Market Briefs

March 2020

 

According to the ICG, world wheat production will reach a record level of 769 Mt in 2020/2021 after 763 in 2019/2020.

 

World tin production fell 6.6% to 335,000 tonnes in 2019, according to the ITA. Most of this decline is linked to China. The world’s leading producer is now PT. Timah in Indonesia with 76,400 tonnes.

 

At the end of February, the Argentine government decided to suspend the registration of agricultural exports. A priori, we can anticipate a sharp increase in export taxes. Argentina is said to be on the verge of increasing its soybean export tax from 30% to 33%. There is talk of a campo strike in the coming days.

 

Sugar production from India is forecast at 26.5 Mt for the 2019/2020 season. This would free up 6 Mt in exports for which the government is providing a subsidy of $145 per tonne. At the end of February, India had contracted 3.2 Mt in exports.

 

According to the WPIC, the world platinum market will remain in surplus in 2020 by 119,000 ounces against 65,000 in 2019.

 

Coronavirus has caused soaring prices for one of the few agricultural products in which China dominates the market: garlic. Mintec’s indicator (garlic, ginger, chilli) is up 17% in two months. China accounts for 80% of garlic exports, 47% of ginger and 20% of chilli.

 

For the first time, China imported more than 100 Mt of bauxite in 2019 (+22% and double the amount compared to 2016). It also imported 1.3 Mt of alumina.

 

The impact of the coronavirus is felt in all markets: iron ore, rubber (15% decline in Tokyo in one month), sea freight (the Baltic is at its lowest since 2016), steel, copper, cobalt

 

In January, Indian imports of Malaysian palm oil were down 85% year-on-year to 46,876 tonnes. In contrast, Malaysia increased sales to Pakistan and Saudi Arabia to 170,000 tonnes, double for Pakistan.

 

Australian wheat production fell in 2019/2020 to the lowest since 2008 to 15.17 Mt (ABARES). Some estimates are even lower at 14.5 Mt. This will leave only 7 to 7.5 Mt for export. The main Australian trader, Graincorp, has taken out an insurance policy guaranteeing it an income when production is less than 15.3 Mt.

 

India offered to cut tariffs on imports of US poultry and dairy products in anticipation of Trump’s visit to Delhi.

 

According to the ILZSG, the world zinc market was in deficit by 189,000 tonnes in 2019 after 522,000 tonnes in 2018.

 

Failure of the OPEC+ meeting in Vienna on 6 March and in the aftermath, Saudi Arabia’s decision to “break” the market: on 9 March a barrel of Brent was around $30, the new forecast by Goldman Sachs for the months to come.

 

However, in the first two months of 2020, Chinese crude oil imports were 5.2% higher at 10.4 mbd, a gain over the year of 350,000 bd. Even after taking into account the increase in exports of refined products (+16.6%) and stocks (at the record level of 782 m barrels), consumption remained at a stable minimum.

 

Goldman Sachs expects a 1.2 million bpd surplus market again in the summer. And the effect on American shale oil production would be limited: 75,000 bpd in the third quarter and -250,000 bpd at the end of the year.

 

A first measure of the impact of the coronavirus on Chinese demand for oil. Petrochina decided to reduce the activity of its Chinese refineries by 320,000 bpd in February and 377,000 bpd in March. Sinopec announced a reduction of 600,000 bpd. In total, if we add the independent refiners of Shandong, Chinese demand in February could decrease by 3.2 mbd. Over the year on average, BP expected a drop of 300 to 500,000 bpd in early February.

 

On 7 February, the LNG spot price in Asia fell for the first time below $3 per MBtu to $2.95, down 57% from mid-October and 86% from the record of February 2014. At this price, natural gas becomes truly competitive with coal in terms of electricity production. This decrease is also linked to the coronavirus since Chinese buyers have declared force majeure on several ships heading for Chinese ports. Total has rejected a force majeure request from a Chinese buyer.

