Another Chinese property giant flirts with default

Market: Coking coal, Crude oil, Metals, Oil products, Petrochemicals
20/08/23

Chinese property developer Country Garden has been removed from Hong Kong's Hang Seng stock index after saying it expected to post a steep loss and miss bond payments, another sign of China's real estate woes worsening and a threat to oil demand.

Foshan, Guangdong-based Country Garden warned of "significant uncertainties" in bond payments on 16 August after missing payments on dollar-dominated bonds this month, raising investor concerns the company could default on its bonds next month. Earlier in the month it said it expected to post a net loss of about Yn45-55bn in the first half of the year, compared with a profit of around Yn1.91bn a year earlier. Falling profits in its real estate business, increasing impairment of projects due to a decline in sales, and foreign exchange losses are behind the challenges.

The company held net assets of about Yn309.6bn as of the end of 2022 but said it "has encountered the biggest difficulties since its establishment".

Country Garden's competitor Evergrande filed for bankruptcy protection in the US this week as it sought to restructure its debt. Major Chinese investment trust, Zhongrong Trust, which has real estate exposure and which is linked to private conglomerate Zhongzhi Group, has also failed to pay interest and principal on several investment products.

For more than a decade real estate has been a major driver of growth in the Chinese economy, which has itself been a key driver of global growth. The growing signs of a systemic failure of the sector, which has underpinned China's demand for oil, could have ripple effects on both global crude and financial markets. Fitch Ratings said this week it may reconsider its top credit score for China if the government does not step in to support the real estate sector.

Before this year, China's real estate investment growth and oil demand growth were largely correlated (See table). Based on the contraction in real estate investment, however, oil demand ought to be significantly lower. This suggests China could be due an abrupt pullback in purchases of oi; or an increase in refined product exports — unless it is able to store all that surplus crude.

Chinese real estate prices in new construction grew in only 20 out of 70 cities in July, 11 less than the previous month, according to a survey by the national bureau of statistics.

Weak economic data suggests Chinese diesel demand could slow in the coming months with more possible diesel exports. This is despite anticipation of a recovery in consumption in September, when construction activity has historically tended to pick up. Beijing was expected to award fresh export quotas in late-July and many now hope they will materialise in late-August instead.

Chinese diesel exports hit a four-month high in July on weaker than expected demand for diesel. Beijing has adjusted interest rates twice in three months but has refrained from introducing large-scale stimulus to prop up the economy.

Real estate vs oil demand (YTD vs yr earlier) (%)

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20/12/24

US House votes to avert government shutdown

Washington, 20 December (Argus) — The US House of Representatives voted overwhelmingly today to extend funding for US federal government agencies and avoid a partial government shutdown. The Republican-controlled House, by a 366-34 vote, approved a measure that would maintain funding for the government at current levels until 14 March, deliver $10bn in agricultural aid and provide $100bn in disaster relief. Its passage was in doubt until voting began in the House at 5pm ET, following a chaotic intervention two days earlier by president-elect Donald Trump and his allies, including Tesla chief executive Elon Musk. The Democratic-led Senate is expected to approve the measure, and President Joe Biden has promised to sign it. Trump and Musk on 18 December derailed a spending deal House speaker Mike Johnson (R-Louisiana) had negotiated with Democratic lawmakers in the House and the Senate. Trump lobbied for a more streamlined version that would have suspended the ceiling on federal debt until 30 January 2027. But that version of the bill failed in the House on Thursday, because of opposition from 38 Republicans who bucked the preference of their party leader. Trump and Musk opposed the bipartisan spending package, contending that it would fund Democratic priorities, such as rebuilding the collapsed Francis Scott Key Bridge in Baltimore, Maryland. But doing away with that bill killed many other initiatives that his party members have advanced, including a provision authorizing year-round 15pc ethanol gasoline (E15) sales. Depending on the timing of the Senate action and the presidential signature, funding for US government agencies could lapse briefly beginning on Saturday. Key US agencies tasked with energy sector regulatory oversight and permitting activities have indicated that a brief shutdown would not significantly interfere with their operations. But the episode previews potential legislative disarray when Republicans take full control of Congress on 3 January and Trump returns to the White House on 20 January. Extending government funding beyond 14 March is likely to feature as an element in the Republicans' attempts to extend corporate tax cuts set to expire at the end of 2025, which is a key priority for Trump. The Republicans will have a 53-47 majority in the Senate next month, but their hold on the House will be even narrower than this year, at 219-215 initially. Trump has picked two House Republican members to serve in his administration, so the House Republican majority could briefly drop to 217-215 just as funding for the government would expire in mid-March. Congress will separately have to tackle the issue of raising the debt limit. Conservative advocacy group Economic Policy Innovation Center projects that US borrowing could reach that limit as early as June. By Haik Gugarats Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

