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Even Chinese and European rate cuts could not offset worries about downside risks, which pushed commodities lower this week. Still, easy monetary policy should prop up energy and base metal demand in the longer term.
Disappointing US jobs data capped a week of declines in commodities markets. While looser monetary policy in China and Europe may spur greater capital spending in the longer term, worries about near-term risks dampened investors’ appetite for energy as well as base metals, and precious metals were sold off to cover losses.
Thursday’s rate cuts in China and Europe did little to pump up demand for commodities, although easy monetary policy should spur economic growth down the line. The People’s Bank of China cut its benchmark lending and deposit rates for the second time in a month, while the European Central Bank cut its key rate to a historic low of 0.75 percent.
On Friday, the US Department of Labor reported that June non-farm payrolls rose by 80,000 compared to an increase of 77,000 the previous month, lower than analysts’ expectations. The unemployment rate remained unchanged at 8.2 percent.
The International Monetary Fund will be cutting back its projections for global growth this year due to weakness in jobs and investments in industrialized nations such as China, India, and Brazil. The IMF’s managing director, Christine Lagarde, said in a speech in Tokyo that “[t]he global growth outlook will be somewhat less than we anticipated just three months ago,” adding that the agency’s world economy projections will be released in 10 days’ time. In April, the IMF projected that global growth would increase by 3.5 percent in 2012 compared to a year ago.
In early morning trade Friday, Brent crude is down 2 percent at $98.68 a barrel, while natural gas is down 0.3 percent at $2.97 per million British thermal units. Copper is 1.9 percent lower at $3.42 a pound and gold is 1.2 percent weaker at $1,589.60 an ounce.
Oil and gas
In Japan, an independent parliamentary report found that the nuclear disaster following the earthquake and tsunami in March 2011 was man-made, and should have been anticipated and avoided. The report, produced by the National Diet’s Fukushima Nuclear Accident Independent Investigation Commission, stated that government regulatory organizations and Tokyo Electric Power (TSE:9501), which operated the Fukushima Daiichi nuclear plant, “betrayed the nation’s right to be safe from nuclear accidents.” As public protests against the resumption of nuclear energy use continued, Tokyo Electric Power reported that its fuel oil consumption rose to 539,000 kiloliters in June, up from 192,000 the same month a year ago, as a result of increased dependence on thermal power generation. Crude oil consumption rose 120 percent on year to 231,000 kiloliters.
ExxonMobil (NYSE:XOM) and Dubai’s Dragon Oil (LSE:DGO), Kuwait Energy, India’s ONGC Videsh, Brazil’s Petra Energia, Pakistan Petroleum (OTC Pink:PKKKY), Thailand’s PTT Exploration and Production (OTC Pink:PTXLF), and Turkish Petroleum have expressed interest in bidding for rights to explore for oil and gas in Afghanistan, according to the Afghan Ministry of Mines. Bids will be accepted in autumn.
Chevron (NYSE:CVX) may find it difficult to reach a settlement with plaintiffs in Ecuador about environmental damage caused by its Texaco unit nearly two decades ago, according to The Wall Street Journal. The oil giant has been sued by indigenous groups who accuse Texaco of contaminating their land. Chevron acquired Texaco in 2001, but the unit had been in operation in the country from 1964 to 1992. An Ecuadorian court ruled last year that Chevron must pay $18.2 billion in damages, and the plaintiffs have since filed lawsuits in Canada and Brazil in order to seize Chevron’s assets in those countries.
Toronto-based Brownstone Energy (TSXV:BWN,OTCQX:BWSOF) completed testing at its Flami-1 well, the second well drilled by Colombia’s NCT Energy Group. Given the lower productivity and higher watercut of the Mirador formation, testing of it has been terminated and the well will now be shut in while an application is made to Colombia’s Ministry of Mines and Energy to put the well on an extended test. Brownstone is paying 50 percent of the total cost of the well and will earn 45.27 percent of production before payout and 34.25 percent of production after payout under a private participating interest agreement.
Copper
A delay in BHP Billiton’s (ASX:BHP,NYSE:BHP,LSE:BLT) Olympic Dam project in Australia would hurt global copper supply from late 2013 onward, according to Reuters. BHP has been mulling the possibility of postponing major projects – including the Olympic Dam, which is the world’s fourth-largest copper deposit – as shareholders clamor for better financial performance from the mining giant. Many analysts believe that the company will delay or even cancel its $30 billion expansion plan for the site as a result.
Construction of Sichuan Hongda’s (SSE:600331) $1.6 billion copper alloy plant in Southwest China was stopped this week amid protests about the environmental damage that the plant may cause. Trading of the company’s shares on the Shanghai Stock Exchange was suspended on Tuesday following the news.
Vancouver-based NGEx Resources (TSX:NGQ) intersected 0.58 percent copper equivalent over 1,013 meters at its Los Helados copper and gold project in Chile.
“The results released today support our view that the Company’s land package has the potential to host a very significant new copper-gold district with multiple deposits within a 15-kilometre radius. We feel that these projects offer our investors exposure to an emerging deposit cluster that continues to deliver outstanding exploration results and has the potential to rank among the most significant in this prolific copper-gold belt,” stated NGEx CEO Wojtek Wodzicki.
Gold
Last month, higher gold prices and a weaker US dollar led South Africa’s gold and foreign currency reserves to rise for the first time in four months. The South African Reserve Bank reported that gross reserves rose 0.6 percent to $49.2 billion, and stated that the increase was “primarily due to valuation adjustments emanating from the higher U.S. dollar gold price and depreciation of the U.S. dollar against other major currencies.”
Also in South Africa, Pretoria’s High Court ruled that Harmony Gold Mining (NYSE:HMY) needs to keep paying for the treatment of acid mine water in and around its Orkney gold mine. Harmony Gold has argued that since it sold the mine to Pamodzi Gold Orkney in 2007, it is no longer responsible for the site. Pamodzi, however, went into provisional liquidation in 2009 and the court ruled that Harmony still owns the land.
Barrick Gold (NYSE:ABX) said that a law banning mining around Argentina’s glaciers will not stop development of its Pascua-Lama project, which is slated to begin production in 2013. The law to protect water reserves will not impact the company as there are no glaciers near the mine on the Argentine side, according to Barrick Gold. The bulk of the project is in Chile.
Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.