Is China Losing Its Dominant Position in the Global Steel Market?

By Metal Miner - Aug 28, 2024

• China's government has suspended approvals for new steel plants due to overproduction and weak demand.
• 
  
• The Chinese steel industry, despite being the world's largest, is facing significant challenges, including a struggling property sector and increased international pressure due to rising exports.
• 
  
• Iron ore prices have plummeted as a result of decreased demand from Chinese steel mills.

Via Metal Miner

Amidst continuing reports of an economic downturn with little or no sign of improvement now comes a report that the Chinese Government has suspended the system allowing approval of new steel plants. It is a move that could have significant implications for the Chinese steel industry and global steel manufacturing as a whole.

According to Bloomberg, China’s Ministry of Industry and Information Technology recently stated that it had decided to pause the current mechanism wherein new steel plant construction was allowed as long as steelmakers first shut down some of their existing facilities. The ministry also mentioned plans to create a new approval process, but provided no timeline. For years, the Chinese Government has insisted on eliminating existing capacity as a pre-condition before allotting permission to construct a new plant.

Seems like those rules are history, for now.

The move surprised almost everyone in the steel sector, but resulted in mostly muted reactions. As frequently reported by MetalMiner in the past, steel exports from China have shot up in the last couple of years and currently stand at their highest rate since 2016.

China Relies on Exports to Buoy Steel Manufacturing

China is the world’s largest steel producer, accounting for over 50% of the global output, or roughly a billion tons a year. But post-COVID, Chinese steel mills struggled to find domestic customers and are now resorting to dumping cheap steel products into as many markets as possible. In response, many of those countries’ steel industry leaders continue to protest.  

According to one estimate by the Bank of America, five Southeast Asian countries, including Vietnam, Thailand, and Malaysia, absorbed 26% of China’s steel exports in 2023 alone. Steel manufacturing titans like ArcelorMittal SA, too, have complained about these exports. Furthermore, the lack of concrete measures announced at China’s high-profile Third Plenum dimmed hopes that the country’s struggling property sector would recover from its downturn.

In fact, just a few days ago, Hu Wangming, head of China Baowu Steel Group Corp., told employees at the company’s biannual meeting that conditions in the country were like a “harsh winter” that could become longer and colder and even more difficult. He also warned that China’s steel industry faced a situation worse than the crises it endured in 2008 and 2015.

Iron Ore Prices Plunge Amid Falling Demand

The aforementioned Bloomberg report also covered the Chinese Ministry warning that the steel industry was staring at challenging times, particularly in terms of the supply and demand relationship. It stated that numerous problems still remain, such as inadequate policy implementation and imperfect supervision and implementation mechanisms.

With domestic steel consumption down, iron ore prices have fallen substantially, losing about 10% this quarter and touching their lowest point since 2022. So far, ore prices have dropped by over 28% in 2024.

Reasons for the Chinese Steel Industry’s Decline

One of the biggest disappointments for Chinese steel mills has been China’s property sector, which continues to be sluggish despite best efforts made by the government to pull it out of its quagmire. In an interview with CNBC, Sabrin Chowdhury, head of commodities analysis at BMI, said that Chinese demand for steel and iron ore remains disappointing because the ongoing downturn in China’s property market negatively impacts industrial metals needed for infrastructure.

According to a recent report from Greece’s Ursa Shipbrokers, China’s steel industry suffers from weak demand, lower profitability for mills, and government directives to limit annual production growth. Ursa’s analysts highlight that only 5% of Chinese steel producers are in profit today, especially as steel prices continue to plummet, with rebar futures reaching a four-year low. The continued downturn in the country’s property sector, which has seen a 10.2% drop in investment, has significantly reduced steel demand.

By Sohrab Darabshaw

 

UK

Drax to Pay £25 Million Following Ofgem Biomass Probe

By City A.M - Aug 30, 2024

Power station operator Drax has agreed to pay £25m after an investigation by energy watchdog Ofgem found it failed to report data adequately.

