Pricing

TORONTO (ICIS)–The labor disruptions at Canada’s West and East coast ports continued on Friday while the chemical, fertilizer and other industries keep warning about impacts on manufacturers and the country's overall economy. WEST COAST PORTS At Vancouver and other west coast ports, a strike and lockout by some 730 ship and dock foremen, who supervise more than 7,000 workers, was in its fifth day on Friday. Employers and union officials are due to meet on Saturday, 9 November, for further negotiations, the British Columbia Maritimes Employers Association (BCMEA) said in an update. At the Port of Vancouver, which is Canada’s largest port by far, the disruptions impact BCMEA member terminals that employ workers represented by labor union International Longshore and Warehouse Union Local 514. Operations at the ports auto and breakbulk sectors and at four container terminals are impacted by the disruptions, and rail embargoes have been put in place, the Port of Vancouver said. However, the port remains open. PORT OF MONTREAL In Montreal, a strike at two of the ports four container terminals and a strike on overtime at all four terminals was in its ninth day on Friday. The two terminals account for about 40% of the port’s total container handling capacity. The port’s logistics dry bulk and liquid bulk terminals, and its grain terminal remain in service. The Maritime Employers Association (MEA) said on Thursday that it made a final wage offer and wants a reply from labor union Syndicat des debardeurs by Sunday, 10 November, 10:00 local time. If no agreement is reached, only essential services and activities unrelated to longshoring would continue at the port, starting 10 November, 21:00 local time, MEA said. CALL FOR GOVERNMENT TO INTERVENEThe CEO of the Montreal Port Authority (MPA), Julie Gascon, on Thursday called for federal government intervention to end the dispute. “There's no denying that our reputation has been harmed by uncertainty over the reliability of our activities, and in the long run, we are losing competitiveness,” she said. Federal labor minister Steven MacKinnon reminded port employers and unions that “public services, such as ports, exist to serve the needs of Canadians”. The negotiations to settle the disputes were “progressing at an insufficient pace”, he said, adding: “The parties must reach an agreement quickly.” In August, the government intervened in a labor dispute at the country’s freight railroads, ordering the railroads and workers to end their rail shutdown and resume service. However, political commentators said that the minority government under Prime Minister Justin Trudeau was hesitant to intervene in the port labor disputes as it relies on the left-leaning New Democratic Party (NDP) for support in parliament to stay in power. The NDP is close to labor unions. A couple of days after the government’s intervention to end the freight rail labor dispute, the NDP ended a “supply and confidence agreement” from 2022 under which it had committed to supporting the Liberals until June 2025. The NDP now votes in parliament on a case-by-case basis, it has said. This means that the NDP could vote with the opposition Conservatives to bring the government down and trigger an early election. The Conservatives are far ahead of the Liberals in opinion polls. Thumbnail photo source: Port of Vancouver

