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Commodity Tracker: 6 charts to watch this week

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Strike threats at LNG projects in Australia are keeping the market on its toes, while food prices are on the radar amid a heat wave in Europe. Compliance carbon prices in China and South Korea, Argentina's lithium output projections, and steelmaking costs in Europe are also in focus.

1. Disruption risk looms over global LNG, European gas prices

What's happening? Workers at Australia's Gorgon, Wheatstone and North West Shelf LNG projects are threatening to go on strike due to disagreements over pay and working conditions. Gas companies Woodside and Chevron have been in talks with the workers unions to address their concerns. The three LNG terminals have a total LNG export capacity of around 41 million mt/year that equals to around 10%-11% of global LNG supply. The news has already sent European TTF gas prices and Asian spot LNG prices higher as a disruption could coincide with the early winter restocking season, when Europe competes with Asia for LNG supplies.

What's next? Australian union workers have about 10 working days from Aug. 11 to vote on a regulatory order allowing industrial action. However, it remains to be seen whether the strike will actually proceed and whether gas production will be impacted as companies have a number of contingency plans in place. S&P Global Commodity Insights analyst Logan Reese said any potential industrial action will occur in a phased manner and market participants said LNG buyers have not been notified of expected disruptions by their suppliers. The situation remains fluid.

2. Food & Beverage Price Index spikes in July amid extreme weather

What's happening? The S&P Global Commodity Insights Food & Beverage Price Index rose for the first time since February, increasing by 5 points month-on-month to 113.5 points in July. While the end of the Black Sea Grain Initiative and the Indian government's decision to ban non-Basmati white rice exports inevitably played a role in the spike, extreme or erratic weather throughout much of the world proved to be a more significant reason behind the price rises, including El Nino-affected cocoa production in West Africa and heat wave-stricken vegetable output in Southern Europe.

What's next? Both the extreme weather and political decisions in July are still being digested by agricultural markets so far in August. However, all signs so far this month point towards even higher prices, with further increases to the Food & Beverage Price Index later this year also likely amid persistent output concerns and impediments to trade.

3. Compliance carbon prices reach all-new high in China, slip to record low in South Korea

What's happening? The daily weighted average price of China's compliance emission allowances, or CEAs, reached a record high at Yuan 69.90/mtCO2e ($9.76/mtCO2e) on Aug. 11. On the other hand, South Korea's emission trading scheme, the most mature compliance market in Asia-Pacific, saw a record-low clearing price at Won 8,180/mtCO2e ($6.20/mt) in the August monthly auction for the 2023 allowance units, called KAU23. The recent price surge and demand growth in China were driven by enhanced policy clarity. In mid-July, the government announced trading rules for the compliance period ending Dec. 31, with tightened measures to pursue a 100% compliance rate. In South Korea, the oversupply of free allowances resulted in little incentive for compliance entities to pick up the units in the market, translating into low liquidity and collapsed prices.

What's next? China and South Korea have both relaxed supply of emissions allowances for the current compliance period to help relieve companies' financial burdens on top of soaring fuel prices and a downturn in the economy. The price surge in China may be expected to continue only if companies remain enthusiastic to participate in the market, instead of approaching other non-market options like submitting unused CEAs left from the last compliance period, or advancing CEAs from the next compliance period, both of which are allowed under this year's policy. In South Korea, a price rebound would depend on whether the government will further intervene and set stronger market stabilization measures.

4. Argentina's lithium production could more than triple by 2030

What's happening? Argentina, Chile and Bolivia together hold 50% of the world's mineral resources. Bolivia has invested roughly $800 million in its strictly controlled salt flats, with a grid of ponds and an unfinished plant that it said will begin producing 15,000 mt/year of lithium carbonate equivalent this year. Chilean lithium operations are centralized to industry giants SQM and Albemarle, with no large expansion plans in the pipeline, and recently revealed plans for a state-led public-private model -- spooking additional investors. Argentina has over 30 mining projects in different stages and has largely been driven by private investments and regular permit approvals as the government looked to bring in more US dollars through mining exports.

What's next? Argentina currently produces 40,000 mt of lithium carbonate. With the country's current project pipeline, the implementation of direct-lithium-extraction technologies and by addressing infrastructure bottlenecks could drive Argentina's end-2023 lithium production by at least 50%. There are at least four new projects that are expected to start up in Q1 2024, which could drive production to reach 120,000 mt.

5. Iranian crude imports to China's independent refineries rise on competitive prices

What's happening? China's independent refineries imported around 6.28 million mt of Iranian crudes in July, up 13% from June and the highest so far this year. Sources said Iranian Light was currently offered at a discount of around $13-$13.5/b, against the ICE Brent Futures on a delivered basis in Shandong market, while Iranian Heavy could be even lower at a discount of around $18-$19/b on the same basis. Russian crudes, on the other hand, are losing their attractiveness to this market due to their rising prices.

What's next? Traders and refinery sources expect China's independent refineries to continue shifting away from Russian crudes while at the same time increasing their imports of Iranian crudes this month. Sources said there is sufficient supply of Iranian crudes in the market available to the independent refineries.

6. Europe DRI steelmaking costs via green hydrogen remain high

What's happening? European lower-emissions steelmaking costs using direct-reduced iron and hydrogen remain high compared with ferrous scrap and blast furnace-based pig iron input costs. Spreads between pig iron and green hydrogen DRI using electrolyzers and renewable power, have narrowed after peaking in August 2022. After a decline in natural gas prices, DRI using gas regained competitiveness this year. DRI costs using blue hydrogen with carbon capture and storage remain lower than using green hydrogen, while still being significantly higher than conventional scrap-based electric arc furnaces and pig iron.

What's next? Hydrogen-based steel costs in Europe may become more competitive with long-term energy contracts and subsidies to help offset new electrolyzers, steel plants and related investments. Steelmakers expect the higher production costs of lower emissions steel to be met by firmer prices and demand for certified steel. Consumer segments targeting sustainability and industry standards with procurement mandates may boost demand. EU steelmakers face increasing costs for emissions as free allowances to help comply with EU regulations are gradually phased out until 2035. Scrap markets may see stronger regional demand and EAF growth as steel producers use scrap and DRI to manage costs and maintenance cycles.

Reporting by Eric Yep, Peter Storey, Ivy Yin, Adriana Carvalho, Daisy Xu, Hector Forster