When Numbers Talk, Who Wants To Listen?/I : The Meaning Of Commodities, Markets For Kazakhstan

EXCLUSIVE: Kazakhstan – Commodities that Count, Markets that Matter; Highlights over the week ending February 24 2017

Astana. KazWorld.info – With its much-desired industrialisation process still not moving ahead half as fast as the government has targeted, Kazakhstan remains dependent on commodities for more than three-quarters of its external income. This means that the bulk of its revenues expressed in cash (mainly in US dollar) is determined by produce value setting through global market mechanisms beyond its control. This is why Kazakhstan has every reason to follow trends and events on those markets by the day if not by the hour. The fact that this hardly seem to happen, at least not systematically and within the public domain, casts doubts on forecasts state officials are so terribly fond of and leaving the public in the dark concerning one of the main causes of ups and downs in socioeconomic conditions.

by Charles van der Leeuw, writer, news analyst

When Numbers Talk, Who Wants To Listen?/I : The Meaning Of Commodities, Markets For Kazakhstan

On a global level, the Organisation of Petroleum Exporting Countries (OPEC) tries once a month to put global and regional overall economic trends and price settings for commodities – not just oil but other subsoil- and agro-resources as well. “The improving dynamic of the global economy has been confirmed recently and is reflected in the current global economic growth forecast of 3.0% for 2016 and 3.2% for 2017,” the latest OPEC report published recently reads. “It is the OECD economies – particularly OECD Europe – that have seen some improvements. Overall, OECD growth in 2017 was revised up from 1.8% to 1.9%. More upside to OECD growth may come from fiscal stimulus in the US, but the magnitude and scope of it remains to be seen. Moreover, a continuation of the rebalancing of the oil market after the historic OPEC/non-OPEC declaration of cooperation in December may support oil producers further and may lead to improvements in economic activity, along with renewed investments.”

Outside the “club of rich nations” but still categorised as mid-income nations, prospects are still better for so-called emerging economies which include Kazakhstan’s. Kazakhstan’s hopes to wrestle itself out of its monetary crisis are on the increase with improved overall economic outlooks. “As for emerging economies, an improving oil sector and sound domestic economic developments have lifted Russian economic growth by 0.1 percentage point (pp) so far in 2017,” the OPEC report continues. “Russia is now registering growth of 1.0% in the current year. After the removal of large denomination bills in India, which caused some dampening of domestic consumption, growth for 2016 has been revised down again to 7.1%. For the whole of 2017, however, it remains unchanged at 7.1%. The forecasts for Brazil and China also remain unchanged. Brazil is forecast to recover to 0.4% in 2017, after a deep recession of 3.4% in 2016. China continues to enjoy solid growth of 6.2% in 2017, following the 6.7% seen a year earlier.”

Limited growth perspectives

It remains disputable whether overall economic growth automatically leads to growth in demand for commodities, but the fact that somehow there is a connection between the two cannot possibly be ignored either. This is especially true for combustibles, depending on how intensively factory machines are spinning and vehicles are moving. They consist of oil, gas, coal and uranium (there is no global market for scrapwood). The Kazakhs have considerable reserves of all four and limited internal consumption – meaning if they want to make money on them they largely depend on the big world outside and its market mechanisms.

OPEC shows confidence in its price forecasts for oil (which is accountable for around 60 per cent of Kazakhstan’s external sales) in the current calendar year. “In 2017, oil demand growth is assumed to remain healthy with potential growth estimated at 1.2 mb/d, well above the ten-year average of 1.0 mb/d,” the cartel observes “Several assumptions have been considered in 2017 projections. Firstly, global economic activities are anticipated to rise by around 3.2% with economic development in the OECD region rising solidly above 2016 levels. Secondly, road transportation is anticipated to continue to be the driving factor for oil demand growth in 2017, primarily as a result of anticipated high vehicle sales in the US, Europe, China and India. Thirdly, the expanding petrochemical sectors in US and China are projected to lend support to petrochemical feedstocks.”

Torn between hunger for cash and ever more cash and the need to join international restraints in output to prevent more price slumps in the global market place, Kazakhstan faces limited growth perspectives in terms of income on sales. “Kazakhstan’s crude oil output grew by 10 tb/d in December to average 1.43 mb/d, with liquids output – which includes NGLs – averaging 1.70 mb/d,” the OPEC report reads. “As a result, Kashagan’s production reached a maximum of 0.12 mb/d at the end of 2016. For 2017, crude oil production is seen declining by a total of 20 tb/d from fields located in the Aktobe and Kyzylorda regions, according to the Ministry. The adjusted Kazakh oil supply is now seen growing by 0.14 mb/d to average 1.70 mb/d. However, production ramp-ups of the Kashagan field could lead to a maximum level of 0.27 mb/d by year end,” the OPEC report reads. It also notes that the price for Kazakhstan’s main benchmark Urals, which it shares with the fields in the Russian sector of the Caspian Sea and tne onshore oil provinces of Tatarstan and Bashkortostan, gained a stronger position on European markets through the last year. “In Europe, the Urals medium sour crude discount to light sweet North Sea Brent narrowed 15¢ at $1.15/b in January. Sour grades in Europe gained support from the decline in availability of light to medium sour grades,” in OPEC’s words

