Commodity Corner

from Krishna Das:

ANALYSIS-Small ships to unlock rate boon for bulk owners

By Krishna N Das and Jonathan Saul

BANGALORE/LONDON, Feb 8 (Reuters) - Dry cargo shippers with smaller vessels are shifting to more-risk, more-reward spot markets, eyeing rising demand for sugar and grains -- commodities well suited to versatile supramax and handysize ships.

Ship owners generally prefer long-term charters in a weak market. The Baltic Dry Index <.BADI> o-year lows in recent weeks but confidence has been rocked by South Korean dry bulk group Korea Line Corp <005880.KS> filing for bankruptcy protection, highlighting the risk of charter-party defaults.

"Concerns now persist industry-wide, as speculation grows as to whether faults," Deutsche Bank analyst Justin Yagerman said.

"Continued charterer defaults could bring into question many companies' above-market charters." Flooding in Australia, the world's biggest coal exporter, and weather-srupted coal shipments and dented sentiment for capesize vessels -- the giants of seaborne trade routes, typically hauling 150,000 tonne cargoes such as iron ore and coal.

Demand for grains, though, has soared. Wheat prices in the European Union, the world's No.2 exporter, a year, aided by a Russian export ban due to drought and strong demand from North Africa and Middle East countries.

Global food prices, which hit their highest level on record last month, is a mounting worry for world leaders. Recent catastrophic weather around the globe could put yet more pressure on the cost of food, an issue that has already helped spark protests across the Middle East. Egypt is the world's biggest wheat importer.

from Tales from the Trail:

Think brussels sprouts and cauliflower are agricultural commodities? Think again.

While the financial bailouts tossed to automakers, banks and other groups during the recent economic crisis left a funny taste in the mouth of some Americans, one former U.S. regulator hopes efforts to prevent another panic doesn't go rotten.

The U.S. Commodity Futures Trading Commission is immersed in drafting dozens of rules to assist it in increasing oversight of the once opaque over-the-counter derivatives market, widely blamed for exacerbating the recent financial crisis.

Among the rules it must craft is what the definition of an agricultural commodity is? Of course, corn, cotton, soybeans and livestock, among other items, fall into this realm.

 But what about those "other foods" such as brussels sprouts, artichokes, cauliflower, or anything with curry? A former CFTC chairman says they are "abhorrent to American sensibilities" and should be banned.

"Like every U.S. citizen, there are certain agricultural commodities that are abhorrent to me," said Philip McBride Johnson, who is now with the law firm Skadden, Arps, Slate, Meagher & Flom.

 In a comment letter to his former agency, he said there is a "natural link" between defining an agricultural commodity and a provision in a law that requires the regulator to protect the public by forbidding the listing of certain products that "are abhorrent to American sensibilities."

Clearly banned under this act are financial products based on wars, terrorism, and assassinations. If Johnson has his way, regulators will be able to protect consumers from a dozen foods that don't mesh with his palate.

from Global News Journal:

Can export bans be challenged at the WTO?

Russia’s ban on grain exports as a heat wave parches crops in the world’s third biggest wheat exporter has raised questions whether such export curbs break World Trade Organization rules. Russia is not a member of the WTO, and it remains to be seen how its new grain policy will affect its 17-year-old bid to join. But other grain exporters, such as Ukraine, which is also considering export curbs, are part of the global trade referee.

WTO rules are quite clear that members cannot interfere with imports and exports in a way that disrupts trade or discriminates against other members. But in practice most WTO rules aim to stop countries blocking imports – shutting out competitor’s goods to give their own domestic producers an unfair advantage.

from MacroScope:

Argentina set for wheat windfall

Not everyone is upset about the 50 percent surge in wheat prices over the past month.

Wheat's rise to 2-year highs was caused first by heavy rains in Canada and now by a Russian export ban that was triggered by its worst drought in decades. There are floods in Pakistan, another major wheat grower. But while the wheat market shenanigans are triggering much hand-wringing across developing nations, Argentina, one of the world's top seven wheat exporters, may be set for a windfall.

