curve is inversed again due to seasonality: the mid-crop in the top producing countries is harvested in August/September, but its quality is usually lower than that for the main crop, so grinders and traders are not so interested in buying forward these cocoa beans, which explains the low future prices for that period.

Cocoa traders should be able to use this forward curve to make profits, by buying July 2018 cocoa futures and selling September 2018 futures, thus taking advantage of the carry from July to September. Therefore we recommend traders to hold a long position on July futures and short position on September futures to take advantage of the carry from July to September 2018.



Authors: Sothea, Isabelle and Cindy

References:

https://af.reuters.com/article/commoditiesNews/idAFL8N1RV36K

https://af.reuters.com/article/ghanaNews/idAFL8N1RM3W0

http://citifmonline.com/2018/03/27/ghana-cote-divoire-sign-strategic-pact-control-cocoa-sector/

https://news.abidjan.net/h/634810.html

http://www.commodafrica.com/22-03-2018-cacao-en-cote-divoire-possible-baisse-de-la-recolte-et-du-prix-au-producteur-pour-la

https://www.agrimoney.com/commodities/european-cocoa-grinders-make-record-start-to-2018-58678

https://www.ft.com/content/09f48faa-4246-11e8-803a-295c97e6fd0b

The largest producer “Inpanema Coffee” focused on super-premium coffee beans following the trend in the demand, for traders it could mean a shift in the way the beans are transported because high quality beans often goes with very fragile ones. Also, the size of the harvest forecasted thanks to unique condition, would certainly decrease the price of that premium coffee which in the end would render its production less attractive to new producers. However, thanks to its new technology, Ipanema will be able to dry the beans at its new facility rendering it easier to transport.

Why are producers ready to switch their production? Of course, for better margin, micro-lot hand-harvested coffee can be sold as much as $736 per 60kg vs $147.2 per 60kg for normal one. As mentioned the difference in the technique of harvesting which is automatic for normal one against manual for high-premium coffee.

https://www.bloomberg.com/news/photo-essays/2018-04-12/brazilian-coffee-farms-focus-on-super-premium-beans-big-harvest

Louis Dreyfus invested $50’000 in the World Coffee Research, it perfectly demonstrates the shift in the role of traders in the supply chain where they cannot be simple merchant anymore and where they need invest to help producers. It is even more accurate for the coffee market considering that it is composed of small and family producers. However, this sum may seem trivial for LDC.

http://www.ldc.com/blog/in-field/ldc-commits-funds-world-coffee-research/

Volcafé, trading arm for coffee of ED&F Man, invested in a program with the roaster company Tchibo in Colombia, this collaboration shows the different relations in the supply chain.

http://www.edfman.com/news/959-tchibo-idh-increase-coffee

Those exports go principally to Europe and the USA where the coffee beans are consumed and where the demand for premium coffee is the strongest.

These numbere did not vary much from last bulletin.

(the orange curve is prices as of 12.04.2018)

(orange curve is prices as of 12.04.2018)

On the first forward curves, there is no difference. Nevertheless, on the second one there is a major change in the market structure, as it became Carry on the second part. It shows perfectly that harvest are forcasted as even higher than last year so it is to signal to the market that it is ok to store. The Inverse shape at the beginning could have to explanation according to us, unfortunately we did not find numbers to back it up, : First, the current stock are low so the convenience yield is high (very low probability), second the as the market would be soon abondant it is an incentive for supplier to sell their current stock to make room for the new one(high probability).

Prices

No great variation from last bulletin.

Forward curves

Prices are in USD for 1 gallon

Prices are in USD for 1 metric ton (264 gal.)

Vitol storing in tankers

European trader Vitol is storing gasoline on tankers offshore Singapore, for the first time since 2016. The vessel can carry the equivalent of about 800,000 barrels of gasoline.

Since the start of 2018, gasoline market has been in a contango structure. This month, the contango between March and April prices widened to as much as 50 cents a barrel. In 2016, traders including Vitol, Unipec, Total and Gunvor were storing gasoline aboard vessels off Singapore as the contango deepened to $1 a barrel. So far, Vitol is the only company storing fuel, the sources said. Typically, traders can store fuel in a contango market in expectation of the later rising prices, but the current contango does not justify, according to the sources.