 

In mid-February, the IEA estimated that for the first time since the 2009 crisis, demand for oil would decrease in the first quarter of 2020 by 435,000 bpd. For the year as a whole, the average increase would only be 825,000 bpd, again the lowest since 2011. OPEC estimates that demand for OPEC would drop by 200,000 bpd. World demand would drop from 230,000 bd to 990,000 bd. Finally, the US Energy Agency has reduced its forecast from 310,000 bpd to 1.03 mbd. For the EIA, American production should increase by 960,000 bpd.

 

The market for ‘Very low sulphur oil’, the new marine fuel compatible with IMO standards, is relaxing a bit. After reaching a premium of $29.35 on a barrel of Brent in early January, it was only trading at $16.35 on a barrel of Brent in mid-February. The coronavirus strikes again…

 

Thanks to the collapse in LNG prices, India is increasing its imports, which should reach the record level of 2.36 Mt in February, reaching the maximum possible, given the capacity of Indian terminals.

 

In February, OPEC pumped only 27.84 bpd, the lowest in ten years, largely thanks to Libya, which pumped 155,000 bpd compared to 760,000 bpd in January.

 

Coal still represented 57.7% of the Chinese energy mix in 2019, certainly down 1.5%, but in reality, the consumption of coal increased by 1%. “Clean” energies (hydro, nuclear, renewable) now represent 23.4% of the total.

 

According to Refinitiv data, Chinese oil imports in February would still be 10.53 mbd against 10.69 in January: a drop of 160,000 bd which puts the impact of the coronavirus into perspective.

 

The tanker freight rate has collapsed by 80% since the start of the coronavirus. In mid-February a VLCC rented $23,000 per day against $100,000 at its highest in November (we even talked about $140,000!).

 

According to Schlumberger, growth in shale oil production in the United States is expected to slow to 600/700,000 bpd in 2020 and 200,000 bpd in 2021.

 

A Mexican company, Libre Abordo, has entered into food for oil swaps with Venezuela involving more than 6 million barrels of oil against white corn and water.

 

According to Shell, global demand for LNG will increase to 700 Mt in 2040. By 2019, demand had increased 12% to 359 Mt.

 

Global investment in hydrocarbon exploration-production will drop in 2019 from $669 billion in 2015 to $540 billion and a forecast to $517 billion in 2020.

 

In the aftermath of the oil counter-shock of 8 March, the corpse count began: Occidental Petroleum, which had bought Anardako for $38 billion in 2019, saw its share price go down by 52% for a capitalization of $11, 2 billion. Exxon fell by 12%, Chevron by 15%, Total by 16% and BP by almost 20%. The Russians Lukoil and Rosneft lost 20.4% and 18.5% respectively.

In addition, the famous speculator Pierre Andurand, now based in Malta (!), Has been “short” on the market for three weeks by playing on the impact of the coronavirus on oil demand. Andurand was still long in early January. This confirms a general movement among the portfolio managers.

 

The counter shock represents a loss of $500 million per day for OPEC producers. If we take the extremes on the barrel of Brent ($71.75 at the highest beginning of January after the death of Iranian general Soleimani and $31.02 in session at the lowest on 8 March) the virtual losses are even greater. That said, Russia, Saudi Arabia and the UAE have reserves: $500 billion each for Russia and Saudi Arabia. It is estimated that Russia can last at least six years at prices of $20 to $30. The Russian “fiscal breakeven” would be of the order of $42, that of Saudi Arabia more than $80. A priori, Saudi Arabia is set to see its budget deficit explode well above 10% in 2020.

 

The IEA has begun to do its post-coronavirus reviews. World oil demand is forecast to decrease by 90,000 bpd (for the first time since 2009) to 99.9 bpd. In the first quarter, demand will have fallen by 2.5 mbd (including 1.8 mbd in China – which does not really match Chinese import figures). In 2021, world consumption will rebound by 2.1 mbd.