Brent futures rebounded by 7% on China announcing enhanced
import quotas for 2023. This signaled that the country would continue to ramp
up its demand, whether for inventory replenishment or heightened demand for
petroleum products.
The second round of quotas enhancing allowed imports to
108.78 million tons of crude oil for 2023, corresponding to 60.6% of the ceiling,
as compared to the earlier quota of 58.4%.
The developments out of China were enough to overshadow the
inventory data from the US, where crude oil stocks in the country increased by
a mammoth 19 million barrels during the week ended January 06, 2023.
Additionally, the latest CPI reading from the US led to
expectations of the pace of rate hikes in the US to slow down. As a knee-jerk
reaction, the US$ showed weakness, with the US Dollar Spot Index dropping by 0.9%
on Thursday, making the dollar-denominated crude oil futures more attractive
for investors trading in other currencies.
Moreover, a slowdown in the rate hike has led to
expectations of demand not dropping by as much as earlier anticipated.
Global refining margins have continued to tick upwards
amidst drop in refinery utilization due to snow storms in Texas, offsetting demand
lows from holiday season resulting in larger than anticipated fuel inventory
declines. Overall, snow storm in Texas has halted nearly 2.4 million bpd of
refining capacity.
On the European front, shortage of natural gas exacerbated
by the conflict in Ukraine, and western sanctions on Russian fuel supplies has
resulted in overall power/heating demand turning towards diesel/fuel oil,
exacerbating heating oil prices further. On the flipside, stronger-than
expected economic data from China may result in refined-product exports from
the Asian powerhouse to begin rolling out soon, weighing on margins/cracking
spreads in the near term.
Overall, EIA’s January outlook expects combined gasoline,
diesel and jet inventories to rise 9% in 2023, led by a 2.8% jump in refining
throughput, with weaker economic activity pressuring diesel and gasoline
consumption going forward. To note, gasoline/gasoil spreads currently stand at
US$12.4/30.5 per barrel.
Richard’s Bay coal prices have continued to decline,
currently hovering at US$167/ton compared to December 022/2QFY23 average of
US$231/239/ton.
Lower than
anticipated heating demand due to milder winters in Europe and buildup of coal
stockpiles in anticipation of winters has resulted in laggard demand for coal,
leading to a decline in prices, particularly since mid-December 2022.
Coal prices had risen significantly during the past year
amidst the global commodity super-cycle, peaking at US$460/ton in March 2022.
Going forward, analysts expect coal prices to trend downwards to hover around
US$160/ton in the near term. In the long run, coal prices are expected to
settle around US$120/ton, although still higher as compared to pre-COVID
averages of US$80/ton.
This may be attributed to delays in green energy conversion
plans by developed countries, with several EU countries extending the life of
coal plants which previously were scheduled for closure and reopening
previously shut plants last year to address the shortage of Russian gas.
Even with the winter season beginning to settle (seasonal
construction slowdown), scrap has rallied 22% from lows of US$340/ton in
November 2022, to currently hovering around US$418/ton as compared to FYTD/
CYTD average of US$377- US$402/ton.
The said rise is majorly attributable to Chinese lockdown
pullbacks, evident by 4.3% increase in purchase managers index (PMI) in
December 2022 as compared to November 2022 (although still in a contractionary
phase below 50).
The decision to move away from restrictions include a
reduction in the overall mandatory quarantine period, which has been causing a
myriad of problems for the world’s second largest economy. The said rally was
not only driven by easing of restrictions but also by the abandoning of
zero-COVID policy entirely, as protests against lockdowns have been running rampant
in the country’s capital.
Although, the said bull-run may be short lived as routine
virus controls, the ongoing property crisis, and the winter pollution curbs are
expected to keep the construction/ engineering on the back foot in the near
term. On the flipside, demand may pick up from a stimulus package (aimed at the
housing sector) to be announced soon by the Chinese government targeting
domestic industries and consumer spending.
Overall, Asian scrap demand is unlikely to be on a firm
footing in the near term, as rising energy costs and a depressed outlook in
Asia/ Europe are expected to dictate the production and procurement decisions
of steel companies going forward.
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