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Viewpoint: Copper volatility, uncertainty ahead in 2025

20/12/24

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20/12/24

Viewpoint: Copper volatility, uncertainty ahead in 2025

Houston, 20 December (Argus) — US copper prices are expected to remain volatile in 2025 because of uncertain market conditions, including Chinese demand, electric vehicle (EV) rollouts and falling borrowing costs. Following a two-year downturn prompted by China's economic slowdown in the wake of the Covid-19 pandemic, the next active price on the Chicago Mercantile Exchange (CME) hit an all-time record high of $5.106/lb on 21 May 2024. Expectations of increased demand in China, the prospect of looming US interest rate cuts, and projected ramped-up demand for copper in EVs and the green energy sector fueled copper price gains into the mid-year. These expectations proved partly exaggerated, leading copper to fall back to an average of $4.33/lb over the second half of 2024. US copper market participants expect those same factors, albeit to varying degrees, to retain a prominent role in determining prices for 2025. Macroeconomic uncertainties Suppliers and consumers widely expect volatility to persist in the global copper trade as broader macroeconomic factors — chiefly Chinese demand and stimulus, US Federal Reserve interest rate decisions — and delayed US EV ramp-up plans pull the market in diverging directions. President-elect Donald Trump's pledge to implement import tariffs have further complicated the picture for US participants, with likely retaliatory tariffs clouding the picture even more. Trade disagreements and tariffs would not only raise costs but also curb demand as the flow of various goods is dented, market sources said. Meanwhile, US Federal Reserve policymakers on 18 December signaled they are likely to cut the target rate by only 50 basis points next year, paring back their expectations from a prior 100 basis points as inflation remains sticky. The DXY dollar index, which tracks the greenback against six major currencies, surged after the Fed announcement to its highest in two years. A strong dollar puts downward pressure on copper prices because it tends to weaken demand from holders of other currencies. Tariffs are also expected to spur inflation and may prompt the Fed to further slow the pace of rate cuts, or even hike rates, effectively lending support to the dollar, making it more expensive for holders of other currencies to buy into copper. The US Dollar index, DXY, surpassed 108.2 on 19 December, the highest since November 2022. Goldman Sachs has forecast that the greenback will remain strong in the near-term. Automakers slow EV transition Although the green energy transition — generally covering solar, wind, and EV markets for copper markets — is expected to contribute to US consumption of copper, automakers have signaled their interest in delaying EV deployments. Wind and solar markets are widely expected to remain growth sectors with US projects and installations scheduled to rise next year . Still, the picture for EVs, which could ultimately contribute to copper demand heavily, is murkier. EVs utilize copper in motor coils for engines, and the cabling for charging stations among other components, and each EV requires 183 lbs of copper, nearly four times more than equivalent internal combustion engine vehicles. Several automakers, including GM, Ford and Toyota, have either delayed EV plans or shifted more towards hybrids instead this year. Price outlooks diverge Market participants broadly expect the copper market to slide into a deficit by 2026, chiefly because of growing demand from the renewable sector but until then are split on the direction of prices. The CME next active month price through November averaged $4.24/lb in 2024, up from a $3.86/lb average for the same time period in 2023. Investment bank Goldman Sachs said copper prices will average $4.61/lb for 2025, forecasting upside risk from potential further stimulus while simultaneously seeing downside risk from likely US-China trade tensions. Other financial organizations have forecast copper to range from $3.97-4.99/lb in 2025. Citigroup forecast copper at $3.97/lb, Bank of America dropped its outlook to $4.28/lb while UBS was at $4.76-$4.99/lb. Most copper traders and analysts agree that 2025 will likely be a year of transition for the red metal market, buffeted by ongoing uncertainty. By Mike Hlafka Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