Drax, which receives hefty Government subsidies from burning biomass wood chips, lacked the necessary data governance and controls in place, according to Ofgem.

This meant it did not give the regulator accurate and robust data on the type of wood it uses.

Ofgem did not find any evidence that Drax’s biomass is not sustainable or that Drax had been issued renewables obligation certificates (ROCs) incorrectly.

Ofgem said Drax will pay £25m to its voluntary redress fund as a result of the findings.

The fine comes after an investigation into the sustainability of the biomass it uses at its wood-burning power plant, which was subject of a major BBC Panorama documentary.

Drax Group chief executive, Will Gardiner said: “It is welcome that Ofgem has found no evidence that our biomass failed to meet the sustainability criteria of the Renewables Obligation (RO) scheme, nor that the ROCs we received for the renewable power we produced had been provided incorrectly.”

“Although Ofgem has noted there is no evidence to suggest Drax deliberately misreported its profiling data, we recognise the importance of maintaining a strong evidence base and are continuing to invest to improve confidence in our future reporting.”

Ofgem chief executive Jonathan Brearley said: “This has been a complex and detailed investigation. Energy consumers expect all companies, particularly those receiving millions of pounds annually in public subsidies to comply with all their statutory requirements. 

“There are no excuses for Drax’s admission that it did not comply with its mandatory requirement to give Ofgem accurate and robust data on the exact types of Canadian wood it utilises. The legislation is clear about Drax’s obligations – that’s why we took tough action. 

“Drax has accepted that it had weak procedures, controls and governance which resulted in inaccurate reporting of data about the forestry type and sawlog content being used. It has agreed to make a significant payment of £25m to our voluntary redress fund and carry out an independent external audit of its global profiling data reporting.  

“This report will be submitted to Ofgem for our independent assessment and findings published, so the conclusions are fully transparent.? While Ofgem currently has no reason to believe there have been further instances of non-compliance we won’t hesitate to act if required.” 

A spokesperson for the Department for Energy Security and Net Zero said: “We expect full compliance with all regulatory obligations – consumers rightly expect the highest standard of accountability from generators.

“The size of the redress payment underscores the robustness of the regulatory system and the requirement that generators abide by both the spirit and the letter of the regulations.

“The detail of the investigation and subsequent findings are a matter for Ofgem.” 

With contribution from Press Association

By City AM 

Ecuador Begins Shutting Oil Wells in the Amazon

By Tsvetana Paraskova - Aug 30, 2024, 

Ecuador has shut down one well and began dismantling infrastructure in a drilling site in a protected area of the Amazon, a year after Ecuadorians voted in a referendum to end oil drilling in a national park.

The Ecuadorian government shut down the Ishpingo B-56 well, one of nearly 250 oil wells in the 43-ITT block in the Yasuni National Park, the country’s Energy and Mines Ministry said this week.

In August last year, Ecuadorians voted against drilling for oil in the protected area of the Amazon that’s home to two uncontacted tribes and is a hotspot of biodiversity. Around 60% of voters in a referendum voted against continued oil drilling in the Yasuni National Park, which is home to the Tagaeri and Taromenani who live in self-isolation. The park was designated a UNESCO World Biosphere Reserve in 1989.

As a result of the referendum, state oil company Petroecuador is now forced to dismantle its operations.

However, the beginning of the first such dismantling took place a year after the popular vote expressed clear willingness to end oil drilling in the environmentally sensitive area.

The government has asked for an extension of five years to dismantle all operations in the Yasuni National Park and has been criticized for failing to implement the constitutional court’s order to close more than 200 wells within a year after the referendum from August 2023.

Commenting on the start of well closures, Ecuador’s Energy and Mines Minister Antonio Goncalves said in a statement, as carried by the Associated Press, “I have come to verify that the decision of last year’s referendum, where the citizens voted in favor of the closure of this field, is being complied with.”

“To comply with the closure of the ITT is not an easy job, it requires special and technical planning,” the minister added.

