Category: Uncategorized

Iron ore spot price

According to Metal Bulletin, the spot price for benchmark 62% fines tumbled 8.4% to $64.25 a tonne, its largest one-day percentage drop since April 12 last year.

It is the largest recorded declines in the era of spot pricing for lower and higher grades ore too.

The prices are declining for several reasons, the first one is the steel entering a bear market, and in consequence, the steel prices decrease, it means that the margin for steel mills are decreasing almost to nothing. To counter that, steel mills in China produce steel with low-grade iron ore, which is cheaper. Unfortunately, it is the first time since three year that Chinese mills report losses.

Moreover, today, china has less incentive to produces steel and the producers are offloading existing inventory in the market.

Future of iron ore

Based on a report from iron ore and steel data Analytics Company, they found out that steel mills are putting pressure on iron ore producer to decrease there price in order maintain their margin.

The steel mills are hedging their forward production profit margin because they expect higher production due to less sintering cuts from the government.

It means that with demand of steel decreasing because of the cold season, however in the first quarter 2019, the mills will increase production can maintain their profit margin by buying input at lower price.

The future contract of iron ore are down warding slopping because it reflect the steel industry future contract such as steel rebar and steel scrap

Like iron ore, that’s also been reelected in coking coal and coke futures on Monday with the most actively-traded contracts sitting at 1,289 and 2,137 yuan respectively, down from 1,321.5 and 2,170 yuan on Friday evening.

Steel futures are also under pressure with rebar and hot-rolled coil prices sitting at 3,575 and 3,397 yuan respectively, off Friday’s night session close of 3,627 and 3,465 yuan.

($1 = 6.9499 Chinese yuan)

Recommendation

We should go long, we are expecting to see the price decline due to the rise of iron ore production. Indeed, according to the Fitch Solutions Global Iron Ore Supply and Demand Outlook Report, the iron ore’s output will increase from Brazil and India from 2018 to 2027. Thanks to their new mining infrastructure.

References

Els, F. (2018). Iron ore price craters 8% | MINING.com. [online] MINING.com. Available at: http://www.mining.com/iron-ore-price-craters-8/ [Accessed 28 Nov. 2018].

Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Contracts – Investing.com. [online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-contracts [Accessed 28 Nov. 2018].

Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Contracts – Investing.com. [online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-contracts [Accessed 28 Nov. 2018].

Lme.com. (2018). London Metal Exchange: LME Steel Scrap. [online] Available at: https://www.lme.com/Metals/Ferrous/Steel-Scrap#tabIndex=2 [Accessed 28 Nov. 2018].

MINING.com. (2018). China iron ore hits 4-1/2-month low, steel market under pressure | MINING.com. [online] Available at: http://www.mining.com/web/china-iron-ore-hits-4-1-2-month-low-steel-market-pressure/ [Accessed 28 Nov. 2018].

Scutt, D. (2018). Iron ore is in free-fall. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/iron-ore-price-collapse-china-steel-production-profits-2018-11 [Accessed 28 Nov. 2018].

 

Main hubs of natural gas

Let us starting with an introduction about the meaning of a gas hub. A gas hub is a central infrastructure networks for natural gas when transported through pipelines and for liquified natural gas when transported through vessel. This network is used as central pricing point for the stakeholders.

Henry Hub is the US benchmark for natural gas and considered as the biggest natural gas hub. The second one situated in Europe is the Britain’s National Balancing Point (NBP) used as an the main indicator for Europe wholesale gas market. Finaly the Dutch Title Transfer Facility (TFF) which is mainly due to its huge Groningen onshore gas field and being the center of a large pipeline network. EAX hub stand for East African Commodity Exchange.

https://www.erce.energy/graph/uk-natural-gas-futures-curve

A Therm (thm) equal 100’000 British thermal units (Btu).

The graph above is taken from the National Balancing Point introduced before. It represents the future price from January 2019 to May 2025 taken at four different points in time. There are 3 trends that can be analysed. The first one being the seasonality which we have already seen last week, then the global trend in time and finally the variation of expectation from May compared to the three other months.

We can observe a global trend over time which is price decreasing. This fact is mainly due to the new American technology to extract gas named shale gas. The so called shale gas revolution allowed United States to change from gas importer in 2007 to an exporter in 2017 and expected to become a global LNG player. However, the decrease of price is quite low for the main reason that the Asian demand for the next 5 years is expected to grow for its low C02 gas emission and replace coal energy still largely used in China.

