Commodity Corner

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.

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)

from From Reuters.com:

Mining gold in Russia’s remote Chukotka region

Chukotka, a region revived in the last eight years by the $2.5 billion investment of Chelsea soccer club owner Roman Abramovich, produced a fifth of Russia's gold in the first half of this year. Gold is the region's passport to growth after Abramovich quit as governor last July.

Only South Africa holds more gold than Russia, but Moscow's fragmented industry has struggled to access vast reserves in its inhospitable Far East. The region was first mined in the 1930s by prisoners of the Gulags set up by Soviet leader Josef Stalin.

Senior Commodities Correspondent Robin Paxton and Moscow-based video journalist Heleen van Geest return from the Chukchi Peninsula with a series on the revival of gold mining in the Gulag region.

from Environment Forum:

Calling Dr. Strangelove!

Perhaps you've heard about the Russian submarines patrolling international waters off the U.S. East Coast (if you haven't, take a look at a Reuters story about it) in what feels like an echo of the old Cold War. The Pentagon's not worried about this particular venture, but there are concerns from the U.S. energy industry about another Russian foray -- this one in concert with Cuba. In rhetoric that may ring a bell with anyone who saw the 1964 satirical nuclear-fear movie "Dr. Strangelove," the Washington-based Institute for Energy Research is sounding the alarm about a Russian-Cuban deal to drill for offshore oil near Florida.

"Russia, Communist Cuba Advance Offshore Energy Production Miles Off Florida's Coast," is the title on the institute's news release. Below that is the prescription for action: "Efforts Should Send Strong Message to Interior Dept. to Open OCS in Five-Year Plan." OCS stands for outer continental shelf, an area that was closed to oil drilling until the Bush administration opened it last year in a largely symbolic move aimed at driving down the sky-high gasoline prices of the Summer of 2008.

Environmentalists hate the idea. So does Sen. Bill Nelson, a Florida Democrat who has made opposition to offshore drilling one of his signature issues. But as it turns out, it's unlikely that anybody -- from Russia, Cuba, the United States or anywhere else -- is going to get petroleum out of the OCS in the immediate future.

For a start, it takes time to set up a deep-water offshore drilling rig. And any Cuban effort would be further hampered by the need to use equipment with less than 10 percent American technology, to comply with the long standing U.S. embargo against Cuba. As my Reuters colleague Russell Blinch reported in June, there may be scope for possible U.S.-Cuban cooperation here but no Cuban drilling platform is likely to be in the area this year.

Reports of a Russian-Cuban deal to explore for oil in the Gulf of Mexico prompted a quick response from the Institute for Energy Research, self-described as a free-market energy think-tank.

"This agreement between Russia and Cuba should serve as a wake-up call to Congress and this administration, especially (Interior) Secretary (Ken) Salazar, who is slow-walking a new offshore energy blueprint for the nation," the institute's president, Thomas Pyle, said in a statement. "If we are to remain competitive in the global market, our government must take its foot off the brake, and expand domestic energy production of all forms, onshore and off.”

What's your take? Should the United States drill baby drill off Florida's coast, reasoning that if U.S. companies don't, Russia and Cuba will? Keep a congressional ban in place? Or wait and see?

Will Russia cut aluminum production after winter thaw?

On Alcoa’s quarterly conference call this week, CEO Klaus Kleinfeld pointed out that there is currently a 1.4 million tonne aluminum surplus in the world outside of China, and therefore to expect more production to come off line in coming months above the already-announced 1.6 million tonnes of production that has yet to be implemented.

Source: Alcoa

Both Alcoa, as the world’s largest aluminum producer, and China, producing more than 13 million tonnes in 2008, have idled substantial percentages of their output.

Russia, however, with about 4.2 million annual tonnes of capacity, has not curtailed any production, said Kleinfeld.

He said he thought political factors centered around maintaining employment levels have kept Russian smelters running.

“Many of the smelters are in regions where there is nothing else, in very remote areas, and are an anchor for the area. When Springtime comes and there are new opportunities to shift (workers) into, farming or construction, it will probably be  easier to cut production there,” he said.