Sinopec's profit soars; announces plans to boost oversea expansion

Sinopec's (a.k.a China Petroleum & Chemical Corp.) net income rose at least tenfold to 22 billion yuan ($3.22 billion usd) in the second quarter according to this Bloomberg article.

The company has also announced it is planning a "rapid" overseas expansion in order to secure energy supply adequate to feed Chinese demand.

[Sinopec I passed on a bus ride to Shanxi, October - 2006]

The announcement, along with the company's record gains in profit come as other global giants in the energy industry such as Royal Dutch Shell and Exxon Mobil have seen their earnings decline as prices plummeted and demand waned when the global slowdown ensued at the end of 2008.

According to Bloomberg, Sinopec supplies 80% of China's fuel needs and is China's largest refiner of crude oil. The company is looking for new foreign partners, expand its refining capacity and reduce operational costs. The company expects demand will remain strong in China and that oil prices will continue to rise throughout the second half of the year.

Here are a few highlights from the Bloomberg article, "Sinopec to Boost Expansion Abroad After Profit Surges to Record," which you can access in full by clicking here.

“Sinopec’s main business is refining and it needs to increase its oil reserves and reduce its reliance on other oil producers,” said Larry Grace, an independent oil analyst based in Hong Kong. “There’s a government directive to increase overseas oil and gas assets.”

...

Sinopec gets almost all its revenue from refining and the sale and distribution of fuels. Oil production accounted for just over 2 percent of sales, according to its 2008 annual report. The company imports about 80 percent of the crude it processes.

...

Su said the company will accelerate its “go global” strategy.

Parent company China Petrochemical Corp. said on Aug. 18 it had concluded the C$8.3 billion ($7.7 billion) acquisition of Addax Petroleum Corp. to secure reserves in Iraq and Africa. China Petrochemical has assets in Russia, Angola, Ecuador, Australia, Canada, Kazakhstan and Myanmar.

Sinopec’s parent completed the purchase of Tanganyika Oil Co. for about $1.8 billion in December. Vancouver-based Tanganyika holds stakes in two Syrian production-sharing agreements covering the Oudeh and Tishrine/Sheikh Mansour blocks after expanding from Tanzania in 1996.

IEA downgrades 2009 global oil demand... again

In its Monthly Oil Report, issued Friday in Paris, the IEA said that "after a flurry of downward adjustments by both public and private forecasters," oil demand for 2009 has been revised down by 1 million barrels per day, to 83.4 million barrels per day.

This is a drop of 2.8 per cent compared to 2008, the IEA said.

Global GDP is now expected to contract by 1.4 per cent in 2009, with the 30 members of the Organization for Economic Cooperation and Development (OECD) especially hard-hit.

Click here to access this article in its entirety from Rigzone -- Deutsche Presse-Agentur (dpa).

Commodities in focus – mixed messages from China

Until this past October / November when markets came crashing down all over the world as the US credit crisis exploded into a full blown global economic crisis it seemed as if nothing could stem China's insatiable demand for commodities.

However, once economic crisis spread to wealthy nations a chain reaction started.

First, consumers who had been eating up cheap Chinese exports for years decreased their spending as credit dried up. Less demand for goods produced by China's manufacturing sector would mean less Chinese demand for commodities.

Second, a slowing global economy produced a situation where aggregate commodity demand shrank around the world. It mattered little if a country is rich or poor, a slowing global economy would mean less demand for energy and metals.

Third, as economic problems continued to spread it became less and less likely the economic dragon of China would be able to ride the storm out. If a global recession occurred, China would find it very difficult to rely solely on their domestic economy and international currency reserves to keep things growing as fast as they had been from 2001-2008.

Finally (and this is a over-simplification), combine all facts and you get a situation where the future of the global economy is unpredictable. Meaning, no one really knows when Chinese demand will pick up again, no one really knows when the global economy will recover and therefore investing in metals and energy seemed foolish if recession would hamper demand in the near future.

That being said, a few interesting stories passed through the presses this weekend. The first two indicate demand is returning to the commodity markets in China, the second two tell a different story.