Vitol and Iran

According to Vitol forecasts for 2018, there is a strong demand for crude oil, which will be reflected in the price of gasoline and diesel fuel.

In 2017, Vitol financed Iran for 1 billion dollars on the future exports of oil and refined products but with the current tensions on the Iranian nuclear projects which could lead to a possible American veto – and the war which is played between the Saudi Arabia and Iran in Yemen – it may put Vitol’s investments in Iran at risk.

EIA considers that the summer season for gasoline and diesel starts in April and it ends in late September. Gas prices will be higher than last year because the price of crude has increased and we can also see a seasonality. Because gasoline taxes and retail distribution costs are generally stable, movements in gasoline and diesel are the result of changes in crude oil prices and wholesale margins.

Trade flow : Imports and exports

According to the Business Times : “BRAZIL fuel imports are set to fall from a record as the country’s state-owned oil company lowers prices in a bid to regain market share.

Petroleo Brasileiro SA, which owns 13 out of the 16 refineries in the country, cut the prices of diesel by 47 per cent and petrol by 38 per cent at the refinery gate since January. As a result, diesel imported from the US and petrol from Europe arrives at higher prices than the locally produced fuels.”[1]

Petrobras is going from an extrem to another: the last year the company made a record on petrol and diesel imports and now it is completely stopping the imports and falling the prices to gain market share.

It could be due to an economical struggle related to actual political tensions. Whereas according to the Business Times the reason is the following: “After reporting losses from mismanagement and because of a corruption scandal known as Carwash that started in 2014, the company in 2017 stepped up its policy to align domestic prices with those of the international market. The policy was partly to discourage competition but at first, this did not work.”[2]


[1] https://www.businesstimes.com.sg/energy-commodities/brazil-fuel-imports-to-fall-from-record-as-petrobras-cuts-prices-0

[2] Idem 1st

References

https://businessmirror.com.ph/oil-firms-cut-gas-diesel-pump-price-on-tuesday/

https://www.nytimes.com/reuters/2018/04/02/business/02reuters-china-cnpc-gasoline.html

https://www.nytimes.com/reuters/2018/03/28/business/28reuters-gasoline-singapore-demand.html

https://www.reuters.com/article/us-china-cnpc-gasoline/chinas-cnpc-sells-first-gasoline-to-americas-as-fuel-stocks-hit-record-idUSKCN1HA04K

https://www.ft.com/content/46baed0e-30de-11e8-b5bf-23cb17fd1498

https://businessservices24.com/175218/global-automotive-lubricants-market-study-2018-lukoil-idemitsu-kosan-jx-group-and-valvoline/

www.menafn.com/1096700573/The-Global-Kerosene-Sector-Was-Valued-At-149-Billion-In-2017-According-To-TBRCs-Latest-Report

https://www.trafigura.com/our-services/oil-petroleum-products/gasoline/

https://www.businesstimes.com.sg/energy-commodities/brazil-fuel-imports-to-fall-from-record-as-petrobras-cuts-prices-0

https://uk.reuters.com/article/angola-oil-products/angola-awards-gasoline-diesel-import-tender-to-glencore-total-idUKL8N1QY5B6

Bulletin Corn & Wheat number 2

As of the 9th of April, a bushel (8 gallons) of corn is priced at 3.9075 USD and a bushel of wheat is at 4.9075 USD.

Wheat spot price

Corn spot price

Wheat Future Price

If we look at the wheat forward curve, the market is in a contango. It is important to note that we will be soon harvesting winter wheat (planted between August and September). The total harvested will have an impact on the spot price and the forward curve can change (due to the fundamental of supply and demand.).

Corn future price

Here, the market is also in a Contango. However, we can see a price fall from the July contract to the September contract. Corn is much more sensitive to seasonality. First of all, for the commodity of wheat, the forward curve is more stable because of the existence of winter wheat and spring wheat (allows a more regular and predictable inventory). For Corn, 50% of world supply is from the U.S.A and China. Harvesting is around October so before that, prices should be at the highest before going down due to an increase in supply.