08-Nov-2024

Romanian Black Sea gas prices some of the cheapest regionally Neptun Deep output  on track for 2027 start date New government must encourage investments through progressive fiscal policies LONDON (ICIS)–Romania’s offshore Black Sea gas could be one of the most competitive regionally thanks to its below-average operating and capital expenditure, a senior independent oil and gas exploration specialist told ICIS. Gary Ingram, who worked on the Neptun Deep project from 2009 to 2015, said the gas which is expected to reach markets by 2027 would be resilient to competition and price fluctuation because of its pure methane content and 'extremely low levels of contaminant gases.’ He calculated that the operation expenditure could be less than $10 per barrel of oil equivalent (boe), which would be comparatively cheaper than the global average of $13/boe. Capital expenditure could be even lower, at $5-$6/boe for the Neptun Deep block, compared to a global average of $14/boe. “Taking the case of Neptun gas we can expect that […] the operating expenditure (OPEX) will be less than global average due to the purity of the gas requiring minimal processing, very high flow rates per development well, and wells designed for no interventions during the life of the field. “Secondly, the capital expenditure (CAPEX) for gas development will be lower than global average for a similar size of field due to the lower complexity of gas processing plant required.” Ingram, who worked for the OMV Group, whose daughter company, OMV Petrom is one of the two developers of the Neptun Deep project, said additional reserves could come from nearby exploration prospects. He said generally accepted global performance benchmark for exploration finding cost offshore is $3 per boe. In Neptun’s case, he said, costs per successful well could be kept ‘predictable’ because exploration prospects have most likely been derisked, which means they have a high probability of success. BOOSTING PRODUCTION The EU recently hailed Romania as its largest gas producer thanks to the country’s onshore output, a role which is expected to be further boosted in 2027, when offshore production at the Neptun Deep block is scheduled to start. Ingram said he is confident the project is on target, noting that 12-16 development wells are likely to be drilled as early as 2025. In the first year the bloc could produce around 17.1 million cubic meters/day or 6.3 billion cubic meters annually, which could single-handedly cover 63% of Romania’s yearly gas demand, he said. Romania’s offshore gas reserves are as high as 200billion cubic meters, with most volumes residing in the Neptun block, developed by state company Romgaz and Romanian-Austrian joint venture OMV Petrom. “Publicly quoted gas reserves in the Neptun block are up to 3.5 trillion cubic feet (100bcm), comprising the Domino and Pelican South discoveries to be developed by OMV Petrom. I estimate that there could be an additional 2 tcf  (57bcm) of volume in additional undrilled gas pools in the block,” Ingram said. REGIONAL SUPPLIES Ingram said Black Sea gas had several competitive advantages compared to resources imported regionally. “The gas from the Sakarya field in neighbouring Turkey is very similar to Neptun gas and resides in a similar geological setting,” he said. “Sakarya however is in twice the water depth, around 2km, compared to the Neptun field at approximately 1km, and is a longer distance offshore (175 km) compared to Neptun (around 140 km) with corresponding higher CAPEX.” The specialist said Azeri gas from the offshore Caspian Shah Deniz field, which currently supplies Turkey and southern European buyers, contains heavier gas components with additional gas condensate (oil) but is only 70 km offshore and in 600m of water. “This field will have a more complicated development in order to process the different hydrocarbon types compared to the single-phase methane production in Neptun. This means that Shah Deniz gas would probably have a higher OPEX per unit of production compared to Neptun.” Ingram said Neptun gas was also advantaged compared to LNG imports because it is close to its European market and therefore does not require transport and regasification costs. POLICIES Nevertheless, as Romania is braced for presidential and parliamentary elections between November 24 – December 1, he warned that the new administration should aim to facilitate the onshore and offshore gas industry with progressive fiscal policies which promote significant revenue streams. An ICIS investigation has found that companies active in the Romanian oil and gas sector pay up to 87% of their revenue from oil or gas sales on windfall and corporate taxes. The remaining 13% are then subject to ordinary taxation amounting to 16%. Current taxes paid by oil and gas companies are thought to be the highest in Europe.

08-Nov-2024

Additional reporting by Jake Stones LONDON (ICIS)–On 31 October 2024, the Dutch government launched for consultation its proposal for an industrial obligation to use renewable fuels of non-biological origin (RFNBO), marking one of the first measures in Europe to encourage the use of renewable hydrogen associated with the renewable energy directive's (RED III) targets for industrial decarbonisation. The scheme, renewable hydrogen industry units (HWI), focuses on setting obligations for the use of RFNBO for particular industrial participants, such as those who use more than 0.1kt of hydrogen per year, and broadly aligns with recent guidance from the European Commission. The exception is that hydrogen use associated with ammonia production does not fall under the obligation under the Dutch scheme. The HWI scheme awards RED III obligated market participants an HWI credit for each unit of renewable hydrogen, RFNBO, used in industry. The HWI can then be used to reflect a market participant has met its obligation over the year, or the party can trade the HWI with another obligated party that is yet to meet its quota. To provide a full overview of the proposal's framework, ICIS has produced the following infographic explainer: For any further information regarding ICIS hydrogen content, please reach out to jake.stones@icis.com or sebastian.braun@icis.com