Finally, the variation of expectation from May compared to the three other months, from our point of view is due to the announcement of China to try to stop using coal and consume more natural gas as mentioned before.

Price movement, demand & supply analysis

From November 1st, 2018 until Friday November 16th, 2018, the price of natural gas has raised by 31%. The three reasons that demonstrate this increase are the winter, the current low inventories of this commodity and the drop in oil’s price. Indeed, the cold season is coming earlier and is colder. This season increases the demand of natural gas and LNG to heat homes.
The price of oil has dropped by 14% for the month to date (November 1st to November 16th, 2018). The reason is that companies which produce oil, LNG or NG are switching their production to natural gas in order to meet the huge and growing demand of this commodity. As a result, this switching is influencing the increase of 31% of natural gas.
On the supply side, US Energy Information Administration reported that total stocks stand at 3,247 trillion cubic feet, which is 528 billion cubic feet lower than the prior year at the same period. Inventories are facing a storage deficit which makes the price subject to be greater than previous years.

As a whole, the demand and supply side effects seen above influenced the price movement of NG and LNG. Until the end of the year, the demand will push the price higher, in a quickly or gradually way. This could be seen also on the future contracts which show an increase until the end of the cold season (between February and March 2019).

We recommend in a short period to be prepared to sell LNG and NG because the spot price will certainly show a backwardation against the forward price.
Until the end of the winter (long-term period), we also recommend to sell LNG and NG, knowing that the houses would be frozen by the cold, the spot price will be higher than the forward price.

Anecdote

Storage of natural gas (in US):

Depleted natural reservoir (about 80%): Old reservoirs of gas that are empty: reused as a storage facility.

Salt caverns (about 10%):  Highly reliable because of the salt is very strong and retain gas well. Capital intensive.

Aquifers storage caverns (about 10%): Usually once a year because it is very capital intensive and to control.These types of storage facilities are usually used only in areas where there are no nearby depleted reservoirs. In normal times, facilities are operated with a one winter withdrawal period during high peaks. May be used to meet peak load requirements as well during other times (summer).

Total underground storage in US: about 10mio Cubic Feet

Above ground: Gas tanks: Very short term but easy to fill up and take from. In the pipelines: line packing (inject higher quantity through the pipelines) LNG: 1/600th of normal gas space, more flexible than pipelines (can change suppliers and/or sellers). Capital intensive ($billions).

Capacity in Million Cubic Feet

Sources

Caverns: Home. (2018). Underground Natural Gas Storage. [online] Available at: http://www.energyinfrastructure.org/energy-101/natural-gas-storage [Accessed  Nov. 2018].

Eia.gov. (2018). U.S. Underground Natural Gas Storage Capacity. [online] Available at: https://www.eia.gov/dnav/ng/ng_stor_cap_dcu_nus_a.htm [Accessed Nov. 2018].

SAEFOND, Myra P, 2018. “Natural gas will soon find more fuel to feed its rally”. Market Watch (online). November 18^th, 2018. (Consulted on November 20^th, 2018). Available to the following URL: https://www.marketwatch.com/story/natural-gas-will-soon-find-more-fuel-to-feed-its-rally-2018-11-16?siteid=rss&rss=1

Market Watch’s forward prices, 2018. “Recent contracts”. Market Watch (online). November 18^th, 2018. (Consulted on November 20^th, 2018). Available to the following URL: https://www.marketwatch.com/investing/future/ngf19

Market Watch’s Natural gas spot prices, 2018. “Natural gas (Henry Hub) in USD – Historical prices”. Market Watch (online). November 18^th, 2018. (Consulted on November 20^th, 2018). Available to the following URL: https://markets.businessinsider.com/commodities/historical-prices/natural-gas-price/usd/1.11.2018_19.11.2018

SAEFOND, Myra P, 2018. “Natural-gas futures drop further with weekly U.S. supply up 39 billion cubic feet”. Market Watch (online). November 15^th, 2018. (Consulted on November 20^th, 2018). Available to the following URL: https://www.marketwatch.com/story/natural-gas-futures-drop-further-with-weekly-us-supply-up-39-billion-cubic-feet-2018-11-15