Amazon Watch’s climate and energy director Kevin Koenig responded to the start of the well closures that “The government is bound by its obligations to the constitutional court, which gave it a year to close 227 wells. ... The fact that they closed one yesterday does not mean that they are complying with the court order.”

By Tsvetana Paraskova for Oilprice.com

ExxonMobil's Guyana Oil: A Trillion-Dollar Opportunity?

By David Messler - Aug 30, 2024,

ExxonMobil's Guyana oil production is rapidly expanding, with the potential to reach 2 million barrels per day by the early 2030s.

• The company's Permian Basin assets are also poised for growth, with production expected to reach 2 million barrels of oil equivalent per day by 2027.

• ExxonMobil is involved in a high-stakes dispute with Chevron over the latter's proposed acquisition of Hess, which could have significant implications for ExxonMobil's Guyana operations.

There are two main drivers for ExxonMobil, (XOM), in the face of crude’s relatively tight pricing band-low $70’s to low $80’s, for the most the past year. The first is the Guyana, Stabroek production ramp, and the related kerfuffle with Chevron, (CVX) over the nature of their proposed acquisition of Hess, (NYSE: HES). The second is the ongoing digestion of Pioneer assets and acceleration of Permian output toward 1.2 mm BOEPD.

XOM is a huge company with a lot of irons in the fire-LNG, chemicals, carbon capture, refining, biofuels, and heck, they’re even dabbling in lithium. None of these really matter to the stock in the near term. XOM moves with higher or lower oil and gas prices and is likely to perform in lockstep with these commodities well into the future. Darren Woods, CEO let loose with a pithy comment in the Q-2 call that reveals the firm priorities of this company, regardless of what other “ponds” into which, they dip their oars-

“Later this month, we'll publish our global outlook, which projects global energy demand 15% higher in 2050 than it is today. We see oil demand holding steady at around 100 million barrels per day in 2050, while demand for renewables and natural gas grows considerably.”

Let’s give Mr. Woods his due. As the CEO of a company producing ~4.3 mm BOPD of crude oil, it is fair and reasonable for us to assign a solid probability of his being right. In this article we will cover a tight focus on what we believe to be the key needle-movers for the company.

Guyana

As was noted in the early August, Bloomberg piece by Kevin Crowley the 2015 Liza discovery well almost didn’t happen. Guyana’s waters were a minefield of 40+ dry holes accumulated over the years and XOM management wasn’t convinced that this prospect met their capital allocation criteria. Even more critical was the fact that XOM’s concession was about to expire, if they were going to do it, it had to be then. Read Crowley’s piece for more of the back story, but the success of Liza changed the company and the country. Quoting Crowley from the article-

“Today, Liza is the world’s biggest oil discovery in a generation. Exxon controls a block that holds 11 billion barrels of recoverable oil, worth nearly $1 trillion at current prices. The find has transformed Guyana from one of South America’s poorest countries into one that will pump more crude per person than Saudi Arabia or Kuwait by 2027. Guyana is on track to overtake Venezuela as South America’s second-largest oil producer, after Brazil.”

Now with more than 30 discovery wells, 6-sanctioned projects, current daily production of ~650K BOPD rising to 750K in 2025 with the commissioning of Yellowtail, 1mm+ BOPD in 2027 with the commissioning of Whiptail, and up to 1.5 mm BOPD with the startup of the 7th project- Hammerhead, the company is growing Guyana production at a rate of about 20% annually. The “Guyana Effect” shows up in total return comparisons with key competitors and the overall S&P 500 index, as noted in the Crowley article.

Guyana appears to have a long ramp for future development in Stabroek, as reporting indicates that another two fields, Fangtooth-now under delineation drilling, and the  Haimara discovery-new appraisal wells planned for later this year, could take reserves well beyond the 11 bn BOIP now booked.

If the company can continue the pace of announcing a new project for Guyana every eighteen months or so, it’s not hard to imagine daily production hitting the 2.0 mm BOPD level in the XOM graph below in the early 2030’s.

As a final point on Guyana, low cost of supply is everything in long-term oil production. With supply costs of less than $35 per barrel, Stabroek fits nicely in the low-cost category assuring profitable production at any likely Brent prices.