08-Nov-2024

LONDON (ICIS)–“Cut the debt burden, don’t decimate the economy” This was the message in miniature from IMF chief economist Pierre‑Olivier Gourinchas when several reporters posed questions about the then-upcoming UK budget at a press conference on 24 October. Reporters from both sides of the political aisle raised questions over the potential impact of the budget, which had been expected to focus on aggressive cost-cutting after weeks of the ruling Labour government fulminating about Conservative debt. Widening the scope of the question beyond the UK, Gourinchas noted that high debt levels left countries more exposed to fiscal shocks that could precipitate the need to cut services dramatically and quickly. “When countries have elevated debt levels, when interest rates are high, when growth is OK but not great, there is a risk that things could escalate or get out of control quickly,” he said. “Most countries have important needs when it comes to spending, whether it's about central services, what we think about healthcare, or if we think about public investment and climate transition. So we need to protect also the type of spending that can be good for growth,” he added. UK Chancellor Rachel Reeves seems to have kept that balance in mind with a high-tax, high borrowing, high spending budget, with increases targeting businesses through higher per-employee tax contributions, farmers through tighter inheritance tax rules, and the wealthy through more tax on private schools and private planes. The measures are expected to modestly goose economic growth in the short term but less so further ahead, according to the Office for Budget Responsibility, which estimates that national GDP will grow 2% next year. This slows down after, back to the prevailing trend of 1.5% per year. The budget represents one of the largest increases in taxation ever seen in the country, but the UK is far from alone in this. With borrowing costs high over the last few years and economies still paying the bill on pandemic and energy crisis-era borrowing, taxation is high across much of the developed world at present. Debt as a share of GDP is not expected to rise through to the end of the decade on the back of the budget, but nor is it expected to fall, standing at just under 100%. UK debt as a proportion of GDP Higher spending is likely to drive higher inflation in the short term, with levels now expected to firm from 1.7% in September 2024 to a quarterly peak of 2.7% in mid-2025, according to the OBR. The core UK sector trade body, the Chemical Industries Association (CIA), cautiously greeted the increase in investment spending, something that has been sorely lacking in the UK for decades. “We are pleased to see increases in investment after the UK has been in the bottom of the G7 for investment as a share of GDP for 24 of the past 30 years,” said CIA head of economics Michela Borra. That persistent low ranking has endured despite the decline for other western European economies in the G7 club in the face of weakening international competitiveness. Whether the level of public industrial investment is sufficiently substantial to drive growth remains to be seen, however. The budget earmarks £2 billion for the automotive industry for zero-emission vehicles and related supply chains, and £975 million for aerospace research, to be eked out over five years. Life sciences spending  is also set to get a bump, with £520 million to go to the creation of a Life Sciences Innovative Manufacturing Fund “to build resilience for future health emergencies”, the UK Treasury said. Automotive, aerospace and life sciences are key end markets for the upstream chemicals sector and all additional growth investment is a welcome surprise when the expectation in the run-up was for no new funding or spending cuts. That said, the electric vehicle market has slowed to a cruise after years of steady year-on-year growth, with still-developing technologies and charging infrastructure availability continuing to spook consumers. Charging infrastructure remains a Catch-22 problem, with consumers put off by limited availability and providers sceptical of demand growth levels. Firms have moved to take the first step but the level of investment in electric vehicle charging networks remains below what is needed. Another significant milestone is the recognition of a fuel-exempt mass balance approach for content in chemical recycling, which could help to map out the landscape for the sector as it matures. Under fuel exempt mass balance accounting rules, volumes used in fuel applications would not be attributable as recycled material, but material not ending up in fuels would be freely attributable across the value chain. Far larger than all the chemicals end market funding outlined in the budget is the nearly £22 billion for carbon capture and blue hydrogen announced earlier in October. With an aim to strengthen two of the country’s regional industrial clusters, the funding is expected to develop two carbon capture projects in Merseyside and Teesside, as well as two clean hydrogen production plants. Chief among the benefits of the budget is the hope that this will represent a stable longer-term roadmap for business investment, after a period of substantial changeability for government priorities during the ministerial and leadership churn of the last few years of Conservative government. “Capital intensive sectors such as chemicals will welcome this Government’s commitment to longer term policy stability – be it through its industrial strategy; its corporation tax roadmap or its full expensing regime to encourage investment in plant and equipment,” said CIA chief Steve Elliott. Despite the stronger than expected focus on capital investment, there is little direct uplift for the chemicals sector, which remains the UK’s third-largest industry in terms of GDP contribution. The only reference to the sector in the full budget text is to the mass balance recognition and, while greater focus and clarity on carbon, hydrogen and renewable power remain vital for the evolution of the sector, it remains difficult to hold policymaker attention. With the number of strategic reviews of European chemicals footprints by large global players continue to pile up, the lack of impetus to shore up a sector that has been mired in low and declining growth continues to pose a threat to its future viability. “It’s now all about delivery as the UK and wider Europe has become increasingly unattractive to global investors in manufacturing,” said Elliott. “Urgent action – and in many cases partnership between industry and government – is required if UK chemical businesses are to boost their already significant contributions to the macro-economy; strengthen their resilience in supporting the nation’s critical infrastructure and enable the country’s transition to a net zero future,” he added. Insight by Tom Brown.