HOGUE, Tom, 2018. “Q&A: What is a gas trading hub, and how are they established?”. Reuters (online). December 29^th, 2017. (Consulted on November 20^th, 2018). Available to the following URL: https://www.reuters.com/article/us-china-gas-exchange-q-a/qa-what-is-a-gas-trading-hub-and-how-are-they-established-idUSKBN1EN0I1

ERCE, 2018. “UK Natural Gas Futures Curve”. ERCE (online). (Consulted on November 20^th, 2018). Available to the following URL: https://www.erce.energy/graph/uk-natural-gas-futures-curve

ICIS, 2018. Comparing natural gas prices as Europe and Asia compete for US LNG”. ERCE (online). (Consulted on November 20^th, 2018). Available to the following URL: https://s3-eu-west-1.amazonaws.com/cjp-rbi-icis/wp-content/uploads/sites/7/2018/09/03034112/comparing-natural-gas-prices-as-europe-and-asia-compete-for-us-lng.pdf

USAID, 2018. Futures market a boosts for the EAX”. USAID (online). (Consulted on November 20^th, 2018). Available to the following URL: https://www.eatradehub.org/futures_market_a_boost_for_the_eax

In the 1^st Bulletin, when looking on the graph of ICO (International Coffee Organization) composite indicator price of green coffee beans of all major origins and type, we can notice a decrease that started in 2^nd of November (price of 116 cents/lb) continues to the 2^nd Bulletin until 13^th November (price of 108 cents/lb) and then stabilized from the 17^th of November (109 USD cents/lb).

1st Bulletin

2nd Bulletin

 

 

Therefore there is a decrease in the price which can be explained by the following:

The Brazilian currency real had strengthened comparing to the USD which meant the traders demand decreased while the supply level stayed stable and this sent the prices down.
In addition, According to the ICE the number of coffee future contracts this year so far has declined from 287,732 to 247,618[1] which confirms us the demand had decreased. (Explained in the 2 graphs below)

However, for this second bulletin, there was a smaller variation in the price comparing to the first bulletin. we can assume that the presidential election in the leading coffee export country, Brazil, still has a lower impact on ICO composite price indicator comparing to the 1st bulletin. There was a slight decrease in the price of 8 cents overall which is about 9% (116-108/116). We assume that enough time has passed after the recent elections in the Brazil, the political situation in Brazil stabilized and this can explain the decrease in volatility of the price of coffee beans there is slight price decrease as previously mentioned.

 

Forward curve

As we can notice in the forwards curve for Arabica and Robusta presented below, the correlation between these two graphs continues to be similar compared to our first bulletin.

The coffee market continues to be a Carry market – the cash price today is lower than the futures prices in a stable trend which we assume it is due to lack of impactful news and events.

There was a slight decrease in the spot prices for Arabica beans that are represented by the first point in the forward curve .
There was a steeper decrease in the spot prices for Robusta beans that are represented by the first point in the forward curve .

 

 

 

 

Coffee Terminal Markets Explanation:
There are two major terminal markets for the coffee commodity which are the following:

1. The most active terminal market is without doubt for the Arabica coffee as it is the most exported worldwide (around 70%) represented by the “US Coffee C” contract and traded on the ICE
2. Robusta coffee contracts are traded on the “London-based London International Financial Futures and Options Exchange known as “LIFE” and which is owned by the ICE.

In order to be accepted in those terminals, there is a need for a testing grade as well as cup testing for the flavor and the ICE establishes a “standard” with using certain coffees.

Interesting trends in the Coffee Sector: Reviving Colombians Coffee Culture

Article: “In Colombia, kids learn barista skills with the goal of saving the country’s coffee culture”
The article speaks about the goal of Colombia, one of the leading export country of coffee, in motivating and getting children invested in the coffee industry and profession. In fact, there are some general issues that decrease the interest to enter the industry such as “farmers’ low coffee prices, climate change, and a rapidly aging coffee workforce” These threat the future of coffee sector in Columbia.
According to Colombian Coffee Growers Federation, there are only 10%[1] of Colombian coffee farmers currently looking at coffee as a business for the next generation. This means that the younger generation do not believe in coffee business as a way of life. This can be a huge problem in the next 15 to 20 years for the whole coffee supply as the country represents high market share and as the demand for coffee is constantly increasing (supply-demand unbalances). In addition, we can see the same issue in other producing countries such as Tanzania and Uganda, important coffee exporters, where the average age of coffee farmers is 5 to 6 years older than other farmers.