Baoshan Steel, Angang Steel, Wuhan Iron & Steel and Maanshan Iron & Steel. Four major Chinese steelmaker stock ratings where raised by Credit Suisse, which said improving demand will help raise steel prices (click here for Bloomberg LP article).

China National Petroleum Corp., the country's biggest oil and gas producer, said it plans to increase oil and gas production by 5% annually to meet domestic demand (click here for Bloomberg LP article).

China's State Electricity Regulatory Commission said demand and output in China will continue to shrink this year because of slower economic growth. China is the world's second largest consumer of energy.

If people are using less electricity it means one of three things. First, it could be a bad sign for the economy. It could indicate the Chinese are becoming more efficient / environmentally friendly. Or third, it may mean the Chinese are trying to save a few Yuan from the higher price they have to pay for the energy.

The correct answer in this situation I feel is the first. A slowing economy simply means less demand for energy. I don't doubt the Chinese are indeed adapting their growth strategies to be more environmentally friendly, but I don't think it is the reason their demand for energy is shrinking (80% of China's energy comes from coal). Last, I don't think it's because of higher prices, commodities after all have once again become very cheap (click here for the Bloomberg LP article).

Moving onto aluminum. China's Shanxi Guanlu said on Friday it was shutting 40,000t of aluminum capacity owing to low prices and weak demand (click here for the full article from the Mining Journal).

I think the main idea to take away with you from all of this is that the market has no idea how to make up its mind and neither do the participants in the market. If and when the global economy does see a recovery, be sure you have some of your money invested in energy and metals, because demand will return and with a vengeance.

For a bit of perspective check out what Jimmy Rogers and Marc Faber, the guru's of commodity investing have to say.



Jim Rogers - Recession and Commodities in 2008




Marc Faber - Says He'd Favor Industrial Commodities Over Gold 2009 - P1




Marc Faber - Says He'd Favor Industrial Commodities Over Gold 2009 - P2

Energy in focus: China-US talk energy cooperation, while US House of Rep pushes national renewable energy plan and Bush moves to end offshore oil ban

Two developments in the energy sector warrant attention, and two which are unfolding in parallel with one another.

I apologize for a slowdown in updates as of recent, took a bit of a mental break yesterday and was dragged into the Eurocup 2008 when I should have been working.

First, headlines from most major media have reported Chinese and US leaders are meeting in Annapolis, Maryland to discuss energy cooperation. A positive move in the right direction, as described by the attendees, it is about the time to two largest net importers of energy discuss ways to better manage energy supplies and cooperation around the world for the general good of the global economy.

Visiting Chinese Vice Premier Wang Qishan (front L) shakes hands with U.S. Treasury Secretary Henry Paulson (front R) at the opening ceremony of the 4th round of China-U.S. Strategic Economic Dialogue in Annapolis, Maryland, the United States of America, June 17, 2008. China and the United States on Tuesday started here their 4th round of Strategic Economic Dialogue. (Xinhua/Yao Dawei) <-- click here for full story from Xinhua Media.



There is also talk in the House of Representatives for renewing a bill which promotes the development of more sources of renewable energy. As reported by C-SPAN

"Despite federal initiatives going back to the 1970's, renewable electricity makes up less than 3% of the generation mix in the U.S. Sen. Jeff Bingaman (D-NM) chairs a Senate Energy & Natural Resources Committee hearing to discuss the challenges and regional solutions to developing transmission for renewable-electricity resources."

Third, this morning good old President G. Bush made headlines saying he wants to lift the currently in place bans on offshore oil drilling. (See Reuters Article here)

In Washington, the White House press secretary, Dana Perino, said Mr. Bush would urge Congress to “pass legislation lifting the Congressional ban on safe, environmentally friendly offshore oil drilling,” adding, “The president believes Congress shouldn’t waste any more time.”

For a full report check out the article published by today's New York Times. You can view the complete article written by reporter Sheryl Stoleberg by clicking on this link.