08-Nov-2024

With growing occurence of negative prices amid renewable penetration, more battery storage capacity will be needed Wide intra-day spreads to remain top revenue option for BESS, but margins can tighten as more capacity comes online Cross-markets optimization, battery degradation among key challenges for operators LONDON (ICIS)–Batteries can help mitigate negative wholesale power prices and wide intraday spreads but there is currently not enough capacity installed to eliminate them, Pierre Lebon, director of analytics at cQuant.io, told ICIS in an interview. Nevertheless, as new battery energy storage system (BESS) capacity comes online, it is likely that the occurrence of negative power prices will decrease, the expert noted. ICIS Analytics showed increased flexibility will be crucial in the long-run to improving solar capture prices, though expansion of battery and electrolyser capacity will remain far below the level of renewable expansion in the next few years. The latest ICIS analytics models predict 63.3GW battery storage capacity for EU countries by 2035. The European resource adequacy assessment, ENTSO-E's annual assessment of the risks to EU security of electricity supply for up to 10 years ahead, showed Germany would be a leader in battery capacity growth across the bloc, while outside EU, the UK has the highest available capacity. It is difficult to identify an optimal ratio of renewable capacity to BESS, as many factors must be taken into account and the supply balance will ultimately depend on each country’s generation mix and demand profile, as well as variable weather conditions. As of September, the number of hours with negative prices in Germany more than doubled to 373 compared to 166 in 2023.  These could have been mitigated by an adequate battery storage capacity, in turn reining in some price spikes in times of lower renewable supply. DURATION The vast majority of battery systems in Europe are currently two- to four-hour batteries and “that's mostly for economic reasons,” Lebon said. “If you have a four-hour battery, if you divide the power by two, you get an eight-hour battery. So you can change the duration if you change the capacity, it then becomes a matter of financial optimization,” he explained. There are currently new technologies such as iron salt battery (ISB) – also known as iron redox flow  battery (IRFB) – which can allow to build battery storage plants with a duration of up to 12-24 hours, however Lebon noted that, while the market is already looking into these technologies, they are still in early development. This seems confirmed by calculations from ICIS based on ERAA data, showing short (one hour) and medium (four hour) duration batteries will remain the preferred technology for the coming years.   REVENUES OPTIONS Operators don't necessarily need to have a negative power price to have a profitable battery, since BESS make money on the spread between the lowest price of the day or based on the duration that they can capture, Lebon explained. “It [negative power prices] adds the extra cherry on top of the cake, which is that you get paid to actually charge the battery,” he said. In markets with a strong ‘duck-shaped’ intra-day curve, the battery operators “can see a lot of value in intra-day trading” and less so on the ancillary services markets, Lebon added. Ancillary services like frequency regulation, voltage control, reserves and black start capabilities are needed to maintain power grids stability and guarantee an uninterrupted supply of electricity. Lebon noted that while battery operators typically consider the potential revenue from both intraday power markets and ancillary services, the stability of the revenue structures associated with the ancillary markets is often questioned. This is because transmission system operators (TSOs) and regulators tend to frequently change the rules and conditions of these markets. While cross-markets optimization – operating both on intraday and ancillary markets to maximize revenue sources – is possible, technical constraints or the legal paperwork needed to access ancillary markets can lead some operators to prioritize only one of these depending on the company’s structure and resources, the expert noted. INVESTING NOW? Penetration of batteries into European markets can reduce intra-day spreads, tightening margins for battery operators. Experts have previously told ICIS that early investors could benefit more from current wide power prices spreads than waiting for cheaper technologies. “The longer it takes for that technology to come in, the more likely it is that this technology will come [online] at a time where the spreads are crushed [by more battery storage capacity being installed],” Lebon added. BATTERY DEGRADATION The degradation of current lithium-ion utility-scale battery systems depends on several factors, including technology, number of cycles and temperatures. ICIS understands the typical yearly degradation can range between 2-5% and plants lifespan between 10-20 years, as reported in the lifetime warranty provided by some producers. A study by the US National Renewable Energy Laboratory indicated 15 years as the median lifespan based on several published values. Degradation is a key challenge in the optimization of battery assets, Lebon noted, adding that operators need to ensure their cycles strategy is compatible with manufacturers’ instructions and warranty.

