The Integer View 22 May 2017 – Chinese Coal Capacity; EU Compromise with Gazprom; Senegal Phosphate Project Update; Legacy Potash Mine BethunePosted On: 22-05-2017 By: Grahame Turnbull
I got 99 problems and China’s coal market is yuan
By Laura Cross – Nitrogen Research Manager
Ambitious coal capacity rationalisation measures are underway in China. The country has already eliminated around 560 million tonnes of coal capacity and closed 7,250 coal mines in 2011-2015. In 2016, China removed 290 million tpy of coal capacity and is expecting to close 150 million tpy in 2017. The Chinese National Development and Reform Commission says it plans to close around 4,300 coal mines, remove outdated capacity totalling 50 million tpy and redeploy around 1 million workers by 2019.
Government measures introduced to the coal sector in 2016 to deal with the structural overcapacity in coal production led to a recovery in coal prices in the second half of the year, with prices having fallen almost uninterrupted prior to this. The primary measure put in place to shorten the market was a directive to reduce the number of days per year that coal mines can operate, from 330 to 276, driving up the price of coking coal in particular.
The increase in coal costs squeezed coal-based nitrogen producer margins, leading operators to further idle capacity, and effectively raised the urea export price floor. However, following the removal of the coal production day limits – implemented when the rapid increase in coal prices was deemed to have put too much pressure on consumers – coal prices began to flatten out. This reinforces the view that the Chinese government will continue to exercise its power to intervene in the market, although this effect has become less influential.
With a more rational approach, the Chinese coal market is forecast to become increasingly driven by production economics, and in turn prices are expected to become more closely aligned with international levels, providing the government stays on the path towards exposing commodity industries to market forces.
EU compromise with Gazprom indicates further shifts away from oil-indexing
By Benjamin Treadwell – Nitrogen Analyst
In March, Russian gas giant Gazprom agreed to a draft compromise with the EU to end an investigation into alleged abuse of market power in Eastern Europe, beginning a seven-week feedback window before any finalisation begins. The agreement would allow for the company to resolve the ongoing investigation without incurring a fine.
The EU has been investigating Gazprom’s operations in eastern Europe since 2011 when investigations into anti-competitive behaviour in Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Poland, Hungary and Slovakia. These regions were found to have limited alternatives to buying from Gazprom and exposed a possible abuse of market power by the Russian gas giant.
While Gazprom will be happy to end the issue quickly and without a fine, the eastern European countries involved believe that the agreement does not go far enough to remove the negative impact of Gazprom on competition in the region.
The biggest impact of the proposed deal would be to link contracted gas prices to benchmark natural gas hubs in Western Europe, effectively stopping the existing structure of oil-indexing in Bulgaria, Estonia, Latvia, Lithuania and Poland. This will allow customers in these regions to have more frequent and effective price reviews and allow gas pricing to based more closely on gas-on-gas competition. If agreement is implemented Brussels will reserve the right to fine Gazprom up to 10% of its global turnover if there is a breach.
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Avenira ramping up at Senegal phosphate project
By Ibi Idoniboye – Lead Phosphate and NPK Analyst
Australian fertilizer producer Avenira Limited reported on April 12th that production at its flagship Baobab Phosphate project in Senegal is gradually ramping up towards nameplate phosphate rock capacity of 500,000 tonnes. The producer has been busy raising capital over the last six months to enable start-up. In April, a share purchase plan sought to raise US$1.9 million of working capital to help provide buffer for slower-than-anticipated initial phosphate rock shipments. In January 2017, the producer secured US$6.7 million in finance through the Bank of West Africa.
The Baobab project is notable in that it is one of two export oriented phosphate rock projects inaugurating commercial operations in 2017 while the market is weak and investor confidence relatively low. Several rock mining projects that looked likely to go ahead just a few years back are now stalling at the finance stage or have been shelved completely. Avenira has already secured several offtake agreements and shipped its first commercial volumes in early March, consisting of 21,000 t of phosphate concentrate to India.
K+S officially opens Legacy potash mine, now named “Bethune”
By Rebecca Hayward – Lead Potash Analyst
K+S has cut ribbon on its new Saskatchewan mine. Total capital expenditure on the mine is estimated to have been US$3.4 billion, which is equivalent to US$1,189 per tonne of the 2.86 million tpy mine.
The new potash mine is now to be known as Bethune, named after the closest neighbouring town. K+S expects to achieve its desired production capacity of 2 million tpy by the end of 2017. The first tonne of marketable potash is expected to be produced in June and the company still expects to reach a production capacity of 2 million tonnes by the end of 2017. The project broke ground in 2012 and has taken five years to complete construction.
Earlier this month, Reuters reported that K+S must overcome the obstacle of where to store its potash. Apparently the company is still in planning phase of a warehouse network with Koch Industries Inc. The company is reported to be confident that it will find sufficient storage.
The Bethune event was the second opening ceremony for a potash mine in Q2 2017, following the inauguration of the 1.4 million tpy Garlyk potash mine in Turkmenistan last month. Both producers must quickly find their foothold in a market characterised by an abundance of spare capacity and prices at close to their lowest point for the past seven years.
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