Donald Trump is a true artist. We know when the public’s attention begins to lag, the artist on stage must change their tone, modulate their voice by modifying the inflection, whispering and then brutally waking the audience with a well-simulated fit of fury. This is exactly the Trumpian strategy on some of the issues that interest CyclOpe.
With respect to Iran, as an aircraft carrier and a B52 squadron crossed into the Gulf following attacks on tankers off Fujairah and sanctions against Iran’s latest economic partners become more precise, Donald Trump declared in Tokyo that he does not wish the fall of the Islamic regime and gave Shinzo Abe carte blanche as negotiator with Iran. Markets appreciated and, at $70 a barrel, downplay—perhaps wrongly—the Middle Eastern political risk.
The same scenario for North Korea where the South Koreans nevertheless must have choked on Donald Trump’s praise of ‘young’ Kim.
Things are more complex with China and there, Trump is deploying a very Macronian ‘at the same time’. Never were tensions so strong between China and the United States and with the ‘Huawei affair’, the conflict has changed in scope. China reacted by making its opponent feel that its real Achilles heel regarding new technologies is in rare earths. Soybeans have moved into the background even though the USDA has cleared $16 billion to help the farmers again. Negotiations are blocked at least until the G20 summit in Japan in late June. Nevertheless, Donald Trump is optimistic about the favourable conclusion of an agreement with China, which has nevertheless reacted with new taxes and needling over Fedex.
With his Canadian and Mexican neighbours, on the one hand he ended up lifting the taxes that hit steel and aluminium, but on the other, has engaged in a showdown with the Mexican President Obrador (AMLO) by implementing taxes of 5%, which could go up to 25%, on Mexican exports if Mexico does not limit uncontrolled immigration. At the same time, he also lifted the additional duties that affected the Turkey of Erdogan’s steel exports.
Finally, as far as Europe is concerned, he must be—like all of us—looking to see who his opponents will be in the autumn of 2019, and it is not very certain that Steve Bannon will be much help to him in this regard. Coincidentally, he has lifted the threat of sanctions on European automobiles for a few months. But the threat remains and he has placed eight countries under surveillance, including Germany and Italy for currency manipulation. In early June, he will be on the beaches of Normandy to celebrate the 75th anniversary of ‘D. Day’. This may be the occasion for a few tweets illustrating his ‘formidable presence’ and for adding a little oil to the fire of Brexit by praising Nigel Farage and Boris Johnson.
Our artist, as we see, has the ability of occupying several scenes at the same time. He is fortunate enough to have only a few ‘amateur’ Democrats to face and to be supported by an audience that appreciates a quality economic performance (3% growth, 3.6% unemployment) based on the power of the new economy and the oil and shale gas revolution.
The sequel of course remains to be written: reason would push for a ‘peace of the braves’ with China, a pause in the escalation with Iran, an opening on the other hand to new ‘fronts’ and why not to this true ‘soft belly’ that Europe has become. But do not doubt it, Donald Trump is able to surprise the world…
In any case, it may seem excessive to focus on Donald Trump alone. But the impact of the smallest Trumpian tweet on the oil and gas markets, soya or pork, steel or rare earths (a non-exhaustive list of course) are such that we must give him our full attention.
For the rest, the contrast is great between the metal markets, which are prone to doubt despite well-oriented fundamentals like copper, and the agricultural markets crumbling under the prospect of historical harvests that only African swine fever in China and the rest of Asia is in any way—very much in fact—upsetting.
In conclusion, some figures: 70, 8, 100, 111, 120. Not a lottery sequence, but:
- $70 a barrel of Brent, the average price in May offers evidence that the markets do not ‘price’ the political risk in the Middle East.
- $8 for a bushel of soybeans, down as a result of the worsening Sino-US trade war.
- $100 per tonne for iron ore, rising as a result of Brazilian accidents and record steel production in China.
- $111 million for a Monet painting sold in New York, the star of a week of sales that totalled more than $1.5 billion
- €120 million is the minimum price for the transfer of French footballer Griezmann from Atletico de Madrid to Barcelona. But here, there may be other records expected for the next ‘mercato’.
Art and football, two of the few areas that remain outside our Trumpian concerns!
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According to the FAO, world meat production is expected to decline for the first time in 2019 by 0.2%. Since 2000, it has increased by 45%. This drop is mainly due to swine fever in China.
India has imported two shipments of non-GMO maize from Ukraine. GMO Cereals are banned in India. The maize was imported at $205 per tonne CIF.
After oil, the United States is attacking Iran on the metal front, banning all deals on steel, aluminium and copper, which account for 10% of Iran’s exports.
The US government is preparing a second programme to support farmers who have been victims of the trade war with China. It would range from $15 to $20 billion, mostly in direct payments. By 2018, $12 billion had been programmed and so far, $9.4 billion has been paid, including $8.5 in direct payments. But despite a cap ($125,000 per entity), one-tenth of farmers received more than half of the payments. The new plan will help soybean producers with aid of $2 a bushel. For wheat, it will be 63 cents a bushel and 4 cents for corn. In the fall 2018 programme, aid was $1.65 for soybeans, 14 cents for wheat and one cent for corn.