07-Nov-2024

LONDON (ICIS)–Germany’s controversial gas storage fee may be rolled forward into January 2025 as plans to scrap it may not be approved following the fall of the coalition government. The German government announced earlier in June the charge levied on gas exported from the country would be scrapped from January 1, 2025. But the fee abolishment has not been formally approved by the German parliament yet, and traders now fear that following the collapse of the government on 7 November, and plans for snap elections, proposals to scrap the fee would drop off the agenda before the end of the year. The fee was introduced in 2022 and has been increased every six months, raising discontent from regional countries pinning their hopes on imports from or via Germany. It was raised from €1.86/MWh to €2.5/MWh from 1 July 2024. The German Federal Ministry for Economic Affairs and Climate Action did not immediately reply to ICIS's questions related to proposals to scrap the fee. It is unclear whether the proposals were part of a wider Ukraine assistance package, which was expected to be adopted in the upcoming weeks. “This is already having an impact on a decision involving gas flows,” Doug Wood, gas committee chair at Energy Traders Europe, told ICIS on 7 November. “We hope this can be resolved before the end of the year.” Wood said that if the proposal to scrap the fee is included in the Ukraine assistance package it may have greater chances to be approved before the end of the year. The fee was strongly opposed by companies and regulators in central and eastern Europe, because since its introduction, the cost to import gas from or via Germany had risen significantly, Markus Krug, deputy head of gas department at the Austrian regulator E-Control, told ICIS the watchdog was "very much concerned in which direction the situation is going. " He said E-Control may have to take a decision to approach the European Commission and the Agency for the Cooperation of Energy Regulators once again and raise their concerns about the impact of the fee on gas flows in central and eastern Europe.