WAR ON TARIFFS

The US-China trade dispute continued to reverberate around the international agricultural market. As the president of China, Mr. Jinping Xi said, China may apply for tariffs on US imported products. Indeed, China’s Ministry of Commerce said it plans to impose 25% duties on the agricultural products such as soybeans and many others, including corn and wheat. Xi Jinping’s government would target the commodities that it buys in huge quantity to feed porks. This move could be very harmful to the two biggest grain trader ADM and Bunge, which are headquartered in the US. This war could benefit other producing countries such as Russia or Brazil who was the main source of oilseed import for China last year. Hopefully, for ADM, the company bought 50% of a Russian based company Aston Foods and Food Ingredients. This acquisition might give a small advantage to ADM, which by the way prospect to take over Bunge. The war just began and not only between US and China.

Sources:

http://marketqview.com/forwardcurvechart.php?ID=90&TYPE=Price

http://marketqview.com/forwardcurvechart.php?ID=19&TYPE=Price

https://www.thebalance.com/wheat-planting-and-harvest-seasons-809321

https://www.thebalance.com/corn-planting-and-harvest-seasons-809309

https://www.bloomberg.com/news/articles/2018-04-04/china-to-levy-25-tariffs-on-u-s-soybean-imports-cctv-reports

Baltic dry index – Price

https://www.bloomberg.com/quote/BDIY:IND

Price (as of April 6th, 2018)

In only a few days BDI and most other indexes lost hundreds of points reaching their lowest value in a year. The shift in prices is believed according to various sources to be the cause of various news that impacted the market recently. The most obvious one is the current US-CHINA war on trade. The market is fragilized because depending on the outcome, routes may significantly change in order to satisfy the new demands of China. Furthermore, some recent research has proven that there is a “dual casuality of BDI and commodities” meaning that changes in the commodities market highly influence indexes such as BDI hence the US-China trade war has a double impact in the BDI index.

Another reason for the current price could be oversupply. According to hellenic shipping news, indicator seem to show a “robust flow of new orders” in a market believed to be tight and expected to either stagnate or decrease.

Finally, the overall sentiment in the dry bulk market is bullish for the long-term. However, things can changes quiet rapidly, as we have evidence a a surge in newbuilding orders, since the beginning of the year, so this will change the supply and demand balance.

Supply and Demand

Regarding the demand and supply of dry bulk, the first quarter of any year represents a challenge for the shipping industry with fewer cargoes being tendered and the Chinese new year in February which creates some business issues.

In terms of freight rates, the positive development of the second half of 2017 came to an end in December 2017, when capesize earnings peaked at US$ 30,475 per day. In January 2018, average capesize earnings were quoted at just USD 14,065 per day.

By the end of January, the freight rates for all sizes of dry bulk carriers were at break-even levels, but not turning profitable. During Chinese New Year, for dry bulk shipping it marks volatility, and a fall in demand during this holiday.

https://www.bimco.org/news/market_analysis/2018/20180220_drybulksmoo_2018_01

This graph demonstrates the different dry bulk carriers average earnings per day, in US$.

As we can see on the graph, prices in 2017 were much higher than previous years, partly due to the the massive substitution of Chinese-origin iron ore, the country favoring imported higher quality ore from Brazil and Australia instead. China’s political initiatives to improve energy-efficiency and to provide cleaner air for the population led to the use of higher quality imports to limit the energy needed and emissions generated in the production process.

In 2017, the overall ton miles demand grew by 5.1% (source: CRSL), powered by a massive lift in Chinese imports once again. Imports saw seaborne iron ore demand go up by 4.7%, and seaborne coal imports lifted by 12%.

Trading Hot Topic
Drewry: Owners Concerned about Meeting New Bunker Standards (Published on April 9th on World Maritimes news website)

The International Maritime Organization has adopted new regulation to control air pollution from ship. These regulations will enter into force on January 1st 2020. The organization has set new limit for Sulphur content of ships’ fuel oil of 0.50% m/m (mass by mass). The current global limit is of 3.50 % m/m.

According to Drewry[1]’s survey, ship-owners are showing concerns over this new standard.