Farmers there are increasing wheat plantings, the Buenos Aires Grains Exchange says. The South American country is expected to export around 8 million tonnes of wheat in the 2010-2011 year. With wheat futures on the Chicago Board of Trade at around $8 a bushel, a very simple calculation shows export revenues are going to very significant.

Investors are taking note.

RBC analysts are advising their clients to buy the Argentine peso against the dollar. The peso is trading at 3.933 at present but currency forwards markets are pricing in a 2.1 percent fall in the peso's value over the next three months. RBC reckons they could be wrong and sees "very strong grain commodity prices supporting higher FX export inflows."  That it hopes, will keep the peso stable to the dollar. Buying the peso now would mean a 2.1 percent gain over 3 months or almost 9 percent in annual terms.

Nick Chamie, strategist at RBC, now expects Argentina's economy to grow 6.5 percent this year -- more than the 5 percent he originally predicted. He points out the stronger wheat price has had a knock-on effect on other grains -- prices for soy and corn, of which Argentina is a top exporter, are up 11-13 percent over past month.

Arentina has a bad reputation with investors -- it defaulted on $100 billion in debt in 2002, a record for any sovereign. It only recently finished restructuring defaulted debt and is hoping to come back to bond markets soon. The grain price bonanza could make its job easier. Strong grain export revenues have already boosted central bank coffers to a record $51 billion.

Getting down to business at U.N. climate talks a hard task

A U.N. concession to delegates at this week’s climate talks in Bonn to take off jackets and ties due to recent high temperatures may be going to some participants’ heads.

Breaking the back of negotiations for a new climate pact after the Kyoto Protocol expires in 2012 is proving hard work even though the talks’ chair hopes to have a new negotiating text on the table by the end of the week.

Developing nations are still blaming the rich for global warming and the issue of who will contribute most to climate financing is still a matter for debate.

A year-end meeting in Cancun looms closer and the pressure is on to get the job done. Yet, the acronyms being bandied around — LULUCF, CDM, AAU, AWG-KP, AWG-LCA, REDD, to name a few — are enough to make your head swim.

Even a Chinese negotiator on Tuesday admitted he did not understand a complicated forestry and land use presentation the previous day by the European Union.

Talks kicked off on Monday with a three-hour session during which countries spent an inordinate amount of time thanking the chair and congratulating the new U.N. climate chief Christiana Figueres on her post.

Delegates didn’t manage to finish the day’s business by the evening and had to continue into Tuesday, despite calls from the chair of the talks to keep to a very tight schedule.

from MacroScope:

Should central banks now sell gold?

Central banks in debt-strapped countries have a golden opportunity ahead of them, if you will excuse the pun, to help their countries' finances by selling their yellow metal holdings.

At least, that is the message that Royal Bank of Scotland's commodities chief Nick Moore has been giving in recent presentations -- and he thinks it might happen.   The gist is that gold is now at a record price but banks have not come close to  meeting their sales allowance for the year.

Under the Central Bank Gold Agreement there is a quota of 400 tonnes that can be sold by central banks within a 12 month period and with only about three months to go in the latest period less than 39 tonnes has been sold.  At today's price that remaining 361 tonnes is worth some $14 billion.

Moore believes that euro zone central banks in particular may increase their sales because of the record price and the deteriorating fiscal positions.  Furthermore, he reckons the price of gold will come down over the next 12 months as its  safe-haven appeal eases and inflation expectations fade.

Among the so-called PIGS -- Portugal, Italy, Greece and Spain -- Italy is the major gold holder with qround 2450 tonnes. But Portugal has some 380 tonnes,  Spain 280 and  Greece 112.

Might current prices not tempt them to selling a  few billion euros worth over the next few months  to help balance the budget a bit?

from Summit Notebook:

That’s rich. I meant the wine.

What do gold and wine have in common?

Price.

Well, too high of a high price, according to Jeffrey Rubin, director of research at Birinyi Associates, the stock market research and money management firm.

Rubin told the Reuters Investment Outlook Summit on Tuesday that he thought gold prices were "certainly a little frothy" at current levels and that he would rather be a buyer of the gold miners such as Newmont Mining Corp, Barrick Gold Corp, or Freeport-McMoRan Copper and Gold Inc. Gold hit an all-time high  above $1,250 an ounce on Tuesday as investors piled in due to fears that European credit contagion could lead to a double-dip recession.

