Showing posts with label Commodities. Show all posts
Showing posts with label Commodities. Show all posts

Friday 13 January 2023

Peeping into the commodities market

After starting the year on weakness, crude oil prices have rebounded, driven by fears regarding China’s subdued demand easing off.

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.