07-Nov-2024

HOUSTON (ICIS)–Oil and gas production, the main source of the feedstock and energy used by the petrochemical industry, should benefit from policies proposed by President-Elect Donald Trump, while hydrogen and renewable fuels could lose some of the support they receive from the federal government. Trump expressed enthusiastic and consistent support for oil and gas production during his campaign. He pledged to remove what he called the electric vehicle (EV) mandate of his predecessor, President Joe Biden. Trump may attempt to eliminate green energy subsidies in Biden's Inflation Reduction Act (IRA) BRIGHTER SENTIMENT ON ENERGYRegardless of who holds the presidency, US oil and gas production has grown because much of it has taken place on the private lands of the Permian basin. Private land is free from federal restrictions and moratoria on leases. That said, the federal government could indirectly restrict energy production, and statements from the president could sour the sentiment in the industry. During his term, US President Joe Biden antagonized the industry by accusing it of price gouging, halting new permits for LNG permits and revoking the permit for the Keystone XL oil pipeline on his first day in office. By contrast, Trump has pledged to remove federal impediments to the industry, such as permits, taxes, leases and restrictions on drilling. WHY ENERGY POLICY MATTERSPrices for plastics and chemicals tend to rise and fall with those for oil. For US producers, feedstock costs for ethylene tend to rise and fall with those for natural gas. Also, most of the feedstock used by chemical producers comes from oil and gas production. Policies that encourage energy production should lower costs for chemical plants. RETREAT FROM RENEWABLES, EVsTrump has pledged to reverse many of the sustainability policies made by Biden. Just as Trump did in his first term, he would withdraw from the Paris Agreement. For electric vehicles (EVs), Trump said he would "cancel the electric vehicle mandate and cut costly and burdensome regulations". He said he would end the following policies: The Environmental Protection Agency's (EPA) recent tailpipe rule, which gradually restricts emissions of carbon dioxide (CO2) from light vehicles. The Department of Transportation's (DoT) Corporate Average Fuel Economy (CAFE) program, which mandates fuel-efficiency standards. These became stricter in 2024. The EPA was expected to decide if California can adopt its Advanced Clean Car II (ACC II) program, which would phase out the sale of combustion-based vehicles by 2035. If the EPA grants California's request, that would trigger similar programs in several other states. Given Trump's opposition to government restrictions on combustion-based automobiles, the EPA would likely reject California's proposal under his presidency or attempt to reverse it if approved before Biden leaves office. According to the Tax Foundation, Trump would try to eliminate the green energy subsidies in the Inflation Reduction Act (IRA). These included tax credits for renewable diesel, sustainable aviation fuel (SAF), blue hydrogen, green hydrogen and carbon capture and storage. In regards to the UN plastic treaty, it is unclear if the US would ratify it, regardless of Trump's position. The treaty could include a cap on plastic production, and such a provision would sink the treaty's chances of passing the US Senate. For renewable plastics, much of the support from the government involves research and development (R&D), so it did little to foster industrial scale production. WHY EVs AND RENEWABLES MATTERPolicies that promote the adoption of EVs would increase demand for materials used to build the vehicles and their batteries. Companies are developing polymers that can meet the heat and electrical challenges of EVs while reducing their weight. Heat management fluids made from base oils could help control the temperature of EV batteries and other components. If such EV policies reduce demand for combustion-based vehicles, then that could threaten margins for refineries. These produce benzene, toluene and xylenes (BTX) in catalytic reformers and propylene in fluid catalytic crackers (FCCs). Lower demand for combustion-based vehicles would also reduce the need for lubricating oil for engines, which would decrease demand for some groups of base oils. Polices that promote renewable power could help companies meet internal sustainability goals and increase demand for epoxy resins used in wind turbines and materials used in solar panels, such as ethylene vinyl acetate (EVA) and polyvinyl butyral (PVB). Insight article by Al Greenwood Thumbnail shows the White House. Image by Lucky-photographer.