Rubin isn't expecting a double-dip U.S. recession, saying the chances are slim. He also felt stock prices were likely near a bottom. Not so for the price of a wine? A good year is already priced in, so to speak.

In the spirit of austerity, we asked Rubin what personal spending he might curtail. For a wine collector with a 1,500 bottle collection, the answer was bitter.

Did Americans drive more this Memorial Day?

Consumer confidence is perking up and with summer around the corner, Americans might be feeling a little more liberal with their travel budget, according to some trendwatchers and people in the travel industry.

“Our train counts are three times what they were last year,” said Bruce Brossman, director of reservations and sales at the Grand Canyon Railway, which expected to sell out on Memorial Day weekend.

The Grand Canyon itself typically draws large crowds over long holiday weekends, but secondary attractions like the two-hour scenic train ride up from Williams, Arizona, suffered in the recession.

Brossman says much of the rise in bookings was due to resurgent consumer confidence.

“Last year was a really tough time and people were really hunkered down and not spending discretionary dollars, and I think that there’s pent-up demand for travel,” Brossman said.

“Last year, everybody hunkered down,” said Tim Kirwan, general manager of the InterContinental Boston hotel, operated by InterContinental Hotel Group .

“They wanted the least expensive room rate and they essentially wanted to go across the street and get a coffee at the donut shop and forgo breakfast,” Kirwan added.

from Summit Notebook:

Would the last person to leave the smelter please turn out the lights?

For UC RUSAL, one simple act is crucial to reducing costs. Bonuses for managers at the world's largest aluminium company depend on the company's 75,000 workers heeding the message. "We have to introduce a new culture: if you leave the office, turn off the lights," Artyom Volynets, UC RUSAL's deputy chief executive for strategy, said at Reuters Global Mining and Steel Summit on Monday. "We have 16 smelters, each with their own headquarters and offices. We employ 75,000 people. If each one of them is switching off the lights at the end of their shift, that would help tremendously." UC RUSAL embarked on a major drive to slash production costs last year as part of an ultimately successful attempt to secure Russia's largest ever private sector debt restructuring. Easy access to Siberian hydroelectric power, compared with relatively high-cost coal used to power smelters in other parts of the world, affords UC RUSAL a distinct cost advantage when making aluminium used in transport, construction and packaging. In the first half of 2009, it cost UC RUSAL an average $1,400 to produce a tonne of aluminium. The metal is now selling at above $2,200 a tonne. UC RUSAL has cut costs by sourcing cheaper raw materials of better quality and improving throughput rates at its smelters in Siberia, which account for about 80 percent of its total output. But cheap power in Siberia had also led to complacency. "Our smelters are located in probably the only remaining major energy-long region in the world. Therefore, if you buy power at 2 cents per kilowatt, you don't really care how much you spend," Volynets said. "For my colleagues on the operational side of the business, their key performance indicators are 100 percent tied to cost improvements," he said. "They will not be compensated if these improvements are not implemented." (Writing by Robin Paxton in Moscow)

Branson’s Virgin Group gets into peak oil

Dire predictions tend to grab the attention – especially when an international celebrity lends a voice.

A report released in Britain this week with the unpromising title — the UK’s Industry Taskforce on Peak Oil & Energy Security – might have found only a specialised readership, but for the inclusion of Richard Branson’s Virgin Group in the six-member task force.

(The others were Arup, Foster & Partners, Scottish and Southern Energy, Solarcentury and Stagecoach Group.)

As it was the warning that oil shortages, insecurity of supply and price volatility will destabilise economic, political and social activity within five years was splashed across the press.

Advocates of the peak oil supply theory have long argued world oil supply is nearing a peak from which it will decline, leading to skyrocketing prices. Some of them have reckoned the peak could be as early as this year.

They have had publicity in the past, but not quite on the Branson scale.

So far, the other side of the peak debate has yet to find celebrity backing, although it is quietly earning more adherents, who are asking whether demand rather than supply will be the first to run out as climate change policies change energy consumption habits.