In order to comply to this new regulations, ship-owners must decide whether to install scrubbers, switch to LNG propelled ships or simply bear the extra cost of using more expensive compliant fuel.

A quarter of the ship-owners interviewed think that the regulation would need to be extended because of a lack of readiness. Indeed, they are worried of the availability of low Sulphur fuel, the scrubber installation, and of further changes to legislation.

The majority of the ship-owners (66%) interviewed have affirmed that their solution for compliance was to use low-Sulphur fuel. The other major part thinks of installing scrubbers.

The IMO is expected to produce a set of guidelines to owners later this year, in which they will clarify the tolerance levels for non-compliance.

“Meeting the new bunker standards is a very real concern to many owners and the sooner the IMO can provide clarity on its enforcement the better. Owners must brace themselves for additional opex and capex costs associated to the legislation,” Drewry said.

1. Drewry is an independent maritime research consultancy offering market insights and advisory services to senior stakeholders across the global shipping industry.

Maritime important routes

https://worldmaritimenews.com/archives/212097/top-five-panamax-bulker-trade-routes/

Few reminders about Panamax Bulkers:

●      About 60 000 – 80 000 deadweight

●      About 200 – 240 meters long

●      Carry coal, iron ore, grain, etc.

VesselsValue has put together a report showing the evolution of the top 5 Panamax Bulker routes based on the total ton miles carried.

One interesting thing to see on this graph is the switch from a domination of Brazil-China routes to USA-China routes in the first quarter of 2014. These route mainly cover grain trade, especially soybeans. The main soybean export competitor of Brazil is the USA, and due to a better harvest in 2014 and 2015, the USA could offer lower prices for export which increased their sales to China. The same years, Brazil endured bad harvest due to weather incidents. These are the causes of such a switch in the main trade routes of Panamax during this period.

“The evolution of the top 5 trade routes for Panamax bulkers can be measured through the billons of ton miles, the laden distance travelled multiplied by the amount of cargo carried for every vessel in the fleet, moved from country to country over time, VesselsValue said.”

Major Bulk carrier routes:

http://maritimesa.org/grade-10/types-of-bulk-carriers/

This first graph shows the main routes for coal trade.

It is interesting to see that even though China is one of the biggest coal producer in the world, there is no main route leaving China for other continents, but many roads have their final destination there. It is again a proof of major development of the country and their need for coal in their constructions and manufacturing. It seems that China is not that concerned about its carbon dioxide emissions (which is contradictory with their cut in aluminium production in winter, as we have seen in previous aluminium bulletins)

These two graphs show the major bulk trade routes for grains. Not surprisingly, North America has two of the major loading areas (Pacific, Atlantic, and Mississippi), as they are, taking the example of wheat, number 1 exporter in the world, followed by Canada, Russia, and Australia.[1]


[1] http://www.worldstopexports.com/wheat-exports-country/

On this graph, we can see the major trade routes for Iron Ore. During 2016, the major importers were China with 67.8% of total iron ore imports (purchases valued US$57.1 billion), Japan with 8.7%, and South Korea with 4.8%. They are then followed by European countries (10.6%)[1].


[1] http://www.worldstopexports.com/iron-ore-imports-by-country/

Major crude oil routes:

http://maritimesa.org/grade-10/crude-oil-tankers/

Arabian Gulf to:

●      Europe (Via Suez or Cape)

●      North America (Via Suez or Cape)

●      Japan

●      Korea

●      China

●      India

●      Singapore

North Sea to:

●      Europe

●      North America

Black Sea to:

●      Europe

●      North America

●      Asia (Via Suez)

West Africa (especially Angola & Nigeria) to:

●      Europe

●      North America

●      Asia

Venezuela to:

●      Europe

●      North America

●      South America

Brazil to:

●      Europe

●      North America

●      Asia

Alaska to:

●      West Coast, North America

●      West Coast, South America

●      Asia

North Africa to:

●      North America

●      Europe

●      Asia (via Suez)

News

1. Shipping Worried As World Trade Tensions Escalate (hellenic shipping news)

China’s Customs Tariffs Commission announced on March 31st the execution of reciprocal tariffs of 25% on 128 goods imported from the US. The import duties will be on fresh and dried fruits, ginseng, nuts, wine, pork and certain steel products. These measures had taken effect on Monday April 2nd, 2018, and are a response on the US tariffs on metal announced by the President Donald Trump in March.