References:

https://www.nbcnews.com/news/world/colombia-kids-learn-barista-skills-goal-saving-country-s-coffee-n937466

https://www.theice.com/products/15/Coffee-C-Futures

https://www.theice.com/products/37089079/Robusta-Coffee-Futures

https://forexfocus.com/commodities/coffee-futures-trading-in-a-narrow-range/

https://seekingalpha.com/article/4221712-coffee-retreats-higher-low-will-build-base

http://www.ico.org/prices/pr-prices.pdf

https://tradingeconomics.com/brazil/currency

Supply and demand factors

LNG is a product directly impacted by the Natural Gas supply and demand: LNG is NG that is liquefied. We then have to look at the supply side which is the amount of natural gas production, the amount of gas in storage and the volumes of imports/exports. The price variations will also affect the supply side: a decrease in the price will reduce production and sales of stored gas, while an increase in price will tend to show the opposite trend.
On the demand side, we can observe factors such as the weather (winter/summer), the petrol prices (substitute) and the economic growth and policies in a country.

If we look at this graph again, which shows the American consumption of gas over the years, we can definitively observe a seasonality due to the weather: cold weather increases demand for heating while summer increases demand for cooling, meaning a higher electricity consumption (since many electric power plants are fuelled by NG, it directly affects the demand). This example could be used to explain NG consumption in other countries such as Japan or South Korea since NG is used for the same purpose.

Price

The two biggest LNG importers are Japan and Korea (accounting for 34% and 15% respectively in world LNG imports), since they have no access to pipelines. Prices of NG there is different and higher than other NG markets (US: Henry Hub; Europe: NBP) since it includes cost of freights and gasification/regasification costs (see graph here).

Inventory levels of LNG

The demand of LNG increases during the winter when people need natural gas to produce the heat. During the winter, the inventory level of LNG is low because of the peak demand of the market. The opposite occurs during the summer when the climate is pleasant. In this period, the inventory level of LNG tends to increase.
The seasons are also linked to the spot and future price of LNG. During the winter, the spot price of LNG is higher than the forward price, and during the summer it is the opposite.

The present price of LNG

As shown in the Asian LNG prices’ graph, the spot price of LNG is equal to $12 per mbtu. The spot price of NG (Henry Hub) is equal to $3.53. The differential between these two commodities is equal to $8.47.

As we can see on the natural gas’ forward price curve, the forward price is currently equal to $3.84. In order to know the liquefied natural gas’ forward price, the differential of $8.47 shall be added to the natural gas’ forward price and gives $12.31.

By comparing the LNG’s spot price and LNG’s future price, we determine that the forward price ($12.31) is equal to the spot price ($12). The demand of LNG will probably raise in the next months. We will see if the spot price will be higher.

 

 

Long-term recommendation – US/China trade war

The winter period in China might be seen as a factor which makes the Chinese market as a bullish market for US LNG suppliers. However, the trade war between China and USA has led to a tariff of 10% on US LNG imports. Because of this tariff of 10%, China had to find some alternatives to avoid this impact on the LNG demand of the country. Indeed, China tied deeper its trade with Russia and is developing a pipeline project for transporting gas from Siberia. Moreover, China shows a high interest to join the pipeline “TAPIA”, which is a pipeline project that involves importing natural gas from Turkmenistan through Afghanistan, Pakistan and India. These projects will help China to prepare for a future increase in demand, since the country is seeing to become the world’s biggest market of natural gas. The consequence for the US would be to loss its market share in China, simply because China will probably not invest in US LNG anymore. In order to avoid a huge deficit for the US, Trump had to convince EU countries and Japan to increase their imports of US LNG.

LNG market shows some opportunities and possible growth in the supply and demand side. However, since the US/China trade war, LNG is becoming more a diplomatic concern. We recommend to pay attention to LNG market which might show a positive or negative fluctuation on the price.