The XOM, CVX, Hess kerfuffle

Chevron-CVX has lagged Exxon in reserves replacement over the last few years, as this OilNow article points out. Although down from 2018’s peak of ~24 bn bbls, XOM is comfortably ahead of Chevron with 16.9 bn bbls compared with 11.1 bn for CVX. Chevron’s motivation for its takeout offer for Hess, (HES) is pretty clear. With HES’ 30% stake in Stabroek, CVX saw an easy way to tack on several bn barrels on reserves with its $53 bn offer for HES. Shareholders for both companies approved the deal, but roadblocks began to crop up.

In late December of 2023, the FTC filed a request for more information on the deal but delayed any action pending the outcome of ExxonMobil’s objection to the merger. With the three-judge panel only recently confirmed recent reporting has a timeline well into 2025 for any resolution.

The core of the dispute lies in the interpretation of the Joint Operating Agreement-JOA, which contains a section on the Right of First Refusal-ROFR that governs the disposition of assets run by the consortium. XOM feels that the HES share should be offered to it under the ROFR language in the JOA. Chevron disagrees, and took pains in setting up the deal to provide for HES’ survival as an entity, effectively eliminating the “change of control” provisions of the JOA. Analysts feel the outcome will come down to the arbitration panel’s interpretation of the “intent” of the CVX/HES agreement as regards the asset. M&A expert, James English at law firm Clark Hill Law was quoted as saying-

"The crux here is whether a change of control even occurred. The three-person arbitration panel that will make the call must decide in part whether to focus on the language in the contract or to delve into Chevron's intent. “A plain language approach would be very favorable to Chevron, while if you go with the intent, Exxon may have a case," English said.”

There is no downside for XOM in this process, in my view. The valuation of the stake held by HES is a closely guarded secret, but we can make some assumptions and arrive at an estimate. 

A trillion dollar valuation has been put on the 11 billion worth of reserves already booked, implying a Brent price of $90-not out of line, but aspirational from current levels. That would put HES’ 30% share at ~$335 bn or so, 6X+ above the $53 bn takeout price. Depending on which estimate you use for the percentage ascribed to HES’ 30% as part of the CVX bid -60-80% according to experts cited in the Reuters article, it’s not hard to imagine a significant payday for XOM.

ExxonMobil is in the catbird’s seat in this scenario. They could make a counter offer for the HES stake, bid for a fraction of it, or take compensation from Chevron, if they prevail in arbitration. If it gets too pricey CVX would just walk away, accepting a $1.72 bn break-up fee from HES.

There’s no way to handicap the outcome of this dispute. As I noted there is no downside for XOM. A lot will come down to how the single word-intent, is interpreted.

The Permian

As the first full quarter of Pioneer assets operating under XOM’s umbrella approaches as Q-3 wraps we will get a peek at how efficiently this merger is being implemented. The company has put a big number on the bulletin board-$2 bn, in cost savings that will accrue from the merger annually. In a Bloomberg article, CEO Darren Woods noted that these savings will come from improved technology and extraction-fracking and cube development techniques, as well as the logistics advantages the merger provided in terms of lateral lengths and materials sourcing. XOM projects costs of supply at $35 per barrel from the Permian.

For full year 2024, XOM projects daily Permian production of 1.2 mm BOEPD across their 1.4 mm acre position in the basin. The company has a target of increasing Permian production to 2.0 mm BOEPD by 2027, implying a growth rate of 20% a year.

Your takeaway

XOM is trading at some fairly rich multiples at current prices. The EV/EBITDA is 7.65X, and the flowing barrel stat is $116K per barrel. Analysts rate the stock as Overweight with price targets ranging from $110-157.00 per share. The median is $130.00.

For those looking for well-covered shareholder returns, XOM is generating free cash of about $26.5 bn annually on a TTM basis. The company distributed $8.1 bn in dividends and repurchased $16.3 bn in stock for a modest free cash yield of ~5%. The company beat EPS estimates by ~5% in Q-2, and estimates have been raised for Q-3 to $2.14 per share. If they come in with a beat we could certainly see a move higher toward the midpoint of estimates. The inverse is also true.

