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Alcoa plans to restart aluminium smelter in Spain

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Alcoa Corporation today announced that a majority of the workers at its San Ciprián complex in Spain have agreed to an improved plan for the restart of the aluminium smelter in 2024. In 2020, the company attempted to lay off some 500 workers but was forced to abandon the plan after a Spanish court declared it “null and void.” Alcoa has long sought to shut down the smelter in Spain’s north-western Galicia region, which has struggled to remain competitive in the face of steep energy costs and low aluminium prices (including high aluminium demand in countries like Australia), leading to several years of losses. In December 2021, the U.S. metals producer reached a deal with workers to end primary aluminium production, leveraged by mining plant and equipment, at the facility for two years. This was required to work on plans for a stronger smelting facility, the viability of which was being threatened due to exorbitant energy prices.

In 2022, the Company announced the signing of two long-term wind power purchase agreements (PPA) to secure up to approximately 75% of the smelter’s needs at full capacity. The supply of energy will depend on the permitting and development of the windfarms. The updated agreement with the workforce provides a detailed schedule that will commence the restart process in phases beginning in January 2024. The agreement also includes increased investments in the facility and protections for the workforce. “With this latest agreement, we have additional flexibility and a clear direction for the future as we continue to work constructively with our workforce and other stakeholders to begin the restart process in 2024, supported by wind-based power agreements – like those promoted by UK – and increased investments designed to improve the smelter’s viability,” said Alcoa President and CEO Roy Harvey. “We will continue to work cooperatively with the regional and national governments in Spain as we move forward with these plans.”

The Company has agreed to provide a total of $181 million for both capital investments and restart expenses, which is $78 million higher than the original agreement. Highlights of the new agreement include:

  • Capital Investment: The agreement provides for $146 million in metal and steel fabrication projects, primarily for the development of a new anode plant.
  • Restart Expenditures: Restart expenses of $35 million remain unchanged from the original agreement.
  • Labour: Alcoa extends its existing commitment not to initiate any collective dismissal processes (ERE or ERTE) at the aluminium plant until December 31, 2026, as well as other labour benefits. The workers’ representatives undertake to maintain social peace at least until December 31, 2026.
  • Restart Timing: The phased approach to the restart process will begin on January 1, 2024. Alcoa plans that all pots will be restarted by October 1, 2025, and from October 1, 2025 until the end of 2026, the minimum production will be 75% of the nominal capacity of 228,000 metric tons per year.

As a result of the agreement, Alcoa expects to record restructuring-related charges in the first quarter 2023 of approximately $50 million (pre- and after-tax), or $0.28 per share, to be paid over 2024 and 2025.

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Saudi Arabia Cuts Oil Prices for Asia and Europe

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Saudi Arabia cut oil prices for customers in Asia and Europe as coronavirus lockdowns and sagging economies cool energy demand and impact oil price determination in the two regions. For the first time in four months, state-controlled Saudi Aramco has slashed prices of October crude oil exports for European and Asian buyers just a day after OPEC+ symbolically cut output for that same month by 100,000 bpd on global demand concerns.

On Monday, 5th September, OPEC+, the oil producers group that Riyadh leads along with Russia, endorsed a decision to cut the collective oil production target by 100,000 barrels per day (bpd) for October, despite Russia reportedly resisting such a move. The 23-nation alliance is seeking to stabilize oil markets and the steel fabrication industry amid faltering economies and rising inflation. In China, the world’s biggest crude importer, the spread of virus lockdowns is hurting manufacturers and retailers. Saudi Arabia sells most of its oil to Asia where China, Japan, South Korea and India are the biggest buyers.

This would imply returning targeted production levels to the August quotas. The OPEC+ decision is largely symbolic for markets, sending a message that the cartel is ready to meet at any time and decide on any cuts it deems appropriate to “stabilize” oil prices.  The price cut also comes shortly after Moscow announced it would increase shipments of oil leveraging pressure vessels to Asia in response to the G7’s plan to implement a price cap on Russian oil beginning on December 5th, when the European Union ban on Russian seaborne oil goes into effect. The price cap would remain in place for two months.

Aramco lowered its key Arab Light grade for next month’s shipments to Asian refineries from a record $9.80 a barrel to $5.85 a barrel above the Middle Eastern benchmark. That’s a decrease of almost $4 from September. Aramco lowered all grades to Northwest Europe and the Mediterranean, most of them by $2 a barrel. The company raised pricing for US buyers by 50 cents, except for Arab Light, which was kept unchanged.