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US government agencies set to shut down

20/12/24

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20/12/24

US government agencies set to shut down

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Viewpoint: PGM demand from hydrogen sector to rise

20/12/24

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20/12/24

Viewpoint: PGM demand from hydrogen sector to rise

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Viewpoint: More changes for Dated crude benchmark ahead

20/12/24

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20/12/24

Viewpoint: More changes for Dated crude benchmark ahead

London, 20 December (Argus) — The crude market has adjusted to the presence of US WTI in the Dated basket, but the past year has revealed some hiccups, suggesting more changes will be needed to the benchmark's structure. WTI has been a part of Dated for more than a year, in which time it has bought much-needed liquidity to a shrinking amount of physical crude underpinning the benchmark, and has encouraged a return of some old, long-absent market participants and the entry of a few new ones. WTI has introduced more transparency to Dated, making it much more easily accessible. While some traders feared the grade would arrest any volatility, which is necessary for trading companies to thrive, this has not happened. Instead, WTI has effectively tied the European market to the US one, with European Ice Brent futures following WTI Nymex futures very closely. But recent months have exposed some flaws, suggesting some more changes to the benchmark are needed. European refiners run as much as 4.5mn b/d of light sweet crude, Vortexa data show. Dated was designed to represent the price moves of this large market via a few crudes produced, and mostly consumed, in the region. But production of several component grades have shrunk because of natural decline at North Sea fields. Production of Brent, the benchmark's namesake grade, has fallen from above 400,000 b/d in 2001 to just 38,000 b/d this year. Forties' exports dropped from more than 600,000 b/d to 175,000 b/d in the same time. Therefore it seemed fair when Dated was set by WTI nearly half of the time, as it is the single largest crude that European refiners buy, accounting for around 14pc of all their supplies. The situation reversed in the last weeks of 2024. WTI has not set Dated since 11 October, with that duty mostly shared between Oseberg, Ekofisk and Troll. But values of these grades — especially Oseberg and Troll — are rather theoretical, due to low liquidity of just 2-5 cargoes a month. It is not uncommon to see bids for those grades in the window, when the scarce supplies loading on the dates covered by bids are already placed. The same applies to Brent, for which loadings range between just 1-2 cargoes every month. WTI and Forties have greater liquidity, allowing them to be more representative of Europe's light sweet market, but their recent marginal role in setting the benchmark price raises a question if grades like Brent, Oseberg and Troll need to be in the basket at all. QPs an almighty relic of the past It might feel counterintuitive that smaller and more expensive grades affect the price of Dated — which is set by the cheapest grade in the basket. But Oseberg, Ekofisk and Troll, which are typically more expensive on a fob basis than is WTI on a delivered-Europe basis, are adjusted by quality premiums (QPs) for benchmarking purposes. QPs are calculated at 60pc of the difference between each grade and the most competitive of the six benchmark grades in the second month prior to the month of loading. The mechanism was made for a basket of crudes that originate in the North Sea and trade on a fob basis. Inclusion of WTI, which in turn is adjusted by intra-European freight to make it a fob price in the North Sea, has widened QPs for the three grades. With price spreads between pricier and cheaper benchmark grades increasingly dependent on volumes of WTI coming to Europe, such an adjustment does not seem to serve its purpose anymore. By Lina Bulyk Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

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