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Cross-Commodity Factbox: EMEA Markets in 2017

The new year brings with it continued uncertainty and volatility for EMEA markets.

Oil and agriculture are in the hands of the effectiveness of an historic OPEC/non-OPEC deal and regulatory policy across sugar and biofuels. European natural gas and LNG have healthy supply options and robust demand, while coal and gold will find it difficult due to Chinese coal output cuts and rising US interest rates and a firming dollar. Tighter capacity reserve margins might add further volatility to European electricity prices.

Here is a selection of what to watch for in 2017:

Oil

The first OPEC-led global production cut in 15 years underpins an emerging but fragile recovery, with 2017 set to see a huge stock overhang disappear by the third quarter and the oil market return to equilibrium, according to Platts Analytics.

With Saudi Arabia and Russia joining forces to cut output by around 800,000 b/d in the first six months of the year, and other oil producers under pressure to comply with their share of cuts to bring the total close to 1.8 million b/d, there remains a great deal of optimism that the pace of rebalancing will be accelerated.

Just how fast will depend on the discipline to enforce and maintain the cuts across a fairly disparate bunch of oil producers, especially with crisis-ravaged OPEC members Libya and Nigeria getting exemptions and possibly adding 500,000 b/d to the mix. The speed of return by US shale producers could ultimately keep a lid on prices. Most oil companies are generally optimistic that prices will rise to a more sustainable level in 2017, but spending is likely to stay modest for now and production growth limp. Caution is likely to dominate the North Sea oil industry, with a mini-revival in production in the last two years juxtaposed against the evidence of years of decline since production peaked in 1999.

There are glimmers of hope for the industry, with oil and gas discoveries in 2016 likely to total over 300 million barrels of oil equivalent.

Sugar/Biofuels

Policy is likely to play a decisive role in the European agriculture market's fortunes in 2017. For the sugar sector, European deregulation brings the biggest global challenge, as Europe undergoes a seismic change. Europe's industry has spent the last decade sheltered from the global push and pull of fundamentals through a quota-based system. From October, that regime will be removed and with it will go WTO limits on exports, enabling the EU to return to the global fold.

While that is likely to see the EU target a return to exports, its traditional destinations have invested in cane refining capacity, and Europe may need to look further afield to find homes for white sugar volumes. For the global market, which saw expectations of supply shortfall drive raw sugar prices on a spectacular surge, revised views now frame a bearish picture of oversupply and prices have nose-dived.

Biofuels also face change, as the EU's Renewable Energy Directive shifts focus toward greater consideration of greenhouse gas savings. From January 1, 2017, Europe's biofuels need to save 50% emissions versus standard mineral oil, with January 1, 2018, raising the bar higher to 60%. In between, the ongoing drive toward developing second and third generation biofuels continues to jar with the bulk of Europe's biofuel producers -- with the bulk of ethanol and biodiesel coming from first generation production capacity.

European Gas

Europe is set to enjoy numerous gas supply options throughout 2017 as traditional pipeline suppliers continue their market share offensive and LNG imports to the continent rally from their unexpected lows in 2016.

Global LNG supply will be boosted further as US and Australian volumes ramp up, though there is the possibility that many cargoes will be swallowed up by the key north Asian markets given the rally in spot LNG prices in December to close to $10/MMBtu, according to Platts Analytics.

Russian gas supplies to Europe are expected to be strong again in the first months of 2017 as buyers look to max out their take-or-pay volumes ahead of a likely rise in oil-indexed contracts, compounded by Gazprom having more access to OPAL pipeline capacity for supply to Germany and CEE countries.

Demand is seen continuing its recovery from the past two years, especially in the power sector. Factors to watch include the availability of French nuclear capacity in 2017 and coal prices, which are expected to remain volatile after their late-2016 rally.

There could be price spikes at the start of the year due to cold weather combined with gas storage constraints at the Rough facility in the UK and historically low stock levels in Northwest Europe.

European gas buyers will look to continue to "de-risk" their long-term gas import contracts away from oil-indexation through re-negotiations with suppliers.

Power

Coal plant closures, ageing infrastructure and nuclear outages saw European power prices rebound strongly in 2016, with record spikes in France and the UK the most visible signs of this trend, which is expected to have further ramifications in 2017. The oversupply situation in Germany amid its rapid expansion of wind and solar should start to ease in the new year. A colder weather outlook for January, rising gas and carbon prices and low hydro levels again saw forward power rebound at the close of 2016.

