Commodity Tracker: 5 charts to watch this week

Chinese power output is in recovery and bitcoin mining is starting to play a noticeable role in the country's demand profile. Also in China, oil buyers are adjusting their procurement in response to recent tax changes. Plus, EU Carbon, Nord Stream 2, and iron ore.

1. Bitcoin mining may represent growing share of China's power demand

What's happening? Chinese power demand made a tremendous recovery so far this year, jumping 19% versus 2020. Growth has largely been driven by a ramp-up in manufacturing and industrial demand, but emergent demand sectors, such as cryptocurrency mining, may also be playing a role. Estimates from the University of Cambridge Bitcoin Electricity Consumption Index indicate global power demand for Bitcoin mining may have risen to around 16.4 GW on average. Since China accounts for around 65% of global Bitcoin computing power (hashrate), it stands to reason upwards of around 11.5 GW, or at least 1.5% of China's power demand, could be attributed to Bitcoin mining.

What's next? Power requirements for cryptocurrency mining are closely correlated with price, but a rising hashrate generally lags price increases. Ordering and installing new mining hardware takes time—usually an order of months—suggesting that electricity demand from cryptocurrency mining may see further upside this year. Although China has added a record amount of renewables, 60% of incremental annual power demand is met by thermal fuels, mostly coal, but also gas. S&P Global Platts Analytics estimates Chinese gas-fired power generation averaged 30 GW for Q1, which is an increase of 5 GW year on year. This uptick in consumption likely helps explain the strong gas demand growth within the country, which has helped underpin significant growth in LNG imports.

2. 2. China's surprise tax move makes room for additional crude inflows

What's happening? China's finance ministry said May 14 imports of mixed aromatics, light cycle oil and bitumen blend will be subject to consumption tax from June 12. Chinese refiners are poised to ramp up gasoil and gasoline production over the coming days and weeks as the consumption tax would make gasoil barrels blended from imported LCO and gasoline barrels blended from mixed aromatics less competitive compared with the middle distillate products produced domestically.

What's next? With growing incentives to produce more gasoil and gasoline domestically, rather than relying on imported products, Chinese refineries will likely step up feedstock crude oil procurement as they especially look to increase spot cargo purchases of various Middle Eastern, Far East Russian and South American grades with decent middle distillate yield.Buoyed by an expectation of uptick in Chinese crude purchases, the benchmark Platts Dubai crude price structure staged a strong rally in recent trading sessions. The spread between Cash Dubai and second-month Dubai futures surged by around $1/b over the past few days, while averaging $1.15/b to date in May, compared with $1.04/b in April , S&P Global Platts data showed.

3. 3. As Nord Stream 2 nears completion, Gazprom downplays market expectations

What's happening? Russia's Gazprom is taking a "conservative" approach to its expectations for gas sales in Europe and Turkey in 2021, with the head of Gazprom Export saying on May 20 that the company expected sales in a range of 175-183 Bcm. At the lower end of the range, exports would be flat year on year, despite higher demand for Russian gas so far this year and the need to rebuild storage stocks over the summer.

What's next? With European gas prices trading at high levels in recent months, many market participants had expected Gazprom to increase its exports to Europe over the summer by booking more capacity in the Ukrainian system, but this seems unlikely. With work to lay Nord Stream 2 continuing, and the US having waived sanctions against the developer on May 19, the pipeline could be completed later in the summer in time to being flowing gas in the fourth quarter. This would likely mean a reduced need for Ukrainian gas transit.

4. 4. EU carbon price tumbles on cheap gas, UK's shift to new emissions market

What's happening? The price of European carbon allowances crashed from an all-time high of Eur56.65/mt May 19, falling below Eur50/mt for the first time since May 7. The price drop was triggered by two main factors. Natural gas prices fell sharply in the second half of May, weighing on the implied coal-to-gas fuel switching price for power generation. The second factor was the start of trading on the UK Emissions Trading System on May 19. Once UK Allowances became available, UK-based companies appeared to offload EUAs that they had used to hedge their carbon price exposure, contributing to the selling pressure.

What's next? Following the crash, EUA prices rebounded to trade at Eur52/mt to Eur54/mt May 21. Traders will be watching the market keenly to see if a new support base will be established, and whether there is further upside as interest continues from compliance entities and financials alike. Eyes will also be on the UK carbon price to see if it trades above a GBP44.74/mt ceiling. Under the UK rules, three months of trading above this level would trigger a cost containment mechanism to limit further upside.

5. Atlantic iron ore pellet premium rises on EU steel rebound

What's happening? Iron ore Atlantic contract blast furnace pellet premiums increased in the first half of 2021 to a peak of $66/dry mt in April following a recovery in European steel and pig iron production rates from the middle of 2020. Demand for seaborne pellets led by Germany, the EU's largest steel producer, increased on restarts at blast furnaces idled during the initial COVID-19 pandemic in Q2 2020. Pellets helped ensure higher productivity and optimized operations on restarts as steel orders and lead times in Europe and the US steadily increased since Q4 2020.

What's next? Record high flat steel prices and margins with raw materials continue to support demand for high-grade iron ores. There may be additional incentives to use pellets, due to higher EU carbon prices, and as some mills continue to restart after maintenance. However, some steel mills are reducing pellets as pig iron production has been maximized to optimal cost levels, and there may be spare sintering capacity for alternative iron ore products if pellet premiums remain at high levels. The European pellet market will be watching ferrous scrap, rebar and billet prices and spreads closely, as tighter margins may hit a recovery in rates at DRI plants, which use DR pellets.

Reporting and analysis by Bruno Brunetti, Ross Wyeno, Jeff Berman, Andre Lambine, Michael Mccafferty, Oceana Zhou, Daisy Xu, Pankaj Rao, Stuart Elliott, Frank Watson, Hector Forster