The ICSG has increased its global copper deficit forecast to 189,000 tonnes in 2019 against a forecast of 65,000 tonnes made in October 2018. In a market of 25mt, this remains relatively uncertain.
In April, Chinese steel production broke a record of 85.03 mt (76.7 mt in April 2018). In the first four months of the year, production was up 10%.
US agricultural exports to China, which amounted to $25 billion in 2017 ($30 billion in 2012) fell to $13 billion in 2018: soybean alone went from $12 to $3 billion.
Despite the drop in coffee prices, Brazilian producers have production costs estimated at 90 cents/lb allowing them to “get by” while also taking advantage of the weakness of the real.
For the first time since 2018, the bushel of soybeans fell below $8 for the May contract. For ‘post-harvest’ contracts (November and beyond), the price remains above $8. According to the University of Iowa, production costs are between $8.86 and $9.21. Carry-out stocks in August are expected to reach a record 27 mt.
At the end of May, the price of iron ore rose above $100 a tonne (see China-Platts). New fears over dams in Brazil led Vale to close nearly 100 mt of production capacity. This is good news for Australian miners whose stock prices are soaring, also good for Vale: $10 a tonne more, that’s $2 billion in additional revenue. On the other hand, stocks of iron ore in Chinese ports (133 mt in early May) are at their lowest in three years.
According to the FAO, the global cereal crop is forecast to increase by 2.7 percent in 2019/2020 to a record 2.72 billion tonnes.
In the United States, China is pushing the rare earth button. In a very symbolic way, Xi Jingping visited a rare earth factory in Ganzhou. 80% of the rare earths used in the United States come from China whose domination in these metals is absolute. A recent Pentagon report is concerned about this dependence.
African swine fever continues to wreak havoc. In China, officially only one million pigs were slaughtered, which underestimates an estimated reality between 20 and 35% of the pig herd, i.e. at least 200 million animals! The whole of Asia is concerned, from Vietnam to Australia.
Russia is preparing for a historic grain harvest with estimates of 117 to 125 mt, including 75 to 80 mt of wheat. Russian exports of wheat should be 42 to 46 mt. As for Ukraine, it will export more than 50 Mt of cereals.
Flour follows milk in the line of ‘fair trade’ products for the French brand ‘C’est qui le patron’ with the flour being supplied by a milling company from the Deux-Sèvres. The price for wheat is guaranteed at a minimum of €205 per tonne.
In 2018, the United States almost reached energy self-sufficiency with 28128 Twh of production (+8%) and 29593 Twh of consumption. Oil (+17%) and gas (+12%) account for 57% of energy production in the United States. The production of renewable energies increased by 4% (22% for solar energy) and that of coal decreased by 2%. On the other hand, the production of greenhouse gases increased by 3.4%.
In April, China imported 10.64 mbd of oil, a figure probably inflated by promotional purchases related to the embargo on Iran. In that same month, China bought 830,000 bd from Iran. But in May, this figure was expected to decline sharply. On the other hand, Saudi Arabia, which supplied 1.2 mbd in April, should increase its shipments.
In June, the United States will break a new shale oil production record at 8.49 mbd (+83,000 bpd) including 4.17 mbd for the Permian Basin (+56,000 bpd), 1.42 mbd for the Bakken (+16,000 bpd). Gas production will be 80.7 billion cubic feet (68.2 a year earlier…). In March, overall crude output reached 11.9 mbd, up 241,000 bpd.
The Conservatives’ election victory in Australia bodes well for coal producers whose re-elected premier Scott Morrison is a staunch supporter.
Attacks against tankers off Fujairah were allegedly perpetrated by submarine drones, which were probably sponsored by the Iranian Revolutionary Guards.
In addition to soybeans, the other major American victim of the conflict with China is LNG, even though the United States has liquefaction trains for export (seven in total, including six for Chenière at Sabine Pass and Corpus Christi). China has become the world’s second largest importer of LNG, a market in 2018 of 316.5 mt.
Global demand for natural gas increased by 4.7% in 2018 to 3850 billion m3. The United States increased its consumption by 80 billion m3, China by 40 billion.
Russia has encountered a real problem of pollution of its oil that could damage the refineries. Since April, the Druzhba pipeline to Eastern Europe and Germany has been closed with 8 to 9 million barrels of ‘dirty’ oil that nobody wants. This pipeline has a capacity of 1 mbd. This represents a loss for the market of about 250,000 bd.
In May, Iran’s oil exports did not exceed 500,000 bd and Iran continues to increase its onshore and floating stocks.
According to Reuters, OPEC oil production in May was 30.17 mbd, down 60,000 bd in April and the lowest since 2015. Saudi Arabia increased its production by 200,000 bd but that remains insufficient in the face of declines in Iran (-400,000 bd) and Venezuela (-50,000 bd). Saudi Arabia is preparing to increase its price by $1 a barrel on 1 July, bringing it to its highest level since January 2014.
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