The value of these import tariffs are valued at around US$ 3 billion which represents a small portion beside the US plan to stamp a 25% import duty on a basket of goods valued at 60 billion in 2017 ( steel and aluminum).

Both parties are looking for an agreement that could help both side. The US president is seeking to get China to agree to reduce the bilateral trade between the US and China by US$ 375.25 billion).

Impact on maritime trade

In 2017, the USA shipped 57’000 containers (containing soybeans) to China with a 25% tariffs there are great chances that they ship less this year, so less containers.

The effect of this trade war between China and the USA on shipping will depend on the willingness of Americans to pay a higher price for Chinese products or the ability of Chinese manufacturer to find other buyers.

Sizing Up China’s Bulkcarrier Fleet

The global bulkcarrier fleet has expanded rapidly, more than doubling between 2008 and 2018. China has played a significant role, they own nearly a quarter of this increase.

China’s role

China is the 3rd largest bulkcarrier owning nation behing Greece and Japan. They reached this position due to their important order for iron, ore, coal and grain. Indeed, it gave incentives to bulk owners to order more vessels.

Sources:

“Drewry: Owners Concerned about Meeting New Bunker Standards”. World Maritimes News [online]. 9 April 2018. (Viewed 9 April 2018).  Available from:https://worldmaritimenews.com/archives/249062/drewry-owners-concerned-about-meeting-new-bunker-standards/

KRIGSLUND, Niklas, 2017. “Bulk rates soared in 2017 thanks to China”. Shipping Watch [online]. 27 December 2017. (Viewed 6 April 2018). Available from: https://shippingwatch.com/carriers/Bulk/article10149613.ece

“Sizing Up China’s Bulkcarrier Fleet”. Hellenic Shipping News [online]. 4 April 2018. (Viewed 6 April 2018). Available from: https://www.hellenicshippingnews.com/sizing-up-chinas-bulkcarrier-fleet/

ROUSSANOGLOU, Nikos, 2018. “Shipping Worried As World Trade Tensions Escalate”. Hellenic Shipping News Worldwide [online]. 6 April 2018. (Viewed 8 April 2018). Available from: https://www.hellenicshippingnews.com/shipping-worried-as-world-trade-tensions-escalate/

“China Urges More Trade Talks as Tariffs on U.S. Goods Begin”. Bloomberg News [online]. 1 April 2018. (Viewed 8 April 2018). Available from: https://www.bloomberg.com/news/articles/2018-04-11/pboc-s-yi-pledges-more-steps-to-further-open-china-s-economy

TEJADA, Carlos, and RUSSEL Karl, 2018. “The U.S. Wants to Take On China With Trade. The Rest of the World Will Be Caught in the Middle.” The New York Times  [online]. 6 March 2018. (Viewed 8 April 2018). Available from: https://www.nytimes.com/interactive/2018/03/06/business/china-tariffs.html

“Sizing Up China’s Bulkcarrier Fleet”. Hellenic Shipping News Worldwide [online]. 4 April 2018. (Viewed 8 April 2018). Available from: https://www.hellenicshippingnews.com/sizing-up-chinas-bulkcarrier-fleet/
“Types of Bulk Carriers”. Maritime Studies South Africa (online). (Viewed 7 April 2018). Available from: http://maritimesa.org/grade-10/types-of-bulk-carriers/

“Wheat Exports by Country”. WTEx (online). (Viewed 9 April 2018). Available from: http://www.worldstopexports.com/wheat-exports-country/

“Iron Ore Imports by Country”. WTEx (online). (Viewed 9 April 2018). Available from: http://www.worldstopexports.com/iron-ore-imports-by-country/

SMITH, Aaron, 2018. “Shipping industry braces for Chinese trade war”. CNN [online]. 5 April 2018. (Viewed April 6 2018). Available from: http://money.cnn.com/2018/04/05/news/shipping-industry-chinese-tariffs/index.html

