China's Economic Woes Hurt Diesel Demand

1. China’s Diesel Renaissance Is Not Happening

- Analytics firms have been cutting their Chinese diesel demand outlooks for 2023, with Rystad and the IEA cutting 100,000 b/d and 150,000 b/d from earlier forecasts, respectively, as China’s weak construction sector and weakening manufacturing activity weigh on diesel.

- Diesel is a key product for Chinese refiners, making up 4.3 million b/d of total products output or 28.2% of total throughput, however it seems post-opening China can’t grow its demand for diesel.

- Whilst Chinese refining has been operating at high rates, stagnant diesel demand at 3.7 million b/d (a level which the IEA expects to remain stagnant in 2024) have led to a build-up in diesel inventories across China, up at 16.4 million tonnes.

- China’s real estate sector has been a key outlet for diesel consumption for construction equipment and machinery, however with new property construction down 71.7% compared to the 2019 average, there is very little support coming from the property segment.

2. El Nino Is Back, Disrupting Latin America’s Power Supply

- The return of the El Nino climatic phenomenon, characterized by unusually warm ocean temperatures and subsequently hotter weather in general, spells trouble for Latin America’s electricity markets.

- The US National Oceanic and Atmospheric Administration believes there is over a 90% probability that a moderate El Nino will develop during the next Austral summer, with temperature anomalies exceeding the +0.5 C mark for several consecutive months.

- For hydropower-dependent countries such as Colombia (80%), prospective droughts could triple the price of electricity – this was the case in 2019, the most recent year of El Nino taking place when spot power prices shot up to $370-380 per MWh.

- Countries south of the Equator should see higher rainfall in general, including Peru, Chile, and parts of Brazil, but the northern regions of the latter might experience the same drought that Colombia would.

3. Cheap and Available, Iranian Oil Is Chinese Refiners’ New Favourite

- Chinese refiners will soon be guzzling Iranian oil as imports in August are about to hit 1.5 million b/d, the highest level since at least 2013, as private refiners in the Shandong region tripled their purchases year-on-year.

- Barring Syria and Venezuela, two long-standing geopolitical allies of Iran, China is virtually the only buyer of Iranian crude, but Tehran still managed to double the volume of its exports year-on-year.

- In the meantime, Iranian authorities are saying the country would be producing 3.5 million b/d of oil by the end of the summer, adding 250,000 b/d compared to current levels.

- Despite the success Tehran has enjoyed in boosting its sales amidst relatively high prices, the IMF still believes the country’s fiscal breakeven level stands at $351 per barrel, up from $278 per barrel in 2022.

4. China’s Carbon Price Starts Moving Up at Last

- The daily weighted price of China’s compliance emission allowances (CEAs) has been getting ever-closer to the $10/mtCO2e mark this week, edging upwards after almost two years of very limited movement.

- The surge in China’s effective carbon price was led by government actions as Beijing clarified compliance rules until December 31, with tightened measures to pursue a 100% compliance rate from the nations’ main emitters.

- Compared to Europe’s $95/mtCO2e carbon price, China is still lagging, especially considering that Chinese companies can submit unused carbon credits from the last compliance period of advance CEAs from the next one.

- Simultaneously, South Korea’s carbon prices have been collapsing after the government provided too many free allowances to the market at large, leading to low trading liquidity and subdued prices.

5. Indonesia Seeks to Regain Its Mojo After Majors Quit the Country

- Indonesia, once a top-5 LNG exporter globally and Asia’s leading natural gas producer, has seen its gas output plummet over the past decade (and its LNG exports halve) as greenfield projects become too delayed to offset production decline.

- Over the last four weeks, UK energy major Shell (LON:SHEL) sold its stake in the Masela project to Pertamina and Petronas, whilst US major Chevron (NYSE:CVX) opted to quit and sell its stake in the IDD project to Italy’s ENI (BIT:ENI).

- The departure of Western majors is a heavy blow to Indonesia’s gas industry as national gas demand is expected to soar by another 20% by 2030, to 7.6 billion cubic feet per day.

- Should the two impacted projects - IDD and Masela - come onstream, they should add some 3.5 bcfd of gas output to the country’s current production of 5.3 bcfd, however even for the new coming stakeholders the complexity of Indonesia’s upstream terms might slow down all progress.

6. Argentina Bids for Lithium Supremacy

- Argentina, the world’s fourth largest lithium producer and second in resources, has become the investor’s favorite as Chile continues to toy with the idea of nationalizing its lithium industry under President Gabriel Boric.

- Argentina has adopted a more pro-market model and in contrast to Chile (where existing mines operated by SQM and Albemarle lead the market) is home to 30 new mining projects with short-term investments totaling $7 billion.

- The Latin American country might also become a battlefield between Chinese and Western interests – despite ample interest from US companies, China remains the main export outlet for produced Argentinian lithium (41.5% of total sales).

- With the current project pipeline, Argentina’s production of lithium carbonate is expected to triple by the end of 2024 and move from the current 40,000 metric tonnes per year to 120,000 mt/year.

7. Despite Low Stocks, Aluminium Is Facing a Harsh H2

- An aluminum glut is taking shape across the global markets as slackening demand meets robust supply, just as manufacturing activity is going in down in China, the United States, and Europe.

- The three-month LME aluminum futures price dropped to $2,140 per metric tonne by the end of this week, a drop of 20% since mid-July, with market premiums for spot deliveries plunging to $475/mt from $650/mt earlier this year.

- Whilst low stocks held in LME-registered warehouses would usually add some support to prices, the lack of large-scale market demand and expectations of rebounding Chinese smelter production limit the impact of inventories.

- Considering the time spread between LME cash settlements and the three-month contract rose to $55/mt this week, the highest since the financial crisis of 2008, it is safe to assume the market is betting on further price slides in early Q4.