XOM should be a part of every long-term energy investor’s portfolio for growth and income. Currently, it is trading near the top of its one-year range-$97-$123.00. Recent weakness in oil and gas prices would certainly argue for a judicious entry point that might come when Q-3 earnings are released in November.

By David Messler for Oilprice.com 

UK Plans New Environmental Guidance for North Sea Oil and Gas Firms

By Charles Kennedy - Aug 29, 2024

The UK government plans to introduce new environmental guidance for oil and gas companies operating in the North Sea, following the landmark ruling of the Supreme Court which requires regulators to consider the Scope 3 emissions of future projects when approving them.

The UK Supreme Court ruled in June that a local council unlawfully granted approval to an onshore oil drilling project as planners must have considered the emissions from the oil’s future use as fuels, in a landmark case that could upset new UK oil and gas project plans.

The judges wrote in the judgment that “It is an agreed fact that, if the project goes ahead, it is not merely likely but inevitable that the oil produced from the well site will be refined and, as an end product, will eventually undergo combustion, and that that combustion will produce greenhouse gas emissions.”

In light of this ruling, the Labour government announced on Thursday it plans new environmental guidance for oil and gas companies, which, the cabinet says, would help “provide stability for industry, support investment, protect jobs, deliver economic growth, and meet its climate obligations, as the North Sea transitions to its clean energy future.”

Minister for Energy Michael Shanks said,

“We will consult at pace on new guidance that takes into account the Supreme Court’s ruling on Environmental Impact Assessments, to enable the industry to plan, secure jobs, and invest in our economy.”

While planning new environmental guidance to provide certainty to industry, the government also said in the same communication that it would not challenge the judicial reviews brought against development consent for the Jackdaw and Rosebank oil and gas fields in the North Sea, throwing more uncertainty on these already consented projects.

Climate groups Greenpeace and Uplift have sued to seek judicial reviews to stop the development of Rosebank and Jackdaw.

Earlier this week, Equinor, the operator of Rosebank, said it awaits clarity on the UK tax regime by the Labour government before strategizing and committing to investments in the UK North Sea.

By Charles Kennedy for Oilprice.com

 

Harris Does U-Turn on Fracking ahead of November Election

By Irina Slav - Aug 30, 2024Kamala Harris said she would not ban fracking if she becomes the next U.S. president, reversing an earlier stance she had made while campaigning as Joe Biden’s vice president.

In an interview with CNN, Harris said “As vice president, I did not ban fracking. As president, I will not ban fracking.”

“We have set goals for the United States of America and by extension, the globe, around when we should meet certain standards for reduction of greenhouse gas emissions, as an example. That value has not changed,” the Democratic presidential nominee also said, adding “What I have seen is that we can grow and we can increase a thriving clean energy economy without banning fracking.”

Harris’ statements are a stark departure from those made in 2019 on the campaign trail. CNN quoted her as saying in September 2019 during a climate change event “There’s no question I’m in favor of banning fracking, and starting with what we can do on Day 1 around public lands,” which led many to expect a hard line against the oil and gas industry from a potential future Democratic administration.

Even without a ban on fracking a Harris presidency would be bad news for the industry. Overviews of her career that have flooded the media space recently note her lawsuits against oil companies including Chevron, which she prosecuted for hazardous materials mishandling. Plains All-American Pipeline also became a target for California's Attorney General back in 2015 for an oil spill off the state's coast. Interestingly, Harris' claim that she also sued Exxon, which she made during the run-up to the 2020 elections, appears to be inaccurate.

The change in Harris’s stance on fracking has visible roots. In order to win the election, she would need to secure votes from swing states such as Pennsylvania, which is heavily dependent on its energy industry. Declaring an intention to ban fracking would alienate such crucial states and lose her the election.

By Irina Slav for Oilprice.com