The discrepancy between such observations and Kazakhstan’s output statistics is significant, and there seems to be no relation whatsoever between the country’s productivity fluctuations and prices movements in the market. In 2016, Kazakhstan produced 65.5767 million tonne of crude oil (450 million barrels of Urals), along with 12.4643 tonne of gas condensate and 21.3835 cubic metre of natural and associated gas. The oil alone, virtually all of which is being exported, should bring in gross nominal revenue of close to $25 billion if the price of Urals, which is a trend follower of North Sea Brent, futures of which are being traded on London’s InterContinental Exchange, is put at $55 a barrel. Siply pumping up more is not an option, since Kazakhstan has joined the “austerity club” consisting of OPEC member states and a number of non-OPEC producers including the Russian Federation and Kazakhstan.

Cereals: Kazakh crops on the rise, market signals mixed

Together with oil, Kazakhstan’s external sales income depends on four ore “pillars”: uranium, coal, wheat and metals. Especially wheat is underperforming, with the share of coarse, low-grade wheat used as fodder on the rise and higher-grade produce for human consumption in decline. In 2016, Kazakhstan produced 20.6 million tonne of cereals, according to figures posted recently by the CIS Interstate Statistics Committee in Moscow. Output increased by 10.5 per cent from the previous year, which in turn witnessed an increase of 8.8 per cent from 2014. This makes Kazakhstan the third-largest producer in the former USSR, and the largest one if calculated per head of the population. Apart from wheat which accounts for the bulk of exports, barley, soyabeans, maize and cotton are playing increasingly important roles.

Global trends are mixed, but far from negative for Kazakhstan’s positioning on the world agro-market, price trends of which are set on the futures markets of Chicago (wheat, maize, soyabeans) and New York (cotton). “Agricultural prices saw their best performance in the past seven months, with average price increases among the groups of food, beverages and raw materials,” OPEC’s report reads. “The increase in food prices was led by higher grain prices. The US Department of Agriculture assessment of wheat planted for the current crop was around 10% below the previous year’s figures – “the second lowest acreage on record” according to the USDA, which together with dry conditions in the main producing areas at the beginning of the month translated into higher prices. Sugar prices jumped, supported by lower estimations of India’s sugar output by the country’s industry body, India Sugar Mills Association, which were due to effects of the previous year’s drought.”

Kazakh subsoil productivity dominated by stagnation

While Kazakhstan’s outut trends in the agro-sector roughly correspond with global market movements, anyone looking for connections between the two in the metal sector will find himself at a loss. “Base metal price increases were led by aluminium and copper,” the report reads. On the demand side, metals were supported by continuing strength in global manufacturing. China’s manufacturing PMI reading of 51.0 also pointed to expansion, although at a lower rate than in the previous month. On the supply side, aluminium prices were supported by reports of potential output restrictions in China. At the same time, copper prices were also supported at the end of the month due to a potential strike at the world’s largest mine in Chile. […] Meanwhile, nickel prices declined steeply as Indonesia signalled some relaxation of the ore’s export ban.”

The explanations for the current trend are rather speculative here, and do not go deep enough to detect the output versus demand fluctuations at the bottom of it. Fact remains that for the last couple of years, base metals, futures of which are being traded on the London Metal Exchange, have been struggling but not plummeting as the oil price did.

Kazakhstan’s mining productivity, seen in this light, can be qualified as disappointing. The sector lost 2.7 per cent year-on-year in 2016 from the previous year. According to data posted in late January this year by the National Statistis Agency, the output of coal in 2016 stood at 102.3839 million tonne, the lowest since 2007 (98.3839 mt). Crude oil output last year reached 65.5767 tonne, the lowest volume since 2009 (64.3544mt), gas condensate 12.4643 million tonne, the lowest since 2013 (12.3034mt), and natural (including associated) gas 21.3835 billion cubic metre – the lowest volume since 2004 (11.6084bnm3), and down to less than half of its 2014 level of 43.4378bnm3.