“Frequently Asked Question”. The International Maritime Organization (IMO) [online]. (Viewed 8 April 2018). Available from: http://www.imo.org/en/MediaCentre/HotTopics/GHG/Documents/FAQ_2020_English.pdf

“Top five Panamax Bulker trade routes.” World Maritime News (online). (Viewed 6 April 2018). Available from: https://worldmaritimenews.com/archives/212097/top-five-panamax-bulker-trade-routes/

“DRY BULK SHIPPING: Q1 REQUIRES CAREFUL HANDLING AS SEASONAL CARGO DEMAND DROPS“. Bimco (online). (Viewed 9 April 2018). Available from: https://www.bimco.org/news/market_analysis/2018/20180220_drybulksmoo_2018_01

(1 MMBtu = 28.263682 m3 of natural gas at 1°F)

We can clearly see the seasonality here. We observe the contango until Jan 2019 with a backwardation between Aug 2018 and Sep 2018 and from Jan 2019. Of course, the seasonality in this case is driven by demand, because production is continuous. Higher demand mean lower stocks and lower demand means higher stocks.

External environment is creating more opportunities for Natural Gas and LNG.
Demand for LNG is growing faster than expected. The reasons are : growing population, the aim to mitigate climate change and to improve air quality.
Growing economies need more and cleaner energy. For this reason, countries are using LNG for power generation and avoid using less clean energy sources like coal.
Asia’s demand for LNG is growing faster than in Europe or USA and is expected to continue to grow fast. The reason for this increase: China is switching from coal to gas to reduce local air pollution and still keep up their economic growth. In 2017, China is the second importer of LNG (behind Japan) with 38 millions tonnes.

MTPA : Metric Tonnes Per Annum
BCM : Billion cubic meters
BCMA : Billion cubic meters per annum
YoY : year over year
LHS : Left hand side
RHS: Right hand side


LNG Buyers are now signing shorter and smaller contracts. The mismatch between buyers and suppliers interests is growing.
LNG Buyers seek short-term sales so they can better compete in their own downstream and gas market. The reason, we suppose, is to use LNG to secure imbalance of supply and demand in domestic gas market.

China needs more and more natural gas due to the President Xi Jinping’s clean-air goal. China has planned to more than triple storage capacity by the end of the next decade. Indeed, China has a storage capacity equivalent to 3.3% of its total demand. That is about 7.8 BCM. By 2020, the country would like to increase that storage to 14.8 BCM and 35 BCM by 2030.
In liquid form, gas volume is about 600 times smaller than in gaseous state and it is much easier to transport. So we think, they will probably build the infrastructure (terminals) to liquefy and gasify their natural gas.

As the consumption in winter is about ten times higher than in summer, the demand for natural gas and its price double in winter. Therefore, it is essential and strategic for China to increase its storage capacity.


CNPC operates 10 of the country’s 13 storage locations. This past winter it supplied 7.41 BCM from storage, or about 4.9% of its sales. The company is renovating its current facilities and building seven additional ones in a bid to increase its capacity to 15 BCM 2025. Moreover, CNPC will spend USD 3.3 billion to build eight new storage facilities in Sichuan and Chongqing, adding 21 BCM of capacity.

For traders, this means that they should continue to keep an eye on China for at least one more decade.

Sources:

https://www.lngindustry.com/liquid-natural-gas/20032018/china-needs-more-space-underground-to-store-gas/

https://www.shell.com/energy-and-innovation/natural-gas/liquefied-natural-gas-lng/lng-outlook/_jcr_content/par/textimage_864093748.stream/1519645795451/d44f97c4d4c4b8542875204a19c0b21297786b22a900ef8c644d07d74a2f6eae/shell-lng-outlook-2018-presentation-slides.pdf

https://www.reuters.com/article/us-shell-lng/lng-market-needs-200-billion-investment-to-meet-demand-shell-idUSKCN1GA1ZH

https://www.shell.com/media/news-and-media-releases/2018/shell-sees-potential-lng-supply-shortage-as-global-demand-surges.htmlhttps://www.eia.gov/energyexplained/index.cfm?page=natural_gas_lng