My reaction from all these developments, is simply that every side is reacting irrationally to the fact we're paying 4+ / gallon at the pumps. Action does need to be taken, but as many steps forward in one direction, usually following the policy / plan of one side of the political spectrum (either Republican or Democrat), the other side has a tendency to denounce the other sides plans almost immediately. I am far from an expert on the US energy sector, so whether the democrats of republicans have a better plan to help the US with its energy demands, I truly do not know. However, it will definitely be better than Bush's promises that gas prices would go down after the war in Iraq... hehe

As soon as Bush made this proposal, of course Nancy Polosi immediately responded in kind, telling reporters "The president’s proposal sounds like another page from the administration’s energy policy that was literally written by the oil industry: give away more public resources to the very same oil companies that are sitting on 68 million acres of federal lands they’ve already leased.”

Wealthy donors + Rice + Interactive Vocab Game -- beginning the day with a new tool to help the global poor cope with rising fuel costs

I decided to mix a bit of humanitarianism spirit and food aid along with the afternoon analysis today which today, concentrates on rising food prices.

Basic staples of nourishment (food), ranging from wheat, rice, corn, soy to chicken and beef are on the rise around the world. Commodity prices are in a bull market, few can argue that. Combining the factors of rising demand for everything from food, energy and base metals in emerging markets AND sky rocketing energy prices resulting from a variety of factors such as overall economic uncertainty, instability in the Middle East, and supply disruptions in the North Sea or Nigeria, have simply established an environment in which natural resources have proportionately speaking, become scarcer than ever before while demand and necessity for them remains strong.

Many will feel the affects of rising prices and inflation, in particular, the poor of the world. The global poor in large rely on basic staples like rice for a large portion of their diets. In terms of energy, most developing countries, unless they have substantial price controls in place, already pay higher prices per barrel of petrol than Americans in the US. A rise in the cost of gas for a taxi driver in Lima, Peru or in Cape Town, South Africa of 10-15% will be much far more painful for a Peruvian or South African than it is for American's filling their tanks this summer.

In an effort to help the poor of the developing world Poverty.com, has launched a sister website www.freerice.com where people can play a very addicting vocabulary game, where you simply choose the definition of a word displayed on the screen, if you choose correctly, the financial backers and advertisers of the site will donate rice to poor countries in exchange for your time. Defined on freerice.com as follows

FreeRice has two goals:

1. Provide English vocabulary to everyone for free.
2. Help end world hunger by providing rice to hungry people for free.

This is made possible by the sponsors who advertise on this site.

Whether you are CEO of a large corporation or a street child in a poor country, improving your vocabulary can improve your life. It is a great investment in yourself.

Perhaps even greater is the investment your donated rice makes in hungry human beings, enabling them to function and be productive. Somewhere in the world, a person is eating rice that you helped provide. Thank you.

The site in my opinion exploits the short attention span of the millions of people who spend way too many hours in front of a computer screen and are constantly searching for ways to distract themselves (myself included hehe).

Food prices have been on the rise in practically every corner of the world. Whether you’re a mother/father shopping for a family of 6 in the United States, and more importantly if you’re a mother/father providing for a family of 6 in the “global south,” which includes most the developing countries of the world.

Jimmy Rogers Commodity Index (RICI), was created in the 90’s to track the growth of commodity prices by Jim Rogers and has since become one of most well respected benchmarks / index for observing and tracking commodity price movements. It’s also a great index for investors who have used it as a means to identify investments in the commodity market. Growing (YTD) in 2008 by 25.86% while the S&P 500 Composite index is down -8.75% this year, the Nasdaq down -9.35%, the Dow Jones Comp down -8.47% (data gathered and accessed on June 13, 2008 from http://www.rogersrawmaterials.com/).

The Rogers Raw Materials Page describes the composition of the index in greater detail. Below is copy a excerpt of how the index is compiled, provided to give readers a general idea

“Rogers International Commodity Index® (RICI)® is based on monthly closing prices of a fixed-weight portfolio of the nearby futures and forwards contract month of international commodity markets. The selection and weighting of the portfolio is reviewed annually and weights assigned in the December preceding the start of a new year.”

This index is a great measure of rising costs. By rising costs, I mean the rising price of practically all goods in the global economy. The global economy is now beginning to show signs; or rather finally express signs that inflation is a potential threat to global growth and needs to be handled with care to ensure continued growth. Sadly, central bankers and countries around the world do not work together all too well yet, multi-lateral organizations lack the influence to organize a global effort—so countries around the world are raising interest rates in order to re-enforce their currencies strength, institutional investors are buying energy and gold to hedge their investments against the possibility of inflation, and even the US, EU, and UK have expressed signs there will be little possibility of further rate cuts, leaning instead towards increasing interest rates.