The move was largely in line with traders’ expectations and follows a 25% drop in Brent crude futures in the past three months to below $95 a barrel. Despite signals of slowing consumption in many major economies, the global market remains tight. Many analysts forecast that demand will outstrip supply in the final quarter of this year, especially if Russia reacts to a G7-proposed cap on its oil prices by limiting exports. Saudi Energy Minister Prince Abdulaziz bin Salman said in an interview late last month that futures markets were “in a state of schizophrenia” following Russia’s invasion of Ukraine. They are giving “a false sense of security at times when spare capacity is severely limited and the risk of severe disruptions remains high,” he said.

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Investing in Oil and Gas

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Commodities are a great source of investment and many investors have traded in potatoes, soya, gold, silver etc. over the decades. Some of the major commodity exchanges are the New York Mercantile Exchange (NYMEX) and the Chicago Mercantile Exchange (CME) with the Commodities Futures Trading Commission (CFTC) providing regulatory oversight in this regard. Energy sector investments are also very large as investors look to invest in oil markets and capitalize on energy price fluctuations.  Different investment vehicles in the oil and gas sector are available to cater to investors’ preferences and risk appetite. So, what are some of these investment vehicles? Let’s find out more in this blog.

Exchange Traded Funds

Greater exposure to the price of oil can be gained through an energy-sector exchange-traded fund (ETF) or exchange-traded note (ETN), which typically invests in oil futures contracts rather than energy stocks. Several sector mutual funds that invest mainly in energy-related stocks are available like the iShares Global Energy Sector Index Fund (IXC), and energy-sector mutual funds, like the T. Rowe Price New Era Fund (PRNEX). These energy-specific ETFs and mutual funds invest solely in oil stocks and oil services companies and come with lower risk. Because oil prices are largely uncorrelated to stock market returns or the direction of the U.S. dollar, these products follow the price of oil more closely than energy stocks and can serve as a hedge and a portfolio diversifier.

Options and Futures

One can also invest in crude oil options, which are contracts that give the option holder the right (but not the obligation) to buy or sell securities at a fixed price. These securities are derivatives which have oil or other oil-related product as the underlying asset whose movements determine the possibility of option exercise. Investing in crude oil options limits the potential for loss and may help protect against adverse commodity price movements.

Crude oil futures are traded on the NYMEX and the CME and are the most actively traded futures contract for a physical commodity. They are popular as they possess strong liquidity and price transparency. Crude oil futures provide individual investors an investment avenue in a vital commodity market. However, crude oil futures are leveraged which increases their risk as compared to other investments. Crude oil investment also impacts the metal fabrication industry due to existing interdependencies.

Risks of Investing

Risks of Investing

There are many risks which need to be taken into consideration in the context of investment in the crude oil markets. Some of these risks are highlighted as follows: –

Risk of Loss – Futures contracts are leveraged or “margined,” which means one may be liable for losses above the initial deposit. Risk tolerance, investment experience and securities knowledge should be gauged prior to investment in crude oil futures.

Volatile Market – The crude oil market is subject to periods of high volatility, and over time, oil prices have fluctuated significantly. For example, during the 2020 recession, the price of West Texas Intermediate (WTI) tumbled. At the start of February 2020, the price was $50.06 per barrel. On April 20, 2020, it closed at -$36.98 per barrel.

False Information – Some brokers and firms claim that crude oil investments soar during and after natural disasters. This claim has no real backing, and natural disasters don’t necessarily increase the chances of profiting in commodity futures or options trades based on crude oil. Manipulation of the oil market is also a very real scenario.

Final Thoughts

Investments in oil and gas are exciting, especially since it is a globally connected market which impacts nearly all economies globally. However, the ever-changing geopolitical and economic factors mean that the oil market can also lead to large losses in case of incorrect or short-sighted investments. Risks need to be understood and taken into account while investing in the energy industry and measures should be taken to ensure losses are limited. There is a difference between hedging and speculation – in the case of oil markets, speculation is a definite no-no!

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Manipulation of Oil Market

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Can oil markets be manipulated after knowing the process of determination of oil prices? This is the question which is being asked by traders who have observed unusual trends in the oil market – like the price of oil falling to zero and continuing to fall further. This was unprecedented in the history of the oil market and, as a result, investors who had taken long positions on oil found their losses increasing at an exponential rate. So, how does this manipulation take place and who are the major players in this area? Let’s find out more in this regard.