References

TAKESHI, Kumon, 2018. “US-China trade war weaponizes liquefied natural gas.” Nikkei (online). October 9, 2018. (Consulted on November 7, 2018). Available to the following URL:
https://asia.nikkei.com/Spotlight/Asia-Insight/US-China-trade-war-weaponizes-liquefied-natural-gas

BP, Natural Gas Prices. (Consulted on November 8, 2018). Available to the following link :
https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy/natural-gas/natural-gas-prices.html

ITC, Trade Statistics For International Business Development. (Consulted on November 8, 2018). Available to the following link :
https://www.trademap.org/(S(ki1e5knkr0ide3lrwd52fdsq))/Country_SelProduct_Map.aspx?nvpm=1%7C%7C%7C%7C%7C271111%7C%7C%7C6%7C1%7C1%7C1%7C1%7C1%7C2%7C1%7C1. Consulted November 2018

EIA, 2017. « Factors Affecting Natural Gas Prices ». EIA (online). August 23, 2017. (Consulted on November 8, 2018). Available to the following link :
https://www.eia.gov/energyexplained/index.php?page=natural_gas_factors_affecting_prices. Consulted November 2018

EIA, 2018. “Short-term energy outlook”. EIA (online). November 6, 2018. (Consulted on November 8, 2018). Available on the following link:
https://www.eia.gov/outlooks/steo/marketreview/natgas.php

YCHARTS, 2019. “Henry Hub Natural Gas Spot Price”. Ycharts (online). November 5th, 2018. (Consulted on November 12th, 2018). Available to the following URL:
https://ycharts.com/indicators/natural_gas_spot_price

TERAZONO, Emiko, 2018. “LNG prices leap on strong Chinese demand.” Financial Times (online). October 2nd, 2018. (Consulted on November 7th, 2018). Available to the following URL:
https://www.ft.com/content/e54e6392-c332-11e8-8d55-54197280d3f7

The main drivers for a change in price in this period:

1. Macroeconomic factor:

Presidential election in Brazil has slumped the Brazilian currency “real”. This resulted in making profitable to ship the Robusta coffee beans “for delivery on the exchange” in Europe. Plus, the Brazilian coffee producers have been hammered by the currency depreciation as it has raised the cost of inputs of production (such as: fertilizer, pesticides)

However, as we can see the real appreciated back in October that is why the Shipments to Europe have now started to slow down. The cause of this decrease is because the market favors Jair Bolsonaro and is forecasted to be the Brazilian’s new President. However, the latter, as Trump, has some plans such rising the economy in brazil which was in recession with some new financial measures favouring enterprises to invest as well as attract foreign directt investors within the country. Some of the new regulation would increase the use of Amazonian forest resources which would mean more supply provided by the farmers would be available.

2. Currency

The UDSBLR is the relation between the US dollar and the Brazilian Real- shows the value of a us dollar in Brazilian real- so decrease in the graph means the real is getting stronger (to buy 1 dollar you need less real) and increase means the real weakens.

The coffee composite indicator is an index for the price of all kinds of beans aggregated together.

We can also explain this as the Brazilian currency depreciates versus the US Dollar, there is more demand as you can buy the same quantity for less price in USD and therefore the price increases which explains the negative correlation between the USDBL and the coffee composite indicator.

We can see in both graphs during the period of the presidential election in Brazil the price of coffee bean is volatile due to the decrease in political stability of the country.

Arabica Coffee Bean Price:

Robusta Coffee Bean Price:

As we can see in both of these graphs, which represent the price of Arabica and Robusta beans over the past 2 years, the market was bearish for a long time while now. Around the end of September, the price started to increase.

As price of coffee decreased, the demand obviously increased, as importers wanted to buy it while the price is still attractive. However, this level of low prices negatively impacted productivity due to low farmers salaries (which don’t incentive farmers to produce). This results in a high demand and a low supply which pushes the prices up as we are seeing now in the futures market.

Our Recommendation:

As we are currently in a carry market, we think it would better to buy and store the coffee.

 

References:

https://www.bbc.com/news/world-latin-america-46039996?intlink_from_url=https://www.bbc.com/news/topics/c4wq0zk0wq2t/brazil-general-elections-2018&link_location=live-reporting-story

https://seekingalpha.com/article/4211740-4-reasons-coffees-price-moving-higher?page=2?article_roadblock

https://tradingeconomics.com/brazil/currency

https://www.theice.com/products/15/Coffee-C-Futures/data?marketId=5305276&span=3

https://www.bloomberg.com/opinion/articles/2018-10-29/coffee-s-brazil-election-buzz-might-not-last-if-real-weakens

https://www.cnbc.com/2018/10/01/reuters-america-coffee-industry-could-act-to-raise-prices-brazil-association-abic.html

https://www.investing.com/analysis/tropical-trump-bolsonaro-looms-large-over-sugar-coffee-rally-200347582

https://www.climatecouncil.org.au/2016/09/12/trouble-is-brewing/