In the metal sector, things hardly look better. Still according to the National Statistics Agency, iron ore output in 2016 stood at 15.9947 million tonne, down fro 24.5617mt in 2014, with only copper ore output on the rise, amounting to 76.0458 tonne, up from 41.2913 in 2013. The output of bauxite ore, which Kazakhstan has in abundance with only a small percentage under exploitation, stood at 5.7028 million tonne and that of chromite ore at 5.545 million tonne in 2016. Looking at the previous ten years, both can be marked as stable. This is not the case with manganese ore which in 2016 saw a production level of 1.5694 million tonne, down from 3.0447mt in 2010. Zinc and lead, which the Agency indicates in quantities of concentrate, are heading in opposite directions: the latter rose in terms of Kazakh output from 37,800 tonne in 2014 to 70,700 in 2016, while the former tumbled from 405,300 tonne in 2010 to 325,600 tonne last year.

Like a starving tyrannosaur

None of these trends stand in any even remote relation to price setting tendencies since the beginning of the new century – meaning that marketing, to put it mildly, is not among Kazakhstan’s strongest characteristics. True: most experts giving comments on market data live by the day, by the week or at best by the month and long-term oscillations and directions are hardly put into account. If on one day the price of a certain commodity gains 3 or 4 per cent, commentators tend to call prices “soaring” and if it loses a few per cent on the day, “plummeting”. Basing production targets on such affirmations would be silly indeed.

The difficulty in determining and projecting commodity prices is that so-called benchmarks, meaning bid- and offer prices of globally circulating paper which adds positive or deducts negative added value to or from spot prices on physical markets. These so-called futures are divided into two categories: term and forward. Holders of term market paper have either to buy the physical commodities indicated in their contracts or sell the contracts before that deadline – hopefully with a profit. Producers and consumers of commodities around the world are only indirectly and from a distance involved, with immediate decisions on buying or selling taken by a few thousand traders on mostly American and English but to growing extents also Chinese markets. Normally, such certificates should be traded following trends on spot markets, but today that principle has virtually been turned upside down. The system is like a starving tyrannosaur who refuses to die even if nature indicates that it is time to go. But as long as this is the case, the world must take its presence into account.

From the upcoming week on, KazWorld will serve its readers with a weekly commodity market review, in which it will be attempted to look beyond momentary trends and fluctuations, and view the price movements in the global market place in a broader perspective.

Futures prices as of February 14th, 2017 – 12:56 CST

Contract Month Open High Low Last Change
Wheat Mar 17 450-4 452-0 446-2 449-4 -2-6
Corn Mar 17 375-0 375-2 373-0 374-2 -1-2
Soybeans Mar 17 1055-0 1056-0 1042-4 1045-6 -8-4
Soybean Meal Mar 17 343.8 343.8 338.8 340.3 -2.9
Soybean Oil Mar 17 34.21 34.32 33.75 34.01 -0.16
Oats Mar 17 253-0 256-0 252-4 253-6 -1-0
Rough Rice Mar 17 9.480 9.520 9.410 9.435 -0.050
Hard Red Wheat Mar 17 465-6 467-0 461-2 464-0 -2-6
Spring Wheat Mar 17 569-4 570-2 565-6 567-4 -3-2
Cotton #2 Mar 17 76.65 76.73 75.90 76.71 +0.10
Orange Juice Mar 17 167.20 173.00 167.20 169.95 +2.85
Coffee Mar 17 144.75 145.80 142.50 143.65s -0.60
Sugar #11 Mar 17 20.04 20.52 20.04 20.47s +0.47
Cocoa Mar 17 1889 1969 1889 1929s +40
Lumber Mar 17 365.00 369.80 364.00 365.40 unch
Live Cattle Feb 17 115.975 117.200 115.575 117.125 +1.200
Feeder Cattle Mar 17 121.825 123.600 121.675 123.275 +1.450
Lean Hogs Apr 17 70.000 71.625 70.000 71.500 +1.800
Class III Milk Feb 17 16.87 16.88 16.86 16.88 +0.01
Crude Oil WTI Mar 17 52.91 53.72 52.86 53.28 +0.35
ULSD NY Harbor Mar 17 1.6264 1.6559 1.6238 1.6396 +0.0123
Gasoline RBOB Mar 17 1.5450 1.5759 1.5339 1.5539 +0.0093
Natural Gas Mar 17 2.923 2.953 2.892 2.893 -0.051
Crude Oil Brent (F) Apr 17 55.71 56.45 55.55 56.10 +0.51
Ethanol Futures Mar 17 1.557 1.557 1.536 1.548 -0.037
Gold Apr 17 1226.1 1236.0 1222.7 1226.8 +1.0
Silver Mar 17 17.810 18.090 17.730 17.950 +0.129
High Grade Copper Mar 17 2.7855 2.8145 2.7135 2.7470 -0.0360
Platinum Apr 17 1001.1 1011.9 998.7 1003.9 +3.6
Palladium Mar 17 775.00 784.90 773.65 782.00 +7.05

source: AgriMoney