07-Nov-2024

SAO PAULO (ICIS)–Brazil's central bank monetary policy committee (Copom) voted unanimously late on Wednesday to hike the main interest rate benchmark, the Selic, by 50 basis points to 11.25%, to fend off rising inflation and a depreciating Brazilian real. Central bank urges government to put fiscal house in order H1 October inflation data reveals that upward trend continues Despite high borrowing costs, car sales at decade-high in October The 50 basis point increase is a double-down on the first 25 basis point increase in September which put an end to the monetary policy easing which started in August 2023 after a post-inflation crisis. Copom did not mention the market fallout which followed US Republican candidate Donald Trump’s victory in the presidential election, as global investors are wary about radical changes in US trade policy via higher import tariffs, among others. Instead, Copom focused on the healthy domestic economy and strong labor market which has put upward pressure on prices. After a small fall in August, the annual rate of inflation ticked higher in September – an upward trend that started May – to stand at 4.4%. Indicators for H1 October showed inflation ticking up further to 4.5%. The Banco Central do Brasil's (BCB) own inflation expectations reflect this trend, with inflation expected to end this year at 4.6% before falling to 4.0% in 2025. The BCB’s mandate is to keep inflation at around 3%. “The scenario remains marked by resilient economic activity, labor market pressures, positive output gap, an increase in the inflation projections, and deanchored expectations, which requires a more contractionary monetary policy,” said Copom. “[Copom] judges that this decision [increase in the Selic] is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment.” Petrochemical-intensive industrial companies have repeatedly said high interest rates have harmed sales as consumers think twice before purchasing durable goods on credit due to high borrowing costs. One vocal opponent to high rates is automotive trade group Anfavea, although its own figures this week showed sales riding at a high not seen since 2014, regardless of high borrowing costs. The automotive industry is a major global consumer of petrochemicals, which make up more than one-third of the raw material costs of an average vehicle, driving demand for chemicals such polypropylene (PP), nylon, polystyrene (PS), styrene butadiene rubber (SBR), polyurethane (PU), methyl methacrylate (MMA) and polymethyl methacrylate (PMMA), among others. Meanwhile, Brazilian president Lula's cabinet is looking to strengthen the country's industrial sectors to fulfil his Workers Party (PT) electoral promise to create more and better paid industrial jobs. As a result, Lula and several of his  officials have repeatedly and publicly criticized the BCB for its interest rates policy. Meanwhile, central bank governor Roberto Campos Neto, appointed by the previous center-right Jair Bolsonaro administration, will end his term in December, when Lula appointed Gabriel Galipolo will succeed him. It is a move that has put some investors on alert due to his closeness to Lula, as he may prioritize the cabinet's demands instead of the bank's inflation target, its main mandate. But as global markets increasingly look at Brazil, Galipolo has fallen in line and also voted to increase rates in the last two Copom meetings. CABINET URGED TO END DEFICITThe Brazilian cabinet, presided over by Luiz Inacio Lula da Silva, was expected to run a fiscal deficit this year in an attempt to expand public services without increasing taxes. Investors and analysts have been piling pressure on the government by punishing the Brazilian real (R), which has depreciated sharply in the past few months against the US dollar, making dollar-denominated imports into Brazil more expensive and ultimately filtering down in the form of higher inflation. At the start of 2024, the real was trading at $1:4.85. But the exchange rate stood at $1:5.69 on Wednesday, a depreciation of nearly 15%. On Wednesday, Copom joined the chorus of voices asking for stricter fiscal policy, arguing that to stop the real losing ground it is necessary a “credible fiscal policy committed to debt sustainability, with the presentation and execution of structural measures” in the public accounts. The Brazilian cabinet is reportedly working against the clock this week on those measures, and Finance Minister Fernando Haddad even cancelled an official trip to Europe this week to focus on this. “The perception of agents [in the market] about the fiscal scenario has significantly impacted asset prices and expectations, especially the risk premium and the exchange rate. [A credible fiscal policy] will contribute to the anchoring of inflation expectations and to the reduction in the risk premia of financial assets, therefore impacting monetary policy.” Analysts at Capital Economics on Wednesday also highlighted the diplomatic but very clear request from the central bank to the government – without stricter fiscal policies aiming to reduce the deficit, investors will continue making the central bank’s work on inflation harder as they bet against Brazilian assets, including its currency. “[The hike] has more to do with the domestic macro backdrop and shoring up monetary policy credibility than a response to the market fallout following Trump’s victory … [Copom’s] Concerns will have only been amplified by recent data and developments, with the accompanying statement reiterating that ‘economic activity and labor market continues to exhibit strength’,” the analysts said. “Alongside all of this, Copom members are probably also feeling compelled to tighten policy in order to shore up their credibility amid investor concerns about politicization of monetary policy. This strikes at an important point – the central bank is responding to Brazil-specific factors rather than the financial market fallout from Trump’s victory, especially given that the real is up by around 1% against the dollar today [6 November].” Capital Economics said Copom’s intention to raise rates further if necessary is likely to become a reality in coming months, expecting the Selic to rise further by 75bps more to reach 12% in early 2025. “That said, the risks are skewed to the upside, particularly if the government fails to soothe investors’ concerns about the fiscal position.” they concluded. Focus article by Jonathan Lopez 

