Welcome to the first edition of Hot Commodities.

This bi-weekly newsletter is available here, and directly to you by email, and uses the PanXchange team’s experience and knowledge to bring you exciting insights into the thrilling world of physical commodities. And, of course, we're going to keep you up to date on blockchain-- what's working, what's practical, and what's downright lunacy.  Speaking of lunacy, expect some re-posted tweets at the bottom from time to time.  We're a pretty snarky bunch over here.

Who are the winners in trade wars?

Trade war and Tariff mentions in media, source: Bloomberg

Trade war and Tariff mentions in media, source: Bloomberg

As “trade war” and “tariff” continue to dominate headlines, China retaliated against U.S. actions with a 25% tariff on U.S. soybeans, typically the first target as Chinese imports of soybeans from the U.S. are almost 10 times higher than from the next trading partner (see chart for 2017 numbers from NOPA). Brazil is the other major soybean producer, exporter and rival to the US, with each nation producing around 100mm metric tons annually. So who’s the real winner in the soybean tiff?

The results since the tariffs were announced and implemented resulted in a drop in U.S. Gulf Coast basis and a rise in Brazil basis, with Brazil soybeans sitting, as of last week, at just over a 20% premium to U.S. soybeans at +2.40 Sept CME soybeans, which is still less than the 25% tariff. This means that all Chinese traders are currently purchasing in Brazil, while traditional buyers of Brazil soybeans are flocking to the U.S. for the discount. As China is by far the largest buyer and unable to be offset by other buyers, the Brazil premium remains.

Source: National Oilseed Processors Association

Source: National Oilseed Processors Association

The result is that Chinese buyers are paying around 20% higher prices for soybeans, Chinese consumers are paying higher prices for meat products, U.S. farmers are getting less for their crop, while Brazilian farmers are raking in a huge premiums over other major markets. The typical response to the question of who wins a trade war is that no one wins, but some lose less than others. However, in this case, there does appear to be one winner, although not the winner the U.S. or China would have hoped for. 

Frac Sand Updates

What is frac sand?  

As basic as we can get, frac sand, also known as proppant, is a special type eally round, really tough silica sand that is mixed with water and a small amount of chemicals. After a well is drilled, the mix of water and sand is pumped at high pressure into the ground. The pressure creates cracks in the shale rock, the water flows in, the sand fills the cracks propping it open, and the oil and gas flows out. For our visual learners out there who want more than an oversimplified explanation, click here for a quick video explaining the whole process. 

Why is it important?

Frac sand is both a leading indicator of hydrocarbon production, and the closest variable input to the wellhead. Oftentimes, the procurement of frac sand can comprise as much as 25% of the total cost of converting the well from a hole in the ground to a producer of oil and natural gas. While well completion technologies are constantly being tweaked to maximize the ultimate return of the well (in terms of both monetary and physical production), it is certain that sand plays, and will continue to play, an important role in making the United States into one of the largest energy producers in the world. The market is relatively new, booming, and constantly evolving and innovating. That’s why we are so excited about it. Here’s our thoughts for this week (We’ll forgive you if you aren’t an expert by the end of this newsletter):

Weekly Market Update:

The frac sand market continues to hover at current levels after taking a seven-week fall of nearly 25% as more local Permian basin mines open. Currently, it is estimated that 13 of the 24 announced mines have opened, and at least eight more have begun construction. As more mines open, this will continue to add pressure to spot sand pricing. Long-term, the picture looks bullish for the Permian Basin as well as the other shale plays such as the Eagle Ford and Bakken. Despite the recent drop in sand pricing, oilfield activity remains strong, and production will continue to rise as takeaway capacity becomes available.

New Futures Markets

CME Group and Cheniere Energy, operator of the Sabine Pass LNG terminal on the U.S. Gulf Coast, announced the first physically delivered LNG futures contract. U.S. natural gas production has boomed in recent years and the US is aiming to become a major player in the global LNG market, with the IEA predicting that “in the next 5 years, the US will account for close to ¾ of all LNG export growth, and its market share will jump to 20%, from 4% today.”

This physically settled futures contract is a big step in the development of natural gas markets, with the U.S. switching from a large net importer of natural gas to large exporter.

Will the contract be able to attract enough liquidity for a full futures contract, seeing as Sabine Pass currently processes only 18mm MT annually, with a total 27mm MT when the fifth and sixth trains at the liquefaction facilities are complete? Will this become the major international pricing hub as the LNG market continues to grow?We'll be following it closely.

Blockchain Perspective

Anyone who has been to a financial technology conference, reads financial technology Twitter or simply hasn’t lived under a rock for the past few years knows that blockchain is the hot topic in the industry, to the point of becoming blockchain mania (Blockchainia!). One of the main targets for blockchain implementation is physical commodities, as the supply chain is derived of many contracts, documents and settlement pieces still done with physical paperwork, the market is one of the most international and many aspects are antiquated – as evidenced by the fact that the shutting down of Yahoo! Messenger on July 17th is a big deal to the industry.

So what’s our take? Check out Julie’s perspective on the blockchain In physical commodity markets.


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