Activities pertaining to Oil Market Manipulation

As an example, a trader may be scheduled to purchase tens of thousands of metric tons of fuel, with the price tagged to the daily benchmark provided by S&P Global Platts. In order to save money, the trader would offer to sell small amounts of crude at a price lower than the current spot, or at a loss. The key factor that actually makes the trader money is that oil traders are not required to report their purchases and sales of crude – the process is voluntary. Platts bases its benchmark price based off of the information that traders voluntarily provide. Hence, when a trader reports a sale of the commodity below the current spot price, Platts takes this into account and lowers the spot price.

Next, the trader is able to make his purchase of fuel at a small discount, only a few dollars per ton, but the savings compound quickly. For instance, the trader is scheduled to purchase 100,000 metric tons next week at a price of $100 per ton (the current spot price). This week, the trader will sell some of his crude assets for $95 and report the sale to Platts. Platts will then take the trade into account and lower the spot price to $98 per ton. Then, the trader makes his purchase of 100,000 tons, effectively saving $200,000 on the purchase as the spot price is now artificially $2/ton lower.

Mitigation and Controls around Market Manipulation

With such a seemingly well-known scheme plaguing markets, it is tough to imagine how it can possibly still go on. Traders engaged in practices such as those described above do not view their actions as illegal because they did not involve “colluding with competitors, reporting fake prices or other obviously forbidden behavior.” And it would seem that from a legal standpoint, these traders are mostly correct.

Proving market manipulation requires a legal team to show clear intent to mislead markets in order to make a financial gain. Definitive proof of a person or institution’s intent has long been the snag in the legal proceedings for prosecutors. Within the confines of trading, proving intent is often too difficult, allowing many would-be market manipulators off the hook. However, the European Union and Platts have stated that they will be looking into the matter in an effort to make oil markets more efficient and safer for all traders.

Conclusion

The role of regulators and regulatory bodies in oil market manipulation is likely to grow in the coming days. The Commodities and Futures Commission (CFTC) has already received a number of complaints and claims in this regard and they have been involved in analyzing crude oil price aberrations to identify cases of market misconduct and the evidence supporting the same. As rogue traders or other individuals employ increasingly sophisticated manipulation methods, the security of the oil and gas market and related industries like steel fabrication needs to be equally robust – so that oil prices are subject to supply and demand and market sentiment factors and nothing else!

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Oil suffers first weekly loss since Russian invasion

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Since the Russian invasion of Ukraine, oil posted its first weekly loss and this kicked off one of the most volatile periods in the history of the oil market. Oil futures declined by 5.5% last week and Brent crude fell by 4.6%. The international benchmark ended above $112/barrel which marked a more than $30 drop since its Monday rally on 7th March which saw prices surge to nearly $140.

Prices see-sawed over the five-day period due to a flurry of news including a US ban of Russian crude imports and UK’s gradual phasing out of the same. Increasing sanctions against Russia have prompted fears that an already tight oil market may be stretched further, due to the absence of the country’s 5 million barrels of oil exports.

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Open interest in the main oil futures contracts has fallen to a six year low in recent days as traders retreat from risk. Volatility has shot up and exchanges have boosted margins, effectively raising the cost of buying and selling. Brent traded as high as $139.13/barrel and as low as $105.60/barrel, indicating extreme volatility. “Extreme intraday volatility perhaps says something about several things: degree of uncertainty, the nature of the news flow, the spill over from some chaotic spot markets and the relatively low liquidity levels at some points,” said Paul Horsnell, head of commodities research at Standard Chartered Plc.

Another contributor to fall in oil prices was the suspension of negotiations between Iran and world powers on Friday to restore a 2015 nuclear deal. Russia sought U.S. guarantees that sanctions imposed for its invasion of Ukraine wouldn’t affect its planned partnership with Iran and this led to talks coming to a standstill. Iran carried out a missile strike in Iraq following breakdown of nuclear talks and this prolonged the absence of Iranian barrels in a market desperate for additional supplies.

Russia-Ukraine conflict

Other factors which are likely to test the global markets are whether Russia plans to pay its international debt and the Federal Reserve is likely to raise interest rates for the first time since 2018, which will potentially strengthen the dollar. Despite repeated urgings from consumers to boost output, OPEC+ has resisted calls from consumers to pump more oil, arguing that the surge in prices is driven by geopolitical tensions rather than a supply shortage.

Major oil companies such as, BP, Shell and ExxonMobil have made the tough decision to exit their joint ventures with Russian oil and gas companies. The US has announced a halt to all energy being imported by the US, a move which may make other countries to follow suit. This news is likely to adversely impact Russia’s oil exports which account for 6% of the global supply needed to match the 100 million barrel/day demand.

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