07-Nov-2024

LONDON (ICIS)–The Bank of England (BoE) on Thursday cut its key interest rate for the second time this year, instituting a 25 basis point fall as inflation continues below target. The bank cut its core interest rate to 4.75% in the wake of a steeper-than-expected decline in inflation in September, from 2.2% to 1.7%. Eurozone inflation also declined that month, dropping to 1.7%, but is expected to have increased last month, bouncing back to 2% according to preliminary Eurostat data, driven by higher food and services pricing and weaker energy cost declines. Both the BoE and the European Central Bank have inflation targets of levels close to but not exceeding 2%. The BoE move also follows the announcement of the UK’s autumn budget, which pledged higher borrowing, taxes and spending to generate funds for areas such as the country’s health service. The UK Office for Budget Responsibility (OBR) projects that the budget will drive inflation higher in the short term, to a quarterly peak of 2.7% in mid-2025.

07-Nov-2024

Biden’s permit pause likely cut short by US election result Trump’s victory may lead to quicker Department of Energy permits Expected FID on Port Arthur expansion moves ahead of Cameron HOUSTON(ICIS)–Just hours after the US re-elected former US President Donald Trump on 5 November, US LNG export plant developer Sempra Infrastructure updated expectations around the timing of its next federal LNG permit. The second phase of Sempra’s Texas project Port Arthur LNG should receive authorization to export to countries outside the US Free Trade Agreement (FTA) from the Department of Energy (DOE) in the first half of 2025, Sempra executives said 6 November. “LNG is a very, very important tool of American foreign policy,” said Jeffrey Martin, CEO of Sempra Infrastructure’s parent company, during its third-quarter earnings call. “I think we have growing confidence in getting the permits we need for Port Arthur, phase two in the first half of next year.” No US LNG export projects have received a non-FTA permit from the DOE since 2023. In January, current President Joe Biden’s administration paused issuance of the permits. While campaigning, Trump said that if elected, he would immediately lift the pause on federal LNG permitting. France’s Technip Energies previewed the electoral result during its third-quarter earnings call on 31 October with CEO Arnaud Pieton’s statement that a Trump victory could faster lift the moratorium on DOE permits than if opponent Kamala Harris had won. COMMERCIAL TALKS Of the two expansion projects under development – the 13mtpa second phase of Port Arthur LNG, and a fourth production train at Cameron LNG that would add 6.75mtpa – CFO Karen Sedgwick said the company expects to make an FID on Port Arthur’s phase two first. “The timing of an FID decision on the Cameron expansion is uncertain at this point,” Sedgwick said. “We continue to work with our partners on the optimal timing for expansion.” Previously, the Cameron expansion FID was delayed in November 2022 and November 2023 . Port Arthur’s 13mtpa second phase requires the non-FTA permit to reach a final investment decision, in addition to lining up more long-term customers and securing financing. The expansion project has been under consideration since at least November 2022. Saudi Arabia’s state-backed Aramco agreed in June to purchase 5mtpa from Port Arthur’s second phase over 20 years, and that it would consider taking a 25% stake in the project. In August, Sempra Infrastructure CEO Justin Bird said the company hoped to have additional heads of agreements to discuss on Sempra’s Q3 call. “As noted in our Q2 call, we saw an increased interest in Port Arthur 2, and I’m happy to say that interest has further increased since the call and momentum continues to build,” Bird said. “Commercial discussions for offtake and project equity are ongoing, and I think we’re seeing better terms.” CONSTRUCTION UPDATES Construction at Sempra’s Energia Costa Azul LNG export project faced delays due to local workforce shortages in Sonora, Mexico, executives said in August. In the latest call, Sempra stuck with its most recent estimate that ECA would start commissioning in spring 2026. Sempra hired engineering company TechnipFMC in 2020 to handle engineering, procurement and construction for ECA with a lump-sum contract. Technip Energies split off from TechnipFMC in 2021. Rival EPC contractor Bechtel leads construction on Port Arthur LNG’s first phase – also 13mtpa – which remains on budget and on schedule, executives said 6 November.

07-Nov-2024