Although in economic theory this should do the trick, the problem is more complicated than many are capable of realizing. Yes… easy money for years has contributed to inflation, but more than anything it’s the fact capacity for production is no longer what it was when you consider the growth of countries such as China and India.

Food related commodities included on the Rogers index and their respective weights: Wheat (7%), corn (4.75%), Live Cattle (2%), Coffee (2%), Rice (0.5%), soybean oil (2%), lean hogs (1%), Sugar (2%), azuki beans (0.25%), Canola (0.67%) Orange Juice (0.66%), soybean meal (0.75%), and barley (0.27%). Personally I feel the only under-represented staple would be rice which deserves far more weight within the index considering how many billions of people in the world eat it on a daily basis. Together food related commodities comprise 21.72% of the index. Energy, metals and wood related commodities comprise the rest.

The world is in a correction phase in which consumers, producers and governments are going to have to adjust and adapt to a new global environment—where wasteful consumption is no longer an option. People must adjust to higher prices as other people in emerging markets demand the same things people in wealthier societies have enjoyed for quite some time.

Reflecting in brief upon my own dissertation on China’s growing interest in South America, observe China’s rising demand for soy and meat, only 2 of the commodities mentioned above and only 1 of the major developing markets in the world. Yes many argue China proportionately holds the most influence as the fastest growing and biggest emerging market, China is by no means the only large growing market.

Commodities in Focus -- Energy, food and metals grab world attention as prices continue to sour and supply problems emerge

Fitch analyst calls for new investment as oil prices soar - Regional

by Nathan Crooks

Business News Americas
http://www.bnamericas.com/news/privatization/Fitch_analyst_calls_for_new_investment_as_oil_prices_soar

Tuesday, June 10, 2008

High international oil prices should encourage oil companies that operate in Latin America to invest in new projects, Gianna Bern, senior director and oil and gas analyst for Fitch Ratings Latin America Corporate Finance, told BNamericas.

"In Latin America, governments have been the one of the biggest beneficiaries of high crude oil prices in terms of taxes and royalties," Bern said.

For example, Venezuela, Ecuador and Bolivia have increased their take of oil profits in recent years. Brazil and Colombia are mulling plans to increase the state's gains from oil production as well.

"Having said that, at US$135/b WTI, now is the time for the oil companies to invest and pursue those projects that they wouldn't ordinarily," she said in reference to West Texas Intermediate prices. "The economics become compelling."

The analyst, meanwhile, does not see an end to high oil prices in the short term.

"High crude oil prices are driven by a fundamental imbalance in the global market between crude oil supply and demand. Supplies are not able to keep up with rising demand, primarily from non-OECD countries," she said.

The Organization for Economic Cooperation and Development (OECD) includes 30 member countries, including Mexico.

"There could be upward pressure on crude prices until there is more of a market balance which could take months, if not longer, for additional supplies to hit the market," Bern continued.

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Grow more food or starve: FAO
Commodity Online
http://www.commodityonline.com/news/topstory/Grow-more-food-or-starve-FAO-9365-3.html

NEW DELHI: Want to beat the food crisis? Go for more investments in the agriculture sector and grow more food.

That is what United Nations Food and Agriculture Organization (FAO) has to advise the countries across the world.

If you don’t listen to FAO, your population will starve. That is the clear message came from Rome after a summit on food crisis there.

“There is an urgent need to help developing countries and countries in transition to expand agriculture and food production, and to increase investment in agriculture, agribusiness and rural development from both public and private sources,” the FAO summit declaration said.

Donors and International Financial Institutions are urged to provide balance of payments support and budget support to food-importing, low-income countries. Other measures should be considered as necessary to improve the financial situation of the countries in need, including reviewing debt servicing as necessary.

The final declaration also called on governments to assure United Nations agencies the resources to expand and enhance their food assistance and support safety net programmes to address hunger and malnutrition, when appropriate, through the use of local or regional purchases.

Speaking about the growing social threat from rising food prices at the opening of the summit, FAO director general Jacques Diouf said: “What is important today is to realise that the time for talking is long past. Now is the time for action.”

The declaration also called for development partners to participate in and contribute to international and regional initiatives on soaring food prices and assist countries to put in place the revised policies and measures to help farmers, particularly small-scale producers, to increase production and integrate with local, regional and international markets.

Also recommended by the declaration are initiatives that moderate unusual fluctuations in food grain prices. “We call on relevant institutions to assist countries in developing their food stock capacities and consider other measures to strengthen food security risk management for affected countries,” FAO said.

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Is Nymex admitting to speculation in crude oil? By Sreekumar Raghavan MUMBAI: The debate is still raging on what is causing the crude to rise. It is going from one extreme to the other. Some blame it on high speculation, others on demand-supply imbalances and forecasters predicting it would rise to $200. The actions of world’s largest commodity derivatives exchange, The New York Mercantile Exchange, Inc. during the past two days indicates the possibility that speculation is indeed beyond allowable limits. In the case of oman crude oil, the margins were raised from $8300 to $9500 on June 9. For members it was raised from 9,130 to 10,450 and for customers from 11,205 to 12,825. On June 10 it was further revised to 11,500, 12,650 and 15,525 for clearing members, members and customers respectively. It has announced margin changes for its crude oil and related futures contract even though no explanation has been provided for such actions by Nymex or market regulator Commodity Futures Trading Commission. Among the contracts attracting higher margins from now include: July to December 2008 crude oil, crude oil calendar swap, MiNYTM crude oil futures, Nymed MACI index futures, natural gas, oman crude among others. July-December Contracts Margins for the July to December 2008 crude oil, crude oil calendar swap, and crude oil financial futures contracts will increase to $8,750 from $7,750 for clearing members, to $9,625 from $8,525 for members, and to $11,813 from$10,463 for customers. Margins for all other months will increase to $8,500from $7,750 for clearing members, to $9,350 from $8,525 for members, and to$11,475 from $10,463 for customers. The margins for the July through December NYMEX miNYTM crude oil futures contracts will increase to $4,375 from $3,875 for clearing members, to $4,813 from $4,263 for members, and to $5,906 from $5,231 for customers. Margins for all other months will increase to $4,250 from $3,875 for clearing members, to $4,675 from $4,263 for members, and to $5,738 from $5,231 for customers.The margins for the NYMEX MACI index futures contract will increase to $1,742 from $1,550 for clearing members, to $1,916 from $1,705 for members, and to$2,351 from $2,093 for customers. Natural Gas Margins for the first and second months of the natural gas, natural gas penultimate financial, and natural gas last day financial futures contracts will increase to $8,250 from $7,500 for clearing members, to $9,075 from $8,250 for members, and to $11,138 from $10,125 for customers. The margins for the third and fourth months will increase to 9,000 from $8,000 for clearing members, to $9,900 from $8,800 for members, and to $12,150 from $10,800 for customers. Margins for the fifth to ninth months will increase to $9,250 from $8,500 for clearing members, to $10,175 from $9,350 formembers, and to $12,488 from $11,475 for customers. The margins for the 10th to 21st months will increase to $6,000 from $5,500 for clearing members, to $6,600 from $6,050 for members, and to $8,100 from $7,425 for customers. Margins for the 22nd to 33rd months will increase to $4,750 from $4,500 for clearing members, to $5,225 from $4,950 for members, and to $6,413 from $6,075 for customers. The margins for the 34th to 45th months will increase to $4,500 from $4,250 for clearing members, to $4,950 from $4,675 for members, and to $6,075 from $5,738 for customers. Margins for all other months will increase to $4,000 from $3,750 for clearing members, to $4,400 from $4,125 for members, and to $5,400 from $5,063 for customers. The margins for the first and second months of the NYMEX miNY natural gas and Henry Hub swap and penultimate swap futures contracts will increase to $2,063 from $1,875 for clearing members, to $2,269 from $2,063 for members, and to$2,784 from $2,531 for customers. The margins for the third and fourth monthswill increase to $2,250 from $2,000 for clearing members, to $2,475 from$2,200 for members, and to $3,038 from $2,700 for customers. Margins for the fifth to ninth months will increase to $2,313 from $2,125 for clearing members, to $2,544 from $2,338 for members, and to $3,122 from $2,869 for customers. The margins for the 10th to 21st months will increase to $1,500 from $1,375 for clearing members, to $1,650 from $1,513 for members, and to $2,025 from $1,856 for customers. Margins for the 22nd to 33rd months will increase to $1,188 from $1,125 for clearing members, to $1,306 from $1,238 for members, and to $1,603 from $1,519 for customers. The margins for the 34th to 45th months will increase to $1,125 from $1,063 for clearing members, to $1,238 from $1,169 for members, and to $1,519 from $1,434 for customers. Margins for all other months will increase to $1,000 from $938 for clearing members, to $1,100 from $1,031 for members, and to $1,350 from $1,266 for customers. The margins for the Henry Hub swing swap futures contracts will increase to $2,063 from $1,875 for clearing members, to $2,269 from $2,063 for members,and to $2,784 from $2,531 for customers.

Heating Oil
Margins for the first month of the heating oil, New York Harbor heating oil calendar swap, and heating oil financial futures contracts will increase to $10,000 from $9,000 for clearing members, to $11,000 from $9,900 for members, and to $13,500 from $12,150 for customers.

Margins for the second month will increase to $9,500 from $8,500 for clearing members, to $10,450 from $9,350 for members, and to $12,825 from $11,475 for customers. Margins for the third through ninth months will increase to $8,750 from $8,000 for clearing members, to $9,625 from $8,800 for members, and to $11,813 from $10,800 for customers. The margins for all other months will increase to $8,000 from $7,500 for clearing members, to $8,800 from $8,250 for members, and to $10,800 from $10,125 for customers.

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Margins for the first month of NYMEX miNY heating oil futures contract will increase to $5,000 from $4,500 for clearing members, to $5,500 from $4,950 for members, and to $6,750 from $6,075 for customers.

The margins for the second month will increase to $4,750 from $4,250 for clearing members, to $5,225 from $4,675 for members, and to $6,413 from $5,738 for customers. Margins for the third through ninth months will increase to$4,375 from $4,000 for clearing members, to $4,813 from $4,400 for members,and to $5,906 from $5,400 for customers. Margins for all other months will increase $4,000 from $3,750 for clearing members, to $4,400 from $4,125 for members, and to $5,400 from $5,063 for customers.

Margins for the first month of the RBOB gasoline, RBOB financial, and RBOB calendar swap futures contracts will increase to $8,750 from $7,750 for clearing members, to $9,625 from $8,525 for members, and to $11,813 from $10,463 for customers. The margins for the second to fourth months will increase to $8,250 from $7,250 clearing members, to $9,075 from $7,975 for members, and to $11,138 from $9,788 for customers. Margins for the fifth to11th months will increase to $7,500 from $6,500 for clearing members, to $8,250 from $7,150 for members, and to $10,125 from $8,775 customers.Margins for all other months will increase to $7,250 from $6,250 for clearing members, to $7,975 from $6,875 for members, and to $9,788 from $8,438 for customers.

Margins for the first month of the NYMEX miNY RBOB gasoline futures contract will increase to $4,375 from $3,875 for clearing members, to $4,813 from $4,263 for members, and to $5,906 from 5,231 for customers. The margins for the second to fourth months will increase to $4,125 from $3,625 for clearing members, to $4,538 from $3,988 for members, and to $5,569 from $4,894 for customers. Margins for the fifth to 11th months will increase to $3,750 from $3,250 for clearing members, to $4,125 from $3,575 for members, and to $5,063 from $4,388 for customers. Margins for all other months will increase to$3,625 from $3,125 for clearing members, to $3,988 from $3,438 for members, and to $4,894 from $4,219 for customers.

If indeed, $25 of the present crude prices are on account of speculation, as suggested by some experts, will Nymex actions result in a fall in prices in near future? That itself can be cause for a speculation.

Meanwhile, a query related to increased margins from Commodity Online is awating reply from Nymex and CFTC