In the UK, where 6 GW of old coal plants retired for economic reasons after last winter, supply issues are expected to linger in 2017, especially at times of cold and little wind.

The worst supply fears for Q1 2017 eased after the French nuclear regulator gave the green light for some reactors to restart in early December, while the France-UK interconnector link is capped at half its capacity until February due to storm-damaged cable.

In Germany, oversupply from both renewable and conventional sources led spot and year-ahead power prices to post their fifth annual decline in a row in 2016. The German government, at the forefront of the energy transformation, hopes to get back on track ahead of elections in September 2017, with the newly introduced auction-based legislation, which might lead to 100 GW of wind and solar installed capacity by 2019.

The German government assigns higher priority to the nuclear phase-out -- removing over 10 GW of reactor capacity by 2022 -- over any potential coal exit, with coal still providing some 40% of German baseload power. Gas' share in the power mix expanded massively in 2016, with flexible gas plants seen as the ideal company for volatile renewables.

Coal

Coal prices may be able to hold on to their gains won from the bullish rally in the latter half of last year after China's National Development and Reform Commission (NDRC) imposed a supply side reform plan in 2016, reducing annual working time from 330 days a year down to 276 and which translated into a production cut of around 500 million mt.

This will largely depend on the success of the NDRC's drive to cap prices after it intervened in term negotiations for FOB North China contracts between Chinese producers and utilities, prompting them to settle at a base price of Yuan 535/mt ($78/mt) with an adjustment based on two local price indexes.

The Chinese 2017 term may set a floor for Australian Newcastle coal, but defaults could be possible should prices drop below this level, as the current backwardation across all coal futures markets suggests.

With major players due to exit paper trading and traders licking their wounds after 2016's losses, volatility across forward curves is expected to rise. In the short term, a cold winter across the northern hemisphere would likely provide further support to prices, particularly given strong power prices in Europe and disruption to nuclear power output, while the long-term social costs to cutting domestic production in China must be weighed, raising the possibility of the country becoming a net exporter.

Gold

The gold price is likely to struggle to gain significant traction in 2017, after a rollercoaster 2016. The US Federal Reserve finally upped the core interest rate at the start of December and in the minutes released alongside the move suggested three more possible rate rises in 2017. Gold as a non-yielding asset class will be pressured by any normalization of financials, and also a strengthening dollar.

Physical markets are yet to respond to the lower price, waiting instead for further downside before buying back in. India, the world's number two physical consumer after China, is predicted to remain largely absent as dynamics and the population change habits.

On the business side, new regulations, and the anticipation of net stable fund ratios at the start of 2018, will keep margins and liquidity tight and it is widely expected that more banks will step away from the bullion business as making money becomes tougher.

The fight for London's over-the-counter market will heat up with ICE, CME Group and LME all releasing new futures products.

Steel

The global steel industry heads into the new year against a backdrop of higher raw materials costs, mostly upward finished steel pricing momentum and the likelihood of a continued scrum over trade.

Steel prices rose exponentially in 2016 due to a credit-fueled infrastructure push in China and much higher raw material costs. Both iron ore and coal prices have soared, and mills globally have succeeded in leveraging this for higher spot and contractual prices, which will likely filter into the first quarter of 2017.

Trade barriers have also enabled mills to cash in on stronger end-user requirements. Nevertheless, in Europe there has been no big jump in real steel demand -- outside of automotive -- which could weigh on steel prices into the second quarter/second half of next year, when fears over tight supply subside and importers establish new supply routes.

Trade cases played a major role in the global steel industry in 2016, and that's likely to continue. Numerous cases filed in the US and Europe have been effective in protecting those markets from imports, blocking material from a number of regions -- particularly China and the CIS -- and redrawing long-time trade routes in the process.

In Europe, 2016 steel output may fall below 200 million mt, with a modest increase in demand absorbed by higher steel imports. But in 2017, anti-dumping duties will be in place against many imports, and so the expected 1.8% increase in steel consumption should enable Europe's mills to increase their production, perhaps to 202 million mt, according to Platts estimates. For the CIS region, production could increase modestly as stronger oil prices fuel domestic steel demand. Output in 2017 could reach